R4.1 – Property Transactions Flashcards
Forms
Form 1040 Schedule D – Capital Gains and Losses
Form 8949 – Sales and Other Dispositions of Capital Assets
– Filed along with Schedule D
Form 8824 – Like Kind Exchanges
Form 6252 – Installment Sales Income
Form 4797 – Sale of Business Property (also Involuntary Conversion and Recapture Amounts Under Section 179 and 280F9b)(2))
Types of Assets
Real Property
Personal Property
Non-capital Assets
Capital assets
Types of Assets – Real Property
Real property = land and building
– Land and all items permanently affixed to the land
Types of Assets – Personal Property
Personal property = machinery and equipment
– Property not classified as real property
Types of Assets – Non-capital Assets
Inventory
Accounts and notes receivables
Depreciable assets used in a trade or business (section 1231, 1245, 1250 property)
Copyrights, literary, musical, or artistic compositions held by the original artist with the exception of musical compositions which receive capital gain treatment
Treasury stock
Types of Assets – Capital Assets
Property held for personal use
Assets held for investment
Goodwill of a corporation
Stocks and securities except those held by dealers
Copyrights, literary, musical, or artistic compositions that have been purchased
Interest in a partnership
Realized Gain or Loss
Realized Gain or Loss
= Amount realized
– Adjusted basis
Amount realized = Cash received \+ FMV property or services received \+ Liabilities assumed by buyers – Selling Expenses
Adjusted basis
= cost or other acquisition basis of property
+ capital improvements
– depreciation, amortization, and depletion
Adjusted Basis
Purchase property: Adjusted basis = cost
Gifted Property: Adjusted basis = donor’s rollover cost
– Exception: FMV < rollover cost basis → basis will depended on future selling price
1) Sale price > rollover cost = gain
Basis = rollover cost
Gain = Sale price - rollover cost
2) Sale price < FMV = loss
Basis = FMV
Loss = FMV - Sale price
3) FMV < Sale price < rollover cost basis = no gain or loss
Basis = Sale price
Inherited Property: Adjusted basis = FMV at date or alternate valuation date
Holding period
– Generally, donee assumes donor’s holding bais
– Exception, if donnee’s basis = FMV (i.e. loss), holding period starts on date of gift
– Inherited property: long-term
Recognized Gain or Loss – 6 Excluded or Deferred Gains
- Homeowner’s Exclusions
- Involuntary conversion
- Divorce property settlement
- Exchange of like-kind business and investment assets
- Installment sales
- Treasury and capital stock transaction
Recognized Gain or Loss – Excluded or Deferred Gains: Homeowner’s Exclusions
Gain from sale of taxpayers principal residence excluded from income
Limit: $500,000 MFJ/SS, $250,000 single/MFS/HoH
Must have owned and used house as a principal residence for at least two of the five years preceding the sale
Either spouse can meet ownership requirement but both spouses must meet the use requirement with respect to the property
Exclusion can be used multiple times but can’t use more than once every two years
Partial excision if sale due to change in place of employment, health or unforeseen circumstances and exclusions claim within the previous two years
Recognized Gain or Loss – Excluded or Deferred Gains: Involuntary Conversion
Destruction, theft, condemnation
Gains are realized but not recognized on involuntary conversions of property is proceeds are reinvested
– Reinvestment must be within 2 years (4 years for property in federally declared disaster area, 3 years for business property)
Gain is recognized to the extent of the unreinvested amount
If no gain recognized, basis of new property
= basis of old asset + additional amount invested
If gain is recognized, basis of new property
= acquisition cost – unrecognized gain
Recognized Gain or Loss – Excluded or Deferred Gains: Divorced Property Settlement
Nontaxable event
Basis for recipient spouse will be carryover basis
Recognized Gain or Loss – Excluded or Deferred Gains: Exchange of Like-Kind Business/Investment Assets
Like-kind exchange = property received has same general character of property given up
If exchanges pure like-kind, no gain recognized
If non-like property is part of its is part of property (i.e. boot received, gain is recognized
– Recognized gain is lower of 1) realized gain or 2) boot
Basis of new property = basis of property given up \+ boot or money given up – money/boot received \+ gain recognized
Like-kind exchanges reported on Form 8824
