Special Deck - Property Transactions Flashcards
What are 1231 Assets?
Non-current business assets. They include depreciable and amortizable property, land used in the business, property, plant and equipment.
- If held over 1 year:
- Net loss is ordinary income
- Net gain is LTCG. Prior depreciation is recaptured as ordinary income on tangible personal property
- If held for less than 1 year, are considered ordinary assets.
Define Ordinary assets
Current business assets. Used direct in the business for profit, such as inventory and receivables, and self-created artisitic works. Also known as “Hot” assets. NO special tax rules: losses netted against ordinary income.
What are capital assets?
Non-business asset.
Assets held for investment purposes and asset held for personal use by the individual. GOODWILL Includes non-business bad debts are always short-term capital loss.
What is Section 1245 Property?
Tangible, personal property that has been sold for more that depreciated or salvage amount. Assets depreciated with MACRS 3, 5 or 7 year depr.
What is Section 1250 property?
Real property that has been sold for more than salvage or depreciated basis.
What is 1245 depreciation recapture?
MACRS or Section 179 depreciation can bring the price of an asset down so low that if resold the price can be MUCH higher than basis. So if asset is sold for more than adjusted basis, then: revenue from sale will be recaptures as ordinary income UP TO AMOUNT OF DEPRECIATION; after that remainder will be a SECTION 1231 GAIN
How does Section 1250 depreciation work
If real property sold for greater than adjusted basis or salvage price, gain is reconized. The difference between accelerated depreciation and equivalent straight line depreciation is treated as ordinary gain. Remainder is unrecaptured 1250 gain and taxed as LTCG at 25%
What is Section 291?
Refers to C corporations selling real property at subject to an additional 20% reduction of LTCG on Section 1250 depreciation recapture.
Explain mechanics of 1250 depreciation recapture.
Building original cost-$600K
Building sale price-$500K
Adjusted basis (accelerated) - $60K
Basis (if straight line used) - $90K
500K (sale price)
- 60K (adjusted basis)
440K (gain)
$600K (original price)
- $60K (adjusted basis)
$540K (accelerated depreciation)
- If Straight line depreciation had been used total depreciation would be $510K
- Acclererated Depr - Straight line depr = additional depr
- 540K - 510K = 30K=additional depr, recaptured as 1250 gain and considered ordinary gain
Balance of gain (440K - 30K = 410K) is Section 1231 gain and taxes as LTCG(at 25%)
Explain mechanics of Section 291 additional depreciation recapture. Building original cost-$600K Building sale price-$500K Adjusted basis-$60K Accelerated depr recorded: $540K
$600K-$60K=$540K (MACRS). SL would have been $510K. $540K-$510K-$30K which is ordinary gain. SO $440K-30K-$410K(Section 1231 gain and $30K ordinary gain.) For Sec 291 purposes, 20% * $410K=$82K=additional amount of ordinary depreciation. $440-30-82=$328 LTCG and $112K(30+82)=ordinary gain.
When a gift received appreciates(goes up in value from donor’s purchase price to FMV at date of gift) what is the basis for donee? How is gain figured?
If appreciated, donors basis and holding period carry over to donee. Original basis and purchase date becomes donees basis and date of aquisition.
When a gift devalues (lowers in value from donor’s purchase price to FMV on gift date) how is G/L figured?
Dual basis rules enter into play. If item is sold for more than carryover basis, difference is gain. If sold for less than FMV, difference is loss. If sold for somewhere in middle, no G/L. SHORT-term or LONG TERM- If sold for greater than carryover basis, carryover holding period date is used to determine(donor’s original purchase date). If sold at loss(below) FMV, donee’s date of acquisition establishes the carryover holding period.
When a gift is given that has had gift tax paid on it how do you establish the adjusted basis?
Donees basis equals donors basis plus percentage of gift tax attributable to appreciation of gift.
appreciation in value* gift tax= amount added to basis
gift FMV
(minus yearly exclusion if applicable)
Example:
donors basis - 19,000
FMV - 54,000
gift tax paid - 8,000
54,000-19,000 = 35,000 (appreciation)
54,000 - 14,000 (yearly exclusion) = 40,000
35,000/40,000 = .857
8,000 * .875 = 7,000
19,000 (donors basis) + 7,000(new appreciation) = $26,000 (adj basis)
The ratio of appreciation/FMV establishes the percentage of gift tax that can be applied to the taxable basis. IF APPLICABLE the yearly gift exclusion is first subtracted from the FMV. For example, gift basis: $10,000. Gift tax paid: $3,000. FMV of gift: $18,000. Formula is $10,000 + [3,000*(18,000-10,000)/18,000(minus gift exclusion if applicable)]. IF gift exclusion applied, the adjusted basis is $16,000. If gift exclusion doesn’t apply, adjusted basis is $11,333.
When a taxpayer suffers a Section 1033 involuntary conversion (casualty loss), how long does the taxpayer have to replace the asset?
Destruction or theft of property resulting in insurance payments - 2 years past the end of the year you recognize the gain(receive the payment.) Government condemnation or eminent domain - 3 years. Federally declared disaster - 4 years.
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later)If alternate date is elected by property is sold before 6 month window; use FMV at date of death.Property inherited is LTCG property regardless of how long it is held by the recipient.
