R4.1 – Property Transactions Flashcards by me A

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))

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Types of Assets

Real Property

Personal Property

Non-capital Assets

Capital assets

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Types of Assets – Real Property

Real property = land and building

– Land and all items permanently affixed to the land

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Types of Assets – Personal Property

Personal property = machinery and equipment

– Property not classified as real property

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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

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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

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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

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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

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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

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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

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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

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Recognized Gain or Loss – Excluded or Deferred Gains: Divorced Property Settlement

Nontaxable event

Basis for recipient spouse will be carryover basis

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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

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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

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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

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3 Types of Nondeductible loss

Wash Sale Losses
Related party transactions
Personal loss

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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 1. Cost depletion 2. 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