REG 3 - Property Tax Flashcards
Purchased Property Basis
Cost + Capital improvements (shipping, installation, sales tax, testing costs)
Purchased Property Holding Period
Purchase date
Gifted Property Basis
= Rollover cost basis = NBV. The gift retains the cost basis it had in the hands of the donor
*EXCEPTION if FMV at the date of the gift is lower than the rollover cost basis
Gifted Property Basis under exception
Lower FMV than NBV at date of gift. It becomes dependent on selling price.
1) Sold higher than NBV, basis is NBV
2) Sold lower than FMV, basis is FMV
3) Sold in between the two, sale price is the basis (aka no gain or loss)
Gifted property basis for depreciation
Use the lower of FMV or NBV
Inherited property basis / holding period
Step up or down to FMV. Automatically long term regardless of how long the property was actually held.
Alternate Valuation date
If used, basis of the asset is the FMV at the earlier of
1) sales/distribution date of the asset or
2) 6 months after death
De Minimis Safe Harbor expense vs capitalize rule
Businesses are allowed to immediately expense (deduct) up to the following amounts under the provided conditions:
1) audited FS = expense up to $5,000 items
2) Unaudited FS = expense up to $2,500 items
3) If item is over these amounts = capitalize entire cost
Gifted Property holding period
Normally the donor’s holding period is assumed. However, under the exception, if FMV of the gift is used (loss basis) as the basis, the holding period starts as of the date of the gift
Realized vs Recognized
Realized = Real World, actually happened Recognized = Record on records/tax returns
HIDE IT (gain exceptions)
A gain is not taxed if taxpayers can “HIDE IT”. Gain to the extent of boot received is taxable.
Homeowners exclusion
Involuntary conversion
Divorce property settlement
Exchange of like-kind (business)
Installment sale
Treasury capital and stock
WRaP (loss exceptions)
Wash sale losses
Related party losses
and
Personal losses
What is included in boot
Cash: Kept and not reinvested
COD: Excess debt assumed by buyer
Homeowner’s Exclusion
$250,000 is available for single filers (500k for married). Excess gain is taxable. Must have owned and used the property as a principal residence for two years or more during the previous five year period ending on the date of the sale or exchange.
Either spouse must meet the ownership requirement but both must meet the use requirement to acquire the full 500,000 exclusion.
Hardship provision to homeowners exclusion
May be eligible for a reduced exclusion if the sale of home is due to a change in place of employment, health, or other unforeseen circumstances. Take the number of qualifying months and divide by 24 (if sold in 1 year multiply 250k exclusion x 12/24).
*The new place of employment must be at least 50 miles farther from the residence that is sold
**Years where the house was rented out before the property becomes a principal residence do not qualify for exclusion and must be prorated similarly to the hardship provision even if both use and ownership requirements are met.
Involuntary Conversion
Gains on conversions of property due to destruction, theft, condemnation, etc are not recognized given the proceeds are reinvested. Gains will be recognized to the extent of the amount not reinvested
involuntary conversion of personal property
Reinvestment must occur within two years after the close of the taxable year in which any part of the gain was realized
involuntary conversion of condemned business property
Reinvestment must occur within two years after the close of the taxable year in which any part of the gain was realized
Involuntary conversion: no gain recognized
When no gain is recognized because of the direct conversion of the property into other similar property, the basis of the new asset is the same as the basis of the old asset
Involuntary conversion: gain recognized
When gain is recognized because the amount received exceeds the cost of replacement, the basis of the replacement property is its cost less the gain not recognized.
Ex)
Old building basis: 400
State condemned old building and awarded: 450
Bought new building: 440
Realized gain = 450-400 = 50
Recognized gain = 450-440 = 10
Gain no recognized = 50-10=40
Cost of new building = 440
gain no recognized = 40
Basis of new building = 440-40=400
Involuntary conversion: loss recognized
Involuntary conversion rules apply to gains only. Losses are recognized. When the loss is recognized the basis of the new property is its replacement cost
Ex)
Old building basis: 340
Insurance proceeds after disaster: 330
Bought new building: 500
Recognized Loss: 340-330=10
Basis of new property: 500
Exchange of Link-Kind Business/Investment Real Property
Nonrecognition treatment is given to gains realized on “like-kind” exchange of real property used in the trade or business or held for investment. Must be RE to RE, Machinery and equipment does not qualify
Exchange of Like kind property timing requirements to receive deferral treatment
1) Must identify the replacement property within 45 days of giving up their property and
2) Must receive replacement property by the earlier of
- 180 days after the property is transferred
- the due date of the taxpayers income tax return
Exchange of like kind property gains when boot is received
If property other than qualifying like kind property is received (cash, relief from debt, nonqualifying property), the gain recognized is the lesser of the realized gain or the boot received.
