REG 3 - Taxable and Nontaxable Dispositions Flashcards
Explain HIDE IT?
A gain is not taxed if a taxpayer can HIDE IT.
H - Homeowner’s exclusion
I - Involuntary conversions
D - Divorce property settlement
E - Exchange of like-kind business / investment assets
I - Installment sales
T - Treasury and capital stock transactions (by corporation)
What is the amount of gain that can be excluded for homeowner’s exclusion?
500,000 - MFJ
250,000 - Single
What is the qualification needed in order to exclude gain in homeowner’s exclusion?
1) Taxpayer must have owned and used the property as a principal residence for 2 years or more during a 5 year period.
- Married taxpayers are treated separately for qualification
- Two year residency does not have to be continuous.
What is the nonqualified use provision (renting of home) for homeowner’s exclusion?
The amount of gain NOT eligible for exclusion (it will be treated as gain) is the amount of nonqualified use/total period the taxpayer lived in the property.
E.g. A taxpayer had a principle residence for 5 years. Of the 5 years, the taxpayer lived in the home for 2 years and rented the home for 4 years. The amount of gain that is NOT able to be excluded is (2/4 = 50%)
Explain qualified use provision if taxpayer was trying to sell home but did not live there during period of 5 years for homeowner’s exclusion.
If taxpayer was actively trying to sell home while it was empty during the 5 year period, they can still take exclusion.
Explain hardship provision for homeowner’s exclusion? How do you calculate hardship provision for exclusion?
Taxpayer may be eligible for a partial exclusion if the sale is due to employment, health, or unforeseen circumstances.
The amount of exclusion is calculated as the number of months in principal residence / 24 months.
24 months because that is the 2 years for qualification.
E.g. A single taxpayer lived in a home for 1 year before getting cancer.
- The amount of exclusion is (12/24 x 250,000) = $125,000
Explain involuntary conversion? How do you recognize gain?
- Occurs when taxpayer receives money for a property involuntarily converted
1) There is no gain if amount received is completely invested
2) There is a recognized gain if entire amount is not reinvested - The recognized gain is equal to the amount not reinvested (the amount of boot kept)
E.g. Taxpayer has a building with a NBV of $400,000. The state paid the taxpayer $450,000 for condemned building. The taxpayer reinvests $440,000.
Realized gain = $50,000 (450,000 - 400,000)
Recognized gain = $10,000 (450,000 - 440,000) (boot kept)
New basis = $400,000 (440,000 - 40,000) (cost of new property less gain not recognized)
What is the basis of new property acquired in gain for involuntary conversion? What is the basis of new property acquired in loss for involuntary conversion.
Gain - The basis of new property acquired is the cost of the new building less the gain not recognized.
Loss - The basis of new property acquired is the replacement cost.
E.g. Taxpayer has a building with a NBV of $400,000. The state paid the taxpayer $450,000 for condemned building. The taxpayer reinvests $440,000.
Realized gain = $50,000 (450,000 - 400,000)
Recognized gain = $10,000 (450,000 - 440,000) (boot kept)
New basis = $400,000 (440,000 - 40,000) (cost of new property less gain not recognized)
How many years after does personal and business property have to be reinvested in order to exclude gain for involuntary conversion?
Personal property - reinvestment must occur two years from year end.
Condemned property - reinvestment must occur three years from year end.
Is divorced property settlement taxable or nontaxable? What is the basis of divorced property settlement?
Divorced property settlement is NONTAXABLE.
The new basis of divorced property settlement is the NBV from former spouse.
