REG 3 Flashcards
What are section 1231 assets?
Assets used in a trade or business and have been owned more than one year.
Section 1231 casualty and theft gains and losses netting process:
Net all casualty and theft gains and losses on property held more than one year. If losses exceed gains, treat them all as ordinary losses and gains and DO NOT net them with other Section 1231 gains or losses. If gains exceed losses, the net gain is combined with other section 1231 gains and losses.
How to net section 1231 gains and losses:
To the extent that section 1231 gains exceed section 1231 losses, the net gain is treated as a long term capital gain (subject to lookback limit). If section 1231 losses exceed section 1231 gains, the loss is deductible as an ordinary loss.
What is the section 1231 netting lookback provision?
Net section 1231 gains must be offset by net section 1231 losses from the 5 preceding tax years that have not been previously recaptured. To the extent of these losses, the net section 1231 gain is treated as ordinary income.
Recapture rules:
Recapture applies only to section 1231 assets because only they are depreciable. These include section 1250 assets (realty) and section 1245 assets (all other assets or “personalty”)
Section 1245 recapture:
If section 1231 property is depreciable, the gain from the sale of the property is subject to recapture as ordinary income. The amount not recaptured is section 1231 gains. Depreciable property is section 1245 property, and all deprecation is subject to being recaptured as ordinary income.
Section 1250 recapture:
Depreciable realty is section 1250 property. Only the excess of actual depreciation over straight-line depreciation is subject to recapture as ordinary income.
25% recapture rate:
For section 1250 property, the portion of the gain that would be recaptured if all depreciation taken was subject to recapture under section 1245 over the regular section 1250 recapture is taxed at 25%, rather than as a section 1231 gain. (Amount taxed at 25% is usually the straight-line depreciation on the asset.)
Section 1250 recapture for corporations:
Rules are the same as for individuals, except: 1. Straight-line depreciation is not taxed at the 25% rate, 2. Additional depreciation is recaptured to the extent of 20% multiplied by recapture if property is section 1245 property less section 1250 depreciation recapture.
How do you calculate MACRS depreciation for personalty?
200% declining balance method with a half-year convention. Taxpayer gets half a year depreciation in year asset is purchased, and half year depreciation in year asset is sold.
How long do you depreciate MACRS personalty property?
5 years for light trucks, automobiles, computers, office equipment. 7 years for office furniture and fixtures, most equipment, machinery.
When do you use the mid-quarter convention?
It is used when more than 40% of all personalty is placed into service during the last quarter of the taxable year.
How do you calculate MACRS depreciation for realty?
Straight-line depreciation with mid-month convention.Taxpayer gets half-month depreciation in month of acquisition and half-month in month of disposal.
How long do you depreciate MACRS realty property?
Residential property for 27.5 years; non-residential for 39 years.
What is the section 179 deduction?
Taxpayers can elect to expense a certain amount of tangible property used in a trade or business. Investment property is not eligible. New or used property is eligible. Basis of the property for cost recovery purposes is reduced by the section 179 amount, even if the deduction is limited by the taxable income rule.
