R4- Property Transactions Flashcards
What is the basic calculation for Basis/Amount Realized in property?
Cost of property \+ Purchase expenses \+ Debt assumed \+ Back taxes and interest paid = Basis. [Amount Realized]
Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
What is the recipient or donee’s basis on gifted property Sold at a Gain?
- Use donor’s basis
What is the Basis of Inherited Property?
Step Up/Down to FMV
FMV at date of death or alternate valuation date (6 months later)
If alternate date is elected by property is sold before 6 month window; use FMV at date of death.
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
What property is eligible for like-kind exchange treatment?
Real or Personal for personal business property only
US property only
What is BOOT in a like-kind exchange?
Cash received
+ unlike property received
+ liability passed to other party
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received
Ignore the boot paid amount from the mortgage completely
What is an Involuntary Conversion?
- Occurs when you receive money for a property (destruction, theft) involuntarily converted
- Nonrecognition treatment is given to gains realized
- Rationale that taxpayer reinvest of the proceeds
What are the requirements for exclusion of gain on a primary residence?
Must live there 2 out of 5 years
What is a Wash Sale?
30 Day rule applies
Disallowed loss adds to basis of new stock
New stock takes on date of acquisition of old stock
Who is considered a related party in a property transaction?
- Ancestors; siblings; spouse; descendants;
- Corporation or Partnership where you’re a 50% shareholder
- In-laws are NOT related parties.
How are capital losses taken in a corporation?
Capital losses only offset capital gains
Carryback 3 years - if you elect NOT to carryback; you lost the option in the future
Carry forward 5 years - only as STCL
What assets are NOT capital assets?
Inventory; Business interest; Accounts Receivable; Covenant not to compete
Goodwill IS a capital asset
What are the steps in applying a capital gain or loss?
Net all STCG and STCL
Net all LTCG and LTCL
Add together
Deduct $3;000
How much ordinary income can be offset by an INDIVIDUAL’s capital losses?
$3;000 per year.
Unused is carried forward and taken $3;000 each year.
No carryback is allowed.
Which property is governed by section 1231?
Real or Personal Business Property held more than a year
Inventory is never 1231 Property
How are section 1231 Gains handled?
- Net Gain = Combine with other 1231 Gains
- If 1231 Gains exceed losses; treat at LTCG
How is section 1245 Depreciation Recapture handled?
- To the extent of depreciation
- Treat as ordinary gain
- Remainder is 1231 gain; which is LTCG
- There are no 1245 Losses
What property qualifies for section 1250 treatment?
1250 property is Real Estate that is not 1231 Property
When are 1231; 1245 and 1250 G/L always ordinary?
When the asset is held less than one year.
What is (are) the depreciation convention(s) for personal property?
Mid-year & Mid-quarter
When is the mid-quarter convention used?
For depreciation when 40% or more of all purchases occur in 4th quarter.
What depreciation convention is used for real property?
Mid-month
What depreciation life and convention are used for leasehold improvements?
15 year straight line (S/L)
What ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross Profit / Contract Price
What is the contract price in an installment sale for income tax purposes?
Contract Price =
Sales Price
- Liability assumed by buyer
What is the difference between Real Property & Personal Property?
- Real: Land & Building
- Personal: Machinery, Equipment & Auto
What are Non-Capital Assets?
- Property included in inventory or Held For Sale in ordinary course of business
- Depreciable Personal Property & Real Estate in Trade/Business [sec1231,etc]
- A/R & N/R
- Artists works- held by original artist
What is the recipient or donee’s basis on gifted property Sold at a loss?
- Use lesser of donor’s basis or FMV at time of distribution
What is the recipient or donee’s basis on gifted property Sold in between donor’s basis and FMV?
- No gain or loss
What is the General Rule for Property received as Gifts Cost Basis?
- Retains the Rollover cost Basis as the donor’s at time of gift
- Increased by any gift tax paid attributable to Net Appreciation
What is the Exception of Gifted Property Basis?
- If FMV at the date of gift is lower then Rollover cost basis
- Then the Donee’s Basis depends on future selling price of the asset
What is the Holding Period for Gifts?
- The recipient normally assumes the Donor’s Holding Period
What is the Holding Period of inherited property?
- Long Term CG property regardless of how long it is held by the recipient.
For Inherited Property if the Alt. Valuation date is elected then valued using FMV at the Earlier Of:
- Distribution date of Asset
OR - Alternate Valuation: Earlier of 6 months of distribution
What items are included in GAIN not included on the Tax Return?’?
