REG 7 - Property & Special Property Tax Transactions Flashcards
What are the 3 types of assets that may be held by a taxpayer?
- Ordinary Income Assets (current assets of a business)
- Section 1231 Assets (non-current business assets)
- Capital Assets (non business assets)
Ordinary Income Assets (3)
Assets that were aquired or produced with the intention of being sold in the ordinary course of business. These include:
- Inventory
- Receivables arising from sales (“hot assets”)
- Self-created artistic work
- Land/PPE held for less than 1 year
Tax Treatment:
- All gains/losses are fully included in the determination of taxable income (Ordinary Rate) w/ NO special treatment or limitiations of any kind.
Section 1231 Assets
These are non-current business assets that are used in the trade or business & whose eventual sale or disposal is only incidental to the business. They include:
- Depreciable/Amortizable Property
- Land (used in business)
- PP&E
Tax Treatment:
- If asset is held over 1 year:
- Net LOSS = Ordinary Loss
- Net GAIN = LT Capital Gain
- Prior depreciation is recaptured as ordinary income on tangible personal property.
- If asset is held under 1 year = Ordinary Loss/Gain
Capital Assets
These are (non-business assets) all assets that do not qualify as ordinary income or 1231 assets, these assets include:
- Investments
- Personal Use Assets
- Goodwill
Tax Treatment:
Individuals:
- LTCG: Special rates (0,15,20%)
- STCG: Ordinary
- Net LOSS: Max of $3000, excess is carried fwd indef
Corporations:
- Net LOSS : NOT Deductible
- Carryback 3 yrs or Carryforward 5 yrs
- Always considered ST loss
Capital Assets
Holding Period & How to Net
Holding Period:
- Long Term > 1 Year
- Short Term <= 1 Year (1 exact year is consdered ST)
- Special Scenarios:
- Inherited Assets - ALWAYS classified as Long-term
- Non-business Bad Debts - classified as ST
How to Net:
- If LT & ST has the same sign, do NOT net.
- If LT & ST does not have the same sign, net the amounts.
- Net L/T & L/T = 10
- Net S/T & S/T = -3
- = Net LT gain of 7 (based on majority)
Capital Assets - Tax Treatment
Individual vs. Corp
(from Sale of Capital Assets)
Tax treatment for Individuals:
- STCG - Regular/Ordinary Rates
- LTCG - Special Rates > 0,15,20% (based on tax bracket)
- Net Loss - $3K maximum deduction; carried forward indefinitely
Tax treatment for Corporations:
- STCG/LTCG - No special rate, @35% corp tax rate
- Capital Loss - Carryback 3 Yrs, Carryforward 5 Yrs
NOTE: Collectibles tax rate is at 28%
NOTE: In most cases, one must report capital gains & losses on Form 8949 & then report the totals on Schedule D.
Depreciation Recapture
Tangible Property (Section 1245)
(TESTED)
1245 Recapture (Tangible Personal Property), gains are reported as ordinary income to the extent of prior depreciation (MACRS Depr), the rest is capital gain.
- Calculated the same way for both individuals & corporations.
- Loss is always Ordinary.
-
Gain may be Ordinary or/and Capital
- Ordinary (Recapture) = up to MACRS depr amt
- LTCG = (Total Gain - MACRS Depr)
NOTE: Since expense was deducted at ordinary, if there is a gain, portion must be ordinary & the excess is capital gain
Example: Correct! Since the equipment was section 1245 property, the gain of $20,000 ($200,000 - $180,000) must be recognized as Sec. 1245 ordinary income to the extent of the excess depreciation deducted. Since the depreciation deducted was $30,000, the entire gain is recognized as Sec. 1245 ordinary income. Depreciation that must be recaptured as income includes ordinary depreciation any special depreciation allowances.
Depreciation Recapture
Real Property (Section 1250)
Depreciable real property, a gain on which is treated as ordinary income to the extent that depreciation taken up to the date of disposal exceeds depreciation calculated under straightline & the remainder is Unrecaptred 1250 gain & treated as a section 1231 gain & taxed as a LTCG at 25%.
- If asset is held <= 1Yr, the entire gain is Ordinary
- If asset is held > 1Yr, gain is part ordinary & Capital gain:
- Ordinary Gain (Recapture) = (Accelerated - S/L);
-
Capital Gain (Excess) = Total Gain - Recapture
- LTCG is taxed @ 25%
Depreciation Recapture
Section 291
When a C-Corp sells Section 1250 property at a gain, a portion of the gain (+20%), in addition to the recapture of additional depreciation (Accelerated - S/L), is treated as ordinary income.
+ (Accelerated - S/L)
+ 20% x [Total Gain - (Accelerated - S/L)]
=Total Recapture / Ordinary Gain
Recapture = (Accelerated - S/L) + (20% x Gain under S/L)
Uniform Capitalization Rules
(UNICAP - Section 263A)
When a corp, partnership, sole prop has manufactured or constructed an asset use for sale, or resale, it must follow UNICAP, which requires the capitalization into inventory of virtually all Direct Costs, & PART of Indirect Costs associated with the manufacture or resale of the asset.
- For inventory, company must capitalize most general, admin, engineering, & overhead cossts.
Costs NOT required to be capitalized under UNICAP:
- Research costs
- Selling
- Advertising
- Marketing
- Certain Administrative Expenses
The uniform capitalization rules (UNICAP) apply to three types of property?
- Real or tangible property produced by the taxpayer for use in his business
- Real or tangible property produced by the taxpayer for sale to customers
- Real or tangible personal property acquired by the taxpayer for sale if the taxpayer’s average gross receipts for the past 3 years were more than $10 million annually.
Individual Tax Transactions
Inheritance
Inheritance - is non taxable.
- The basis of inherited property is the FMV of the property at the date of a decedent’s death or AVD.
- On subsequent sale, the gain/loss is ALWAYS reported as long term capital, regardless of actual holding period.
- The inherited property is considered long-term property, regardless of how long the decedent held the property before death.
- Dual Basis Rule applies on subsequent sale of asset.
Individual Tax Transaction
Gift
(Dual Basis Rule) - TESTED
Gift - Excluded from gross income & not taxable.
- If the gift is in the form of appreciated property, then carryover basis & carryover holding period applies.
- If the gift is in the form of depreciated property, then the Dual Basis Rules will apply.
-
Dual Basis Rule: (WILL BE TESTED)
- If the gift is sold subsequently, if the Selling Price is BETWEEN Original Basis & FMV then there is NO gain/loss.
- The higher donor basis is used to calculate a subsequent gain on sale. (LTCG)
- The lower FMV on the gift date is used to calculate a subsequent loss on the sale. (STLoss)
-
Dual Basis Rule: (WILL BE TESTED)
Sales of Personal Assets
When it applies: A person sells personal-use property at a loss.
Tax Treatement:
- Gains - Taxed as LTCG.
- Losses - NOT deductible; deemed as consumption loss
NOTE: Correct! Personal losses that qualify as casualty or theft losses may be claimed as itemized deductions, subject to the applicable floors of $100 per event and 10% of AGI each year.
Wash Sales
When it applies: An asset that has been sold at a loss is repurchased within 30 days of the sale, the loss is NOT deductible, but is added to the basis of the repurchased asset.
Tax Treatement:
- Gains - Taxed as LTCG.
- Losses - NOT deductible. Amount of loss is added back to repurchased asset which will be the new basis.
NOTE: Correct! Under the wash sale rule, a loss on a sale cannot be deducted if the same shares were repurchased within the 30 days before or after the sale.
