Reg Sec 7

Question 1

3 types of assets held by taxpayer

• Ordinary income
• Section 1231(non-current business assets)
• sale of home by individual tax payer

Answer 1

• ordinary income, is assets that are acquired or produced with the intention of being sold int ordinary course of business including: Inventory, receivables, and artistic works
• Section 1231 are assets that are used in the trade or business whose eventual sale or disposal is incidental to the business including: depreciable and amortizable assets and land used. If held over 1 year: Net loss is ordinary income and Net gain is Long term capital gain. If held less than a year-ordinary.
• Capital assets(non business assets)- assets thate do not qualify as ordinary income or section 1231, which include assets held for investment or for personal use also goodwill are not tax deductible when its a loss.
• individual sales there personal property can avoid a gain up to 250,000 or 500,000 MFJ on gain if lives there for 2 or the last 5 years.

Question 2

Depreciation Recapture(Section 1245, tangible personal property)

Answer 2

-Depreciation recapture referring to the assets with MARCS recovery periods 3,5, or 7 years, the tax code requires that the gains be reported as ordinary income to the extent of prior depr. Example: Section 1245 equipment costing 10,000 has had MARCS deductions of 4,000 to date and then sold. the adjusted basis of the asset on the date of sale is 6,000 and if the equipment is sold for more than 6,000 the first 4,000 will be recaptured as ordinary income with the remainder qualifying as a section 1231 gain. if sold less than 6,000 no recapture is needed

Question 3

• Related party transaction

- Like kind exchanges

Answer 3

A related party may not deduct a loss or a gain on sale of a related party capital asset unless the resale price exceeds prior related party cost basis.
Example: Assume grandfather buys asset for 800 and sells to grandson for 500, he can’t deduct the loss shice its related party. If the grandson sells the assets for 800 he has no gain or loss since grandfather basis in the stock is 800, if sold for 900 grandson would have to report a gain of 100(800-900)

-Like kind exchanges is exchanging real property for real property.

Question 4

Section 1250 Depr Recap(Real Property)

Answer 4

• Section 1250 the amount of gain up to additional depr is treated as an ordinary gain, and excess is treated as section 1231 gain, Long-term capital gain: Example Roger sells an office building for 500,000, adj basis of 60,00 resulting in a gain of 440,000. Orginal cost of 600,000 and 540,000 of Accelerated Depr would have been 540,000 and SL of 510,000. the difference between accelerated and SL is recaptured and is consider ordinary gain of 30,000 of the gain (440,000 )and rest of gain 410,000 is unrecaptured 1250 gain and treated as LTCG
• uniform cap rule, all cost of purchasing, manufacturing, and holding and constructing real property for resale can be capitalize. for inventory the company must also capitalize most general, administrative, engineering, and overhead costs associated with holding the assets.

Question 5

Installment Sale

Replacement property

Answer 5

Applies to gains (not losses) from the disposition of property where at least one payment is to be received each year. Example:
Steve sells property with a basis of 80,000 to Bob selling price of 150,000. Bob agrees to assume a 50,000 mortgage on the property and pay a remaining 100,000 in 10 equal annual installments. The contract price is 100,000(150-50) the gross profit is 70(150-80) and the gross profit ratio is 70%(70/100). So 7,000 of each 10,000 payment is reported as gain from sale.

to not recognize a gain the period is 2 years, 3 when involuntary conversion from government condemnation and 4 in connection with a declared federal disaster.

Question 6

Holding of small business stock

1244 Stock loss

Answer 6

shareholder holds qualified small business stock for at least 5 years is eligible to exclude 50% of the net gain (minus whats paid)

Worthless Section 1244 stock is not included in capital gain or losses because up to 50,000 of loss may be deducted as an ordinary loss.

Question 7

Inherited property

Uniform capitalization rule

Answer 7

when inheriting property, basis in the property is the fair value at death unless elected the alternate valuation date and property is considered to be long term.

real or tangible personal property are direct cost and not available for gross receipts for three years of 10 million.

Question 8

UNICAP(capitalization)

Answer 8

Direct materials , direct labor, and applicable indirect cost must be capitalized under the rule.