REG 4 Flashcards
Individual capital gains and losses: Netting procedures for Capital gains and losses
Short-term Capital Gains and Losses:
1) If any short-term capital losses (including carryovers), use to offset against any short-term gains that would be taxable at ordinary income rates
2) Any remaining short-term capital loss, use to offset any long-term capital gains from the 28% rate group (e.g. collectibles)
3) Any remaining short-term capital loss, use to offset any long-term capital gains from the 25% group (e.g. un-recaptured Section 1250 gains)
4) Any remaining short-term capital loss use to offset long-term capital gains applicable at the lower (e.g. 15%) tax rate.
Long-term Capital Gains and Losses:
1) If there are any long-term capital losses (including carryovers) from the 28% rate group, then use to first offset against any net gains from the 25% rate group and then against net gains from the 15% rate group.
2. If there are any long-term capital losses (including carryovers) from the 15% rate group, then use to offset first against any net gains from the 28% rate group and then against net gains from the 25% rate group.
Capital assets
Capital assets include property (real and personal) held by the taxpayer for investment, such as :
- Personal automobile of the taxpayer
- Furniture and fixtures of the taxpayer
- Stocks and securities of all types (except those held by dealers)
- Personal property of a taxpayer not used in a trade or business
- Real property not used in trade or business
- Interest in a partnership
- Goodwill of a corporation
- Copyrights, literary, musical, or artistic compositions purchased
- Other assets held for investment
Like Kind-Exchange Property
Gain/Loss Realized:
Amount realized=FMV asset received +FMV boots received/liab relieved) less (boot paid/liab assumed)- Adjusted basis of auto given up
Gain/loss recognized:
Gain recognized= X (the lesser of gain realized or boot received) or net relief from liabilities (boot received)
OR
Realized loss is never recognized in like-kind exchanges.
Basis of New Property, use formula below:
New Basis= Adjusted basis of property given up + Gain recognized (- Boot received, if any)(+Boot paid, if any or liab assumed)
OR
Basis in like-kind property received when boot is received= FMV of asset received - Deferred gain +Deferred Loss
MACRS
MACRS 5-year property: automobiles, light trucks, computers, typewriters, copiers, duplicating equipment, and other such items.
MACRS 7-year property: office furniture and fixtures, equipment and property with no ADR midpoint classified elsewhere, and railroad track.
Definitions
Real property is defined as land and all items permanently affixed to the land (e.g. buildings, paving, etc).
Personal property is all property not classified as real property (i.e machinery, equipment, and automobiles)
Capital Assets (separate flashcard)
Non-capital assets are
1) Property included in inventory held for sale to customers in the ordinary course of business
2) Depreciable personal property and real estate used in trade or business (e.g. Section 1231, Section 1245, and Section 1250 property).
3) Accounts and notes receivable from sales or services
4) Copyrights, literary, musical, or artistic compositions held by the original artist
5) Treasure stock
Calculation rules
1) Purchase
Basic formula:
Amount realized
less (Adjusted basis of asset sold)
=Gain/loss
Amount realized=
Cash received
Assumption of debt by buyer (Excess=Boot)
Property received at FMV
Services received at FMV
less (Reduced by selling expenses, i.e. broker commissions)
(Adjusted Basis of Asset sold)
1) Purchase Property Basis = Cost [cost includes purchase of property, prepare the property for use, and place into service, i.e. shipping costs, installation costs, sales taxes, and testing costs.]
Add to basis “capital improvements
less (Reduce basis for accumulated depreciation)
Calculation rules
2) Gift
Gifted property basis
General rule: Donor’s Rollover Cost Basis=NBV
The property acquired as a gift generally retains the rollover cost basis (of the donor at the time of gift). Basis in increased by any gift tax paid attributable to the appreciation in the value of the gift.
Exception: Lower FMV at Date of Gift
If the fair market value at the date of the gift is lower than the roll-over cost basis from the donor, the basis for the donee depends upon the donee’s future selling price of the asset.
(i) Sales of gifts at price greater than Donor’s rollover basis means “gain basis”
(ii) Sale of gifts are price less than lower FMV means “loss basis”
(iii) Sale of gifts less than the rollover cost basis but greater than lower FMV (in the “middle”) neither a gain or loss is recognized.
- Future selling price dictates the basis.
- Holding period-the recipient of the gift normally assumes the donor’s holding period.
Calculation rules
3) Inheritance
Inherited Property Basis (step up/down to FMV)
General rule- Date of Death: FMV becomes basis
Alternate valuation date: the FMV on the alternate valuation date may be used to value all of the estate property.
If the alternate valuation date is elected, the asset is valued using FMV at the earlier of:
(i) distribution date of asset; or
(ii) alternate valuation date (earlier of 6 months after death or date of distribution/sale)
*Holding period-Property acquired from a decedent is automatically considered to be long-term regardless of how long it actually has been held.
