REG R3 Property Taxation

Question 1

In general, how is the donee’s basis of a gift determined? How is the holding period determined?

Answer 1

• In general, the donee’s basis of a gift is the same as the donor’s basis. The carryover basis may be increased for gift tax paid on appreciation of the gift.
• The holding period includes the donor’s holding period unless basis becomes FMV, then the holding period starts at date of gift.

Question 2

What is the basis of a gift for determining gain or loss in a sale transaction?

Answer 2

• For purposes of calculating a gain on sale, the gift basis to use is the donor’s rollover basis.
• For purposes of calculating a loss on sale, the gift basis to use is the FMV at the date of gift.
• If the sales price is between the donor’s rollover basis of the gift and the fair market value of the gift at the date of gift, no gain or loss is recognized on a sale.

Question 3

What is the gift basis used to calculate depreciation?

Answer 3

The basis for depreciation purposes (if applicable) is the lesser of (i) the donor’s adjusted basis at the date of the gift or (ii) the fair market value at the date of the gift.

Note: Depreciable basis is determined separately from gift/loss basis.

Question 4

In general, how is the basis of inherited property determined? How is the holding period determined?

Answer 4

The basis of inherited property is the lower of the:
1. FMV at date of death

Or:

2. FMV at alternate lower valuation date (if elected), which is:
   - six months from date of death; or
   - disposal date (if disposed of less than six months from date of death).

The holding period is automatically deemed long-term for all inherited property, regardless of how long the deceased owned the property.

Question 5

When is a gain not taxed? (HIDE IT)

Answer 5

Homeowner’s exclusion
Involuntary conversions
Divorce property settlement
Exchange of like-kind business/investment assets (real property only)
Installment sale
Treasury and capital stock transactions (by corporation)

Gains are not taxed when you can “HIDE IT.”

Question 6

Identify the major tax provisions of involuntary conversions of property

Answer 6

Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within two years for personal property or three years for business property.

A realized gain exists when insurance proceeds are greater than the adjusted basis in the converted property.
Note the difference between realized gain versus recognized gain:
-Gain not recognized if proceeds reinvested in qualified replacement property.
-Basis is cost of replacement property less any gain not recognized.
-Losses are recognized in involuntary conversions.
-Basis is replacement cost when losses are recognized.
Holding period includes period that original property was held.

Question 7

What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?

Answer 7

Gain exclusion for personal residence:

• $250,000 for single taxpayers
• $500,000 for married taxpayers

Question 8

Identify the criteria for the exclusion provision on the sale of a personal residence.

Answer 8

• Taxpayer must have owned and used the property as the principal residence for two years or more during the five-year period ending on the date of the sale or exchange. Periods of nonqualified use cause a portion of the gain to be taxable.
• Either spouse for a joint return must meet the ownership requirement, and both spouses must meet the use requirement with respect to the property.
• Taxpayers may be eligible for a partial (on a prorated basis) exclusion if the sale is due to a change in place of employment, health, or unforeseen circumstances, when claimed within the previous two years or fail to meet the ownership and use requirements.
• No age requirement.
• No rollover to another house is required.
• Renewable, can be utilized more than one time.

Question 9

Name the criteria for a classification as a like-kind exchange.

Answer 9

Like-kind exchange criteria:

• Tangible real property; and
• Used in trade or business; or
• Held for investment

Question 10

In a like-kind exchange, what is the basis of the property received?

Answer 10

Basis of property received in a like-kind exchange is as follows:

Fair market value of like-kind property received - Deferred gain + Deferred loss.

Question 11

Identify the nondeductible losses (WRAP)

Answer 11

Wash sale loss
Related party transactions
And
Personal loss

“WRAP” up these losses, because they are not deductible.

Question 12

What is the tax treatment given to wash sales?

Answer 12

• Losses are disallowed if the same security is bought within 30 days before or after the sale.
• The disallowed loss increases the basis in the property (security).
• Gains are taxable.