- Homeowners Exclusion
- Involuntary Conversion
- Divorce Property Settlement
- Exchange of Like Kind (Bus)
- Installment Sale
- Treasury Capital & Stock
‘HIDE IT’
What items are included in LOSS not included on the Tax Return?’?
- Wash Sale Losses
- Related Party Losses
- And
- Personal Losses
‘WRaP’
How are losses treated for a Primary Residence?
Loss on sale of home is NOT deductible
Sale of Personal Principal Residence for the Homeowner’s Exclusion from Gross income for Gain:
- $500,000 for Married couples/Surviving Spouse filing Joint Returns
- $250,000 for Single Taxpayers, Married Filing separately & Head of Household
When does Involuntary Conversion NOT result in a Gain?
There is no gain if you reinvest the proceeds completely
When must the Reinvestment from Involuntary Conversion for Personal & Business Property occur within?
- Personal: Must occur within 2 years from year-end
- Business: Must occur within 3 years from year-end
What is the Basis in Like-Kind Exchanges with Boot is received?
FMV of property received
- Deferred Gain
+ Deferred Loss
= Basis in Like-Kind Exchange
What is the Earned Revenue (Taxable income) for Reportable Installment Sale Gain/Income?
Cash Collections X Gross Profit %
= Earned Rev/ Taxable Inc
How does a Related Party Transaction affect a Property Transaction?
Seller cannot take a loss on sale to a related party; but gain is always recognized.
Related party gets to use the disallowed loss when they sell.
What is the Related party’s holding period?
- Begins when they acquire the property.
Can a Personal Loss be deductible on a Non-Business disposal?
- No deduction is allowed
- Itemized only when Casualty & Theft
What is the Holding Period for INDIVIDUAL’S LT & ST Net Capital Gains?
Short Term: One year or Less
Long Term: More then one year
What is the Tax Rates for INDIVIDUAL’S LT Net Capital Gains?
- 20% is the Maximum
- 15%
- 0% for 10-15% taxpayers
What is the Tax Treatment for INDIVIDUAL’S ST Net Capital Gains?
- Treated as Ordinary Income
What is the treatment for a Corporation’s Net Capital Gains?
- Added to Ordinary Income
& - Taxed at Regular tax rate
Half-Year Convention Depreciation applies to?
- Personal Property
- Having been placed in service or disposed of at the midpoint of the year
How many years is Residential & Non-Residential Rental Property depreciated for?
- Residential: 27.5 years Straight Line
- Non-Residential: 39 years SL
What is the Limit for the fixed amount of Expense new/used Personal Property acquired from unrelated party?
- $500,000
What is the Limit for the fixed amount of a new/used REAL Property a business can expense?
- $250,000
- leasehold, retail, restaurant improvements
The Maximum amount of the Expense Deduction is reduced?
- For dollar for dollar by the amount of property that exceeds $2,000,000
The Expense Deduction is Not permitted when?
- A Net Loss exists
OR - If the Deduction would create a Net Loss
Under Percentage Depletion, the deduction is limited to?
- 50% of taxable income
- Included in ‘Preference’ in Alt. Min. Tax
What are the Allowable Percentages for Depletion?
- 5% to 22% depending upon minerals being extracted.
How are section 1231 Losses handled?
- Casualty Losses on 1231 Property; Net the losses
- If 1231 Losses exceed gains; treat as Ordinary Loss
For Section 1250; how are gains/losses handled?
Use 1250 for Gain only.
For losses; use 1231
Individuals: Post-1986 property with a gain is 1231 LTCG
If Straight Line depreciation is used; don’t use 1250 - Entire gain is 1231
For Section 1250; how are gains/losses for Corporations handled?
- Section 291 requires 20% of depreciation classified as ordinary gain
- Remainder is 1231 LTCG
When does section 1245 Depreciation Recapture Gain apply?
- 1231 Gain = LTCG
- 1245 Gain = Ordinary
- Casualty Gain = LTCG
When does section 1245 Depreciation Recapture Losses apply?
- 1231 Loss = Ordinary
- 1245 Loss = N/A
- Casualty Loss = Ordinary
When does Involuntary Conversion result in a gain?
If proceeds not completely reinvested:
- Gain is LESSER of realized Gain
OR - Amount not reinvested.
What conditions must be satisfied for a taxpayer to Expense a depreciable personal property?
- Property must be purchased for use in the taxpayer’s active trade/business
- Property must be purchased from an unrelated party