Realized*, but not recognized, gains or losses
*All realized gains and losses are recognized (i.e. reported on the tax return) unless “HIDE IT” or “WRaP” applied
Amount realized [boot, COD (boot), FMV property less selling expenses]
less (Adjusted Basis of Assets Sold)
=Gain (apply “HIDE IT”)
or
Loss (apply “WRaP”)
Gains (excluded or deferred)
HIDE IT
H-Homeowner’s exclusion: $500K available for married filing jointly, or $250K single, married filing separate, excess of exclusion is taxable. Taxpayer must own and used the property as principal residence for 2 yrs during 5 year period on date of sale. Exclusion is renewable (but limited to once every two years).
I-Involuntary conversions: Gains realized on involuntary conversions of property (i.e. destruction, theft, condemnation) due to i.e. insurance proceeds will not be recognized, as long as the taxpayer reinvests the proceeds. If the taxpayer does not reinvest all the proceeds, his gain on the transaction will be recognized to the extent of the un-used (unreinvested) amount.
The reinvestment must occur:
Personal property: 2 years from year-end
Business property: 3 years from year-end
When gain is recognized due to the unused portion the new basis of the new asset is the
Cost of the new building
Less: (Gain not recognized)
=Basis of new building
When loss occurs, involuntary conversion rules do not apply and loss would be recognized. The basis of the new property is its replacement cost.
D-Divorce property settlement: when divorce property settlement provides for a lump sum payment or property settlement, it is a nontaxable event.
E- Exchange of Like-Kind Business/Investment Assets (tangible): Business trade-in or swapping real estate (except inventory, stock, securities, partnership interests, and real property in different countries). To receive the deferral treatment associated with like-kind exchanges personal property (M&E) must be exchanged for other personal property that has the same general use (in the same asset class).
Basis in like-kind property received when boot is received= FMV of asset received - Deferred gain +Deferred Loss
1st determine: Potential gain realized: Amount realized less Adjusted basis of asset given up.
2nd determine: Gain recognize=lesser of gain realized or boot received (or net relief of liab/boot received)
*No loss is recognized in like-kind exchanges
3rd determine: Basis of new asset= FMV of asset received - Deferred gain +Deferred loss
I-Installment Sale
GP= Sales - COGS
GP%=Gross profit/Sales price
Earned revenue (taxable income)=Cash collections x GP%
T-Treasury and Capital Stock Transaction (by corporation)Corporate transactions dealing with their own capital stock and treasury are exempt from gain (any losses are disallowed). Essentially corp are precluded from tax benefits or income taxes resulting from dealing with their own stock.
Losses (NON-deductible)
WRaP up losses because they are NON-deductible
W- Wash sale loss: A wash sale exists when a security (stock or bond) is sold for a loss and is repurchased within 30 days before or after the sale date.
Basis of the repurchased security=Purchase price of the new security plus the disallowed loss.
*If the security is sold and there is gain and it is repurchased in 30 days, then the capital gains tax is applicable and you will use the new purchase price as the basis.
R-Related party transaction: brothers/sisters, husband/wife, lineal descendants (father/son/grandfather), entities that are MORE than 50% owned by individuals, corps, trusts, and partnerships.
(In-laws are not related parties)
Capital losses are disallowed
Capital gains taxes are imposed on all sales of non-depreciable property between related parties except: husband/wife.
Basis rules, same as gift tax rules.
*Holding period: starts with the new owner’s period of ownership.
A-bought a vowel
P-Personal losses- No deduction is allowed on a nonbusiness disposal or loss. May be deducted if it falls under the category of casualty or theft.
General rules for Losses (Individual/Corporate)
Operating losses: offsets income; carryback/forward: 2 back/20 forward
Individual capital losses: offsets income by $3,000 max, carryback/forward: No carryback, forward indefinitely.
Corporate capital losses: only offsets capital gains, carryback/forward: 3 back, 5 forward
MACRS -Machine and Equipment
MACRS-Real estate
Machine and equipment:
1) salvage value ignored,
2) half-year convention or mid-quarter convention (if more than 40% of assets placed in service in quarter 4)
Real estate:
1) salvage value ignored/ subtract land cost not depreciated)
2) Mid-month convention
3) Residential rental property (27.5 straight line) & Nonresidential (Business) Real property (39-year straight line)
Section 1231: Depreciable personal and real property used in trade or business and held over 12 months
Net Section 1231 losses are treated as ordinary losses.
Loss= Treat as ordinary loss (no limitation)
Gain, subject to the recapture rules, see below Ordinary income = Gain to the extent of accumulated depreciation Section 1231 (Capital) gain=Gain for sale price in excess of original cost and accum depreciation.
Partnership termination
Partnership terminates:
(i) operations cease
(ii) when more than 50% of the total partnership interest is sold or exchanged (change hands) within a 12 month period.
(iii) there are less than 2 partners (i.e. becomes a sole proprietorship)
Effect of termination
-when a partnership is terminated for tax purposes and its remaining partners decided to carry on the partnership business in a (deemed) new partnership, tax law treats this as a distribution of the prior partnership’s assets followed by a recontribution of the (deemed) distributed assets to the new partnership.
