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