Equal to basis of property giving up plus boots received -2 given up
Recognized Gain or Loss – 6 Excluded or Deferred Gains: Installment Sales
Installment sale method used for reporting gains for sales made by non-merchant in personal property and non-dealer in real estate
Installment sales method cannot be used for sale of stocks of securities on unestablished market
Gain recognize when cash received
Taxable income (earned revenue) = cash collections × gross profit
Gross Profit %
= Gross Profit ÷ Sales Price
Gross Profit = Sales - COGS
Recognized Gain or Loss – Excluded or Deferred Gains: Installment Sales
Installment sale method used for reporting gains for sales made by non-merchant in personal property and non-dealer in real estate
Installment sales method cannot be used for sale of stocks of securities on unestablished market
Gain recognize when cash received
Taxable income (earned revenue) = cash collections × gross profit
Gross Profit %
= Gross Profit ÷ Sales Price
Gross Profit = Sales - COGS
3 Types of Nondeductible loss
- Wash Sale Losses
- Related party transactions
- Personal loss
Nondeductible Loss – Wash Sale Losses
Wash sale: sell a security for a loss then repurchase it 30 days before or after sale date for a bargain
Losses on wash sales disallowed
Basis of the purchase security is the purchase price of new security plus the disallowed loss
Acquisition date of purchase security is acquisition date of the original security
if sale results in gain, taxpayer pays capital gains tax; basis is new purchase price
Nondeductible Loss – Wash Sale Losses
Wash sale: sell a security for a loss then repurchase it 30 days before or after sale date for a bargain
Losses on wash sales disallowed
Basis of the purchase security is the purchase price of new security plus the disallowed loss
Acquisition date of purchase security is acquisition date of the original security
if sale results in gain, taxpayer pays capital gains tax; basis is new purchase price
Nondeductible Loss – Related party Transactions: Related Parties
Related parties:
– Direct relatives (siblings, (grand)parents, (grand)kids),
– Spouse
– Entities more than 50% owned by individuals, corporations, trusts, and/or partnerships
– In-laws are not related parties
Nondeductible Loss – Related party Transactions: Basis
Basis depends on buying related party’s final selling price
Final selling price > Selling Related Party’s basis = gain
– Basis = Selling related party’s basis
– Gain = final selling price - selling related party’s basis
Final selling price < Price between the related parties = loss
– Basis = price between the related parties
– Loss = Final selling price – Price between the related parties
Price between related parties < final selling price < selling related party’s basis = no gain or loss
– Basis = Final Selling Price
Nondeductible Loss – Related party Transactions: Basis
Basis depends on buying related party’s final selling price
Final selling price > Selling Related Party’s basis = gain
– Basis = Selling related party’s basis
– Gain = final selling price - selling related party’s basis
Final selling price < Price between the related parties = loss
– Basis = price between the related parties
– Loss = Final selling price – Price between the related parties
Price between related parties < final selling price < selling related party’s basis = no gain or loss
– Basis = Final Selling Price
Nondeductible Loss – Personal Losses
ot recognized and so can not be deducted
May be deductible as part of itemized deduction for casualty and theft losses
Individual Capital Gain and Loss Rules: Net capital loss deduction and loss carryover rules
$3000 max deduction of net capital losses ($1500 MFS)
Loss is limited to taxable income before personal expenses
Excess carried forward indefinitely, maintain character as long-term or short-term
Personal bad debt treated as short-term capital loss in the year the debt becomes worthless
Cost of worthless stock treated as capital loss as if they were sold in the last day of taxable year which became worthless.
Individual Capital Gain and Loss Rules: Net capital loss deduction and loss carryover rules
$3000 max deduction of net capital losses ($1500 MFS)
Loss is limited to taxable income before personal expenses
Excess carried forward indefinitely, maintain character as long-term or short-term
Personal bad debt treated as short-term capital loss in the year the debt becomes worthless
Cost of worthless stock treated as capital loss as if they were sold in the last day of taxable year which became worthless.
