REG Chapter 4

Question 1

Real property

Personal property

Capital asset

Non-capital asset

Section 1231

Answer 1

Real property - attached to land (building, paving)

Personal property - machinery , cars

Capital assets - real and personal property like: personal car, personal furniture, stock, property not used in business, interest in a partnership, copyright, goodwill

Noncapital asset - property normally included in inventory or held for sale in ordinary course of business. Inventory, depreciable machinery, and real estate used in trade of business, accounts and notes receivable.

• Section 1231: business use machinery, equipment, land and building

Question 2

Gain or Loss Calculation

Answer 2

Amount realized - Adj. Basis = Gain/Loss

amount realized includes cash received, debt assumed by buyer, property and services received @ FMV, reduced by selling expenses

adj basis depends if purchased, gift, or inherited

Question 3

Gifted property basis

Answer 3

Use donor’s rollover cost basis = rollover cost / NBV

Exception: lower FMV @ date of gift.

1) sale of gift at price > donor’s rollover basis, use this rollover basis to calculate gain
2) sale of gift at price < lower FMV, use FMV at time the gift was given

If in between then there is no gain or loss

Use donor’s holding period but if FMV at the date of the gift is used to calculate gain/loss then holding period starts on the date of the gift

Question 4

Inherited property basis

Answer 4

Step up or down to FMV

GR: Date of death FMV is your basis

Alternative date: earlier of date given to you or maximum 6 months later

Property inherited is ALWAYS Long Term

Question 5

Gain is not taxed if tax payer can HIDE IT

Answer 5

H - Homeowner exclusion - $500K available for MFJ, individual gets $250K, excess is taxable

I - Involuntary conversion of property: as long as proceeds are reinvested, recognize remainder as gain. You have 2 or 3 years to reinvest (personal/business)

D - Divorce property settlement

E - Exchange in like-kind business/investment assets

I - Installment sales - recognize when cash received

T - Treasury and capital stock transactions by the corporation

Cash or cancellation of debt then treat it as boot and taxed

Question 6

Losses that are not deductible

Answer 6

• wash-sale loss: when security is sold for a loss and repurchased within 30 days before or after the sale date

Question 7

Related party transactions

Answer 7

If own more than 50% it is a really party

Capital losses are disallowed, even when dealing with an arm’s length transaction

Basis rules: same as gift

Holding period starts over - unlike gift

Question 8

Personal losses

Answer 8

No deduction is allowed for a non business disposal

Question 9

Individual and Corporation Capital Gain/Loss Rules

Answer 9

Individual - net capital loss is $3,000, carry forward forever and maintains ST and LT character - no carry back

Corporation - net capital gains and losses, carried back 3 and forward 5 as ST

Question 10

MACRS - Depreciation rules

Answer 10

For machinery and equipment:

• 1/2 conversion for personal property
• Mid 1/4 conversion when more than 40% was placed in service in the last quarter, then use mid quarter

Real estate:

• Residential rental property - 27.5 years straight line
• Non-residential - 39 years straight line
• Computer using mid-month

Question 11

Formation of partnership

Answer 11

GR: no gain/loss recognized
Exception: when services are rendered, then tax FMV. Boot received is also taxable.

Partner’s basis: cash or NBV of property
(-) your liabilities assumed by others
(+) other partner’s liabilities assumed by you

Taxed when earning the money, not when withdrawing

Basis = capital amount + share of liabilities

Return is due 3 months after year end, only 3 month deferral for year end

Question 12

Guaranteed paymennts

Answer 12

Allowed as deduction to partnership and is considered income to parter

Question 13

Income tax - estates and trusts

Answer 13

Income estate/trust generates, includes capital gains
( - ) allowable deductions - unlimited charity if in will
( + ) tax exempt interest
( - ) capital gains allocable to corpus
= distributable net income - this is the amount that the beneficiary will report as income, the extra distribution is non-taxable principal/corpus

Exemption:

• 300 for trust
• 600 for estate

Question 14

Estate

Answer 14

Files return when income exceeds $600
Year ends 12/31 or at date of death
Return due 9 months after death
No estimated tax payments for first 2 years

Question 15

Trust

Answer 15

Year must end 12/31

Simple trust: only distributes current income, and if all of it is distributed then trust will not pay taxes, no charity

Grantor trust: grantor stays in control of assets and reports income/deductions on his return

Complex trust: may distribute principal and provide for charity

Question 16

Items excluded from gift tax

Answer 16

Exclusion of $14K per person
Tuition payments made directly to institution
Medical care payments made directly to provider
Charitable gift
Marital transfer