Question 13

What is the tax treatment of capital gains/losses for individual taxpayers?

Answer 13

Net capital losses are deducted up to a maximum of $3,000 per year against noncapital income. Any excess can be carried forward.

Capital gains are fully taxable (but at lower tax rates).

Holding period:

• Short-term– one year or less.
• Long-term– more than one year.

Question 14

What are the corporate capital gain/loss rules for C corporations?

Answer 14

Net capital gains (long-term and short-term):
-Corporate net capital gains are added to ordinary income and taxed at the regular tax rate.
-Section 1231 gains are entitled to capital gain treatment.
Net capital losses (long-term and short-term):
-Corporate net capital losses are carried back three years and forward five years as short-term capital loss.
-They are deducted from capital or Section 1231 gains.

Question 15

What are Section 1231 assets?

Answer 15

Generally, depreciable or real property used in a trade or business and held over 12 months.

• Net all Section 1231 gains and losses.
• If gains > losses, treat the net amount as long-term capital gain.
• If losses > gains, treat the net amount as ordinary loss.

Question 16

What is the tax treatment of Section 1245 assets?

Answer 16

• Recapture all accumulated depreciation as ordinary income under Section 1245.
• Any excess gain is Section 1231 gain.

Question 17

Identify the tax treatment given Section 1250 assets for individuals.

Answer 17

An amount equal to the lesser of (i) the recognized gain on the sale of the Section 1250 asset or (ii) the accumulated depreciation on the Section 1250 asset is taxed at maximum rate of 25%. Any gain in excess of the amount taxed at 25% is taxed at the preferential rates of 0%, 15%, or 20%.

Question 18

What is the Section 291 rule for corporations?

Answer 18

Amount recaptured as ordinary income on the sale of real property under Section 291 is equal to 20% of the lesser of the recognized gain or the accumulated depreciation, Any gain in excess of the amount recognized as ordinary income is allowed capital gain treatment under Section 1231.

Question 19

What is the tax treatment for sales to related parties?

Answer 19

• No deduction is allowed for losses on sales to related parties.
• On later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss.

Question 20

What is the recovery method for 3- , 5-, 7-, and 10-year property (MACRS)?

Answer 20

200% Declining Balance – Estimated salvage value is not considered.

Notes:

• Taxpayer may choose straight-line depreciation in lieu of 200% declining balance.
• 20-year property uses the 150% declining balance method.

Question 21

What is the half-year convention?

Answer 21

Six months of depreciation is taken in the year of acquisition and the year of disposal.

Note: When straight-line depreciation is elected, the half-year convention is still applicable.

The method of depreciation used must be used for all personal property acquired that year in a given property class.

Question 22

What is the mid-quarter convention?

Answer 22

Mid-quarter convention replaces the half-year convention if greater than 40% of a taxpayer’s property (other than real property) is placed in service during the last three months of a tax year.

The mid-quarter convention treats all personal property placed in service during any quarter of the tax year as being placed in service on the mid-point of the quarter.

Question 23

What is the mid-month convention?

Answer 23

Mid-month convention is used for calculating depreciation of real property (27.5-year residential rental real estate and 39-year nonresidential real property).
The real property is treated as placed in service in the middle of the month of acquisition. When using the midmonth convention, real property is also treated as disposed of during the middle of the month of acquisition.

Question 24

What is the expense deduction (Section 179) in lieu of depreciation?

Answer 24

In 2021, $1,050,000 of acquisition cost of personal property used in a trade or business may be deducted in any one year.
Limitations:
1. Reduced $1 for each $1 of qualifying property placed in service in excess of $2,620,000 (2021).
2. Deduction is not permitted when a net loss exists or if the deduction would create a net loss (limited to
taxpayer’s taxable income from trade or business).

Question 25

How are after-tax cash flows computed?

Answer 25

After-tax cash flows = Earnings after tax + Amortization + Depletion + Depreciation

Note: Multiply pretax cash flow by (1 – Tax rate) as a shortcut to compute after-tax cash flows.