Individual Capital Gain and Loss Rules: Netting procedures
Gains and losses are netted with each tax rate group to create net short-term or long-term gains or losses by rate group
Short-term losses offset short-term gains beginning with highest tax rate group and continuing to lower rate groups; same goes for long-term losses and gains
Corporate Capital Gain and Loss Rules: Net Capital Gains
Net capital gains of a corporation audits to ordinary income taxed at the regular tax rate
No lower capital gains rate
Section 123 assets entitled to capital gains treatment
Cost Recovery –Depreciation
Depreciation deductions are allowed for assets used to produce income
The IRS provides MACRS tables that show the percentage of the asset’s cost basis to be reduced each year, based on the assets’s classification.
Only business and income-producing property is depreciable
– Property used for personal purposes and investment assets are not depreciaable
Cost Recovery –Depreciation: MACRS
MACRS = Modified Accelerate Cost Recovery System
MACRS for Property other than real estate
– 200% for 3, 5, 7, and 10-year property
– 150% for 15 and 20-year property
– Half-year convention, unless purchase more than 40% of property in the last quarter, then mid-quarter convention
MACRS for Real estate = land and buildings – Straight-line depreciation – 27.5-yr residential - 39-yr nonresidential – Mid-month convention
Cost Recovery –Depreciation: Section 179 Deduction
Can deduct a fixed amount of depreciable property used in trade as expense in lieu of depreciation
–For machinery, equipment, and computer software
–$500,000 deduction if purchased up to $2,000,000 in machinery and equipment
–Reduced dollar for dollar on any purchased in excess of $2,000,000
–Cant used deduction if net loss exists, or deduction would create net loss
Cost Recovery –Depletion
For exhaustible natural resources e.g. timber, oil, gas
Two methods
- Cost depletion
- Percentage temptation
Cost Recovery –Depletion: Cost Depletion
Factor applied = Remaining basis of property ÷ remaining number of recoverable units
Depletion for the year calculated based on number of units sold
Cost Recovery –Depletion: % Depletion
Allowable percentage range from 5 to 22% depending on nature of substance
Deduction for depletion limited to 50% of income from wellmine before the depletion (100% for oil)
Depletion – % Depletion
Allowable percentage range from 5 to 22% depending on nature of substance
Deduction for depletion limited to 50% of income from wellmine before the depletion (100% for oil)
Cost Recovery –Amortization
Intangibles e.g. Goodwill, licenses, franchises, trademarks
– 15 yrs, straight-line basis beginning in month acquired
Business organization and start up costs
– Expense $5000 of costs immediately
– Reduced dollar for dollar amounts exceeding $50,000
– Amortize the rest over 180 months
Research expense
– Straight-line 60 months
Depreciation and amortization reported on form 4562
Section 1231 Assets
Section 1231 assets = assets used in a business and help over 12 months
– Includes realty and depreciable property
– Excludes capital assets, inventory, accounts receivable, copyrights, and government publications
Note: section 1231 applies to all involuntary conversions of business assets
Section 1231 provides capital gain treatment to a net game generated from transactions involving involuntary conversions and the disposition of business assets
Part of gains attributed to accumulated depreciation is recaptured
– This reduces the amount of gain eligible for 1231 treatment
Land is not depreciable so all gains on land are 1231 gains
Recapture
Two types of recapture: 1. Section 1245 – Machinery and equipment – Gains only 2. Section 1250 – Buildings – Gains only
Recapture – Losses
Recapture does not apply to losses
Net section 1231 losses are treated as ordinary losses
– There are section 1245 or section 1250 losses
Recapture – Section 1245
Section 1245 assets = machinery and equipment used in a trade or business for > 1 year
Gain up to accumulated depreciation is recaptured = treated and taxed as ordinary income
Gain in excess of accumulated depreciation is section 123 game = treated and taxed as capital gain (0%, 15%, 20%)
Recapture – Section 1250
Section 1250 assets = Real property (buildings) used in trade or business > 1 year
Gain up to accelerated depreciation where depreciation calculated on a straight-line basis = taxed as 25%
Gain beyond accelerate depreciation based on straight-line and up to actual accelerated depreciation = treated and taxed as ordinary income
Gain in excess of accelerated depreciation taken = Section 1231 gain = taxed as capital gains (0%, 15%, 20%)
Recapture – Netting
Section 1231 gains and losses netted against each other
Net section 1231 game treated and taxed as long-term capital gain
Net section 1231 losses deducted as ordinary loss
Recapture – Reporting
Sales of business property, including depreciation recapture recapture reported on From 4797