- Only boot received triggers gain recognition, not boot paid
- *If the exchange includes both debt assumed and debt relief the debt is netted together. Debt relief is considered boot received
Basis rules for property received in a like kind exchange
When gain is deferred basis is ordinarily the same as the property given up. When boot is received:
= FMV of like kind property received - deferred gain + deferred loss
Like kind property exchange losses
Not deductible, increases the basis of the new property
Wash Sale Loss
When a stock or bond is sold for a loss and repurchased within 30 days before or after the sale date. The losses are disallowed for tax purposes. Gain is recognized and taxed. Basis is equal to purchase price + disallowed loss
Ex) January 4: Buy stock A for $100 March 5: Buy stock A for $40 March 15: Sell first share for $41 Realized loss of $59 BUT it is not recognized because of the wash sale rules (a share was bought 30 days before the sale of the stock)
Related party transactions
Family and more than 50% owned business. Losses are generally disallowed from sales between related parties. Basis is the same as the gift basis rules
Personal loss
No deduction is allowed for a loss on the disposal of a personal asset
Short-term capital gains for individuals
Treated as ordinary income (taxed at higher rate).
Net capital loss deduction for individuals
3,000 Maximum deduction per year. Short-term losses are deducted first
Excess net capital loss carryover for individuals
No carryback, carry forward forever. The loss maintains its character as short term or long term in future years
Unrecaptured section 1250 gain from depreciation of real property that is not treated as ordinary income
Taxed at 25% (can only have LTCGs)
Collectibles and Qualified Small Business Stock (QSBS)
Taxed at 28%
Netting Process for Individuals
Net STCL and offset against net LTCGs, starting with 28% group, 25%, then 0/15/20 group.
Net LTCL from 0/15/20 group and offset agains 28% and 25%. Any remaining is offset against STCG.
Net LTCL from 28% and offset against 25% then 0/15/20 group. Any remaining is offset against STCG.
Net Capital Gains for C Corporation
No special/lower tax rates. No distinction between short term and long term capital gains and losses
Net Capital Losses for C Corporation
Only allowed to offset/use against capital gains, not ordinary income. Net capital losses are carried back 3 years and forward 5 years
Section 1245 personal property depreciation recapture rules
- Loss = Section 1231 loss; net 1231 loss treated as ordinary loss
- Ordinary income = gain to extent of accumulated depreciation, and net 1231 gain to the extent of unrecaptured net 1231 losses in previous 5 years
- Capital gain = Net Section 1231 gain after depreciation recapture and 5 year look back
Reportable Installment Sale Gain/Income
1) Gross profit = Sales price - Adjusted basis
2) Gross profit % = Gross Profit / Sales price
3) Gain recognized (taxable income) = Cash collections (excluding interest) x Gross profit %
Constructive Ownership Rules
1) Stock owned directly or indirectly by a corporation partnership, etc is treated as owned proportionately by its shareholders, partners or beneficiaries
- ex.) Kathy owns 80% of ABC company, which in turn owns 30% of DEF company. Kathy owns 24% of DEF (80%x30%) through her holdings of ABC
2) An individual is considered as owning stock owned by related family members
3) Family members can pass off ownership determined by Rule 1 but can’t double dip from other family members based on Rule 2
Related Party Basis
Same as the gift tax rules (based on selling price). Losses are disallowed
Below Market loans between related party imputed interest exceptions
1) Gift loans below 10,000 in aggregate
2) Compensation related loans less than 10,000
Special rules for gift loans not in excess of 100,000
Less than 100,000, the foregone interest is limited to the amount of the borrowers net investment income. If less than 1000, the foregone interest is treated as zero
Personal Property
Machinery, Equipment, Computer and Automobiles
MACRS 5 year class (PP)
Automobiles, computers, and copiers
MACRS 7 year class (PP)
Furniture and fixtures, machinery, and equipment
Half Year Convention
Applies to personal property. Personal property asset is allowed six months of depreciation in the year of acquisition and disposition, regardless of the date on which it is acquired or disposed (Half year is built in to the MACRS rates in Year 1)
Mid quarter Convention
If more than 40% of personal property is placed in service in the last quarter of the year we multiply by the mid quarter ratio applicable to the quarter of disposition
Q1 : 12.5%
Q2: 37.5%
Q3: 62.5%
Q4: 87.5%
MACRS: Real Property
Subtract cost of land, depreciate buildings
Residential Rental Property = 27.5 Year Straight Line
Nonresidential Real Property = 39 Year Straight Line
Mid-month Convention
Straight line depreciation is computed based on number of months the property was in service. One half month is taken in the month the property is placed in service and the other half in the month of disposition
1BM
1) Section 179
2) Bonus Method
3) MACRS
Section 179 Expense Deduction
Can deduct up to 1,050,000 in qualified expenses in lieu of depreciation. Reduced dollar for dollar by the amount of property placed in service over 2,620,000
Bonus Depreciation
Qualified property is M&E. 100% allowed for property placed in service years 2018 through 2022
Depletion Deduction
Limited to 50% of taxable income
Amortization under Tax
15 year, straight line
