Study Unit 10

Question 1

What is the character of gain recognized by the transferor in a related-party sale?

Answer 1

The transferor recognized an ordinary gain.

Question 2

What is the amount of loss recognized by the transferor in a related-party sale?

Answer 2

Loss realized in a related-party sale is not deductible (not recognized).

Question 3

What is the amount of gain or loss recognized by the transferee in a related-party sale if the transferor is not a tax-indifferent party?

Answer 3

Transferee subsequently sells Recognized Gain or Loss
To an unrelated party at a …

Gain > Disallowed loss Recognized gain = Realized gain - Disallowed loss

Gain < Disallowed loss Gain = 0

Loss Loss = Realized loss

Question 4

What is the amount of gain or loss recognized by the transferee in a related-party sale if the transferor is a tax-indifferent party?

Answer 4

Transferee subsequently sells Recognized Gain or Loss
To an unrelated party at a . . .

Gain > Disallowed loss Recognized gain = Realized gain

Gain < Disallowed loss Gain = 0

Loss Loss = Realized loss

Question 5

Give examples of related parties for the purposes of related-party transactions.

Answer 5

• Anestors, descendants, spouses, and siblings
• Trusts and beneficiaries of trusts
• Controlled C corporations, S corporations, and partnerships (greater than 50% direct or constructive ownership)

Question 6

How is recognized gain calculated in an installment sale?

Answer 6

Current-year recognized gain = current-year payment received x (gross profit / contract price

NOTE: Gross profit = sale price - Adjusted basis - Selling expenses
Contract price = Sales price - Liability assumed by buyer

Question 7

Give examples of transactions in which gain is excluded or deferred (nonrecognition transactions).

Answer 7

• Like-kind exchanges of real property
• Involuntary conversions
• Sale of principal residence
• Sale of qualified small business stock
• Installment sales

Question 8

What qualified as boot with respect to Sec. 1031 like-kind exchanges?

Answer 8

Boot is all non qualified property transferred in an exchange transaction. Boot received includes cash, net liability relief, and other non qualified property (its FMV).

Question 9

In a like-kind exchange of real property under Sec. 1031, how is recognized gain or loss calculated?

Answer 9

Recognized gain - Lesser of gain realized or boot received

Recognized loss = 0 (not recognized)

Question 10

In a like-kind exchange of real property under Sec. 1031, how is deferred gain or loss calculated?

Answer 10

Deferred gain = Realized gain - Recognized gain

Deferred loss = Realized loss

Question 11

In a like-kind exchange of real property under Sec. 1031, how is basis of acquired property calculated?

Answer 11

Basis of acquired property = AB of property given + gain recognized - loss recognized + boot given - boot received

											OR

Basis of acquired property = FMV of acquired property - Deferred gain + Deferred loss

Question 12

In an involuntary conversion under Sec. 1033, how is recognized gain calculated?

Answer 12

Recognized gain = Lesser of gain realized or reimbursement not reinvested

Question 13

In an involuntary conversion under Sec. 1033, how is deferred gain calculated?

Answer 13

Deferred gain = Realized gain - Recognized gain

Question 14

In an involuntary conversion under Sec. 1033, how is basis of the acquired property calculated?

Answer 14

Basis of acquired property = FMV of acquired property - Deferred gain

Question 15

State the two tests to qualify for the exclusion of gain upon the sale of a principal residence.

Answer 15

Ownership test Taxpayer has owned the residence for an aggregate of 2 of the 5 prior years

Use test Taxpayer has used the residence for an aggregate of 2 of the 5 prior years

Question 16

When does the proration of the exclusion of gain upon the sale of a principal residence apply?

Answer 16

The proration applies when

* The ownership test and the use test are not met, but the sale is due to a change in place of employment, health, or
    Unforeseen circumstances, or

* The residence sold was not used as the principal residence of the taxpayer for part of the prior 5 years.

Question 17

Define Sec. 1231 property.

Answer 17

Sec. 1231 property includes all real property or depreciable property

* Used in a trade or business and
* Held for more than 1 year.

Question 18

What is the character of gain or loss recognized on the sale of Sec. 1231 property?

Answer 18

Section 1231 gain is treated as long-term capital gain (taxed at a preferential rate).

Section 1231 loss is treated as ordinary loss (can be used to offset ordinary income).

Question 19

Describe a Sec. 1231 gain recapture.

Answer 19

Section 1231 gain (one-term capital gain) in the current year is recaptured as ordinary income to the extend of total Sec. 1231 losses (ordinary losses) in the last 5 years.

Question 20

Describe Sec. 1245 property.

Answer 20

Section 1245 property includes all depreciable personal property

* Used in a trade or business and
* Held for more than 1 year.

Question 21

How are (1) ordinary income and (2) Sec. 1231 gain on the sale of Sec. 1245 property calculated?

Answer 21

Ordinary income = Lesser of recognized gain or accumulated depreciation

Sec. 1231 gain = Recognized gain - Ordinary income recaptured

Question 22

Define Sec. 1250 property.

Answer 22

Section 1250 property includes all depreciable real property

* Used in a trade or business and
* Held for more than 1 year.

Question 23

How are (1) ordinary income and (2) Sec. 1231 gain on the sale of Sec. 1250 property by a C corporation calculated?

Answer 23

Ordinary income = 20% x Lesser of recognized gain or accumulated depreciation

Sec. 1231 gain = Recognized gain = Ordinary income recaptured

Question 24

How are (1) ordinary income, (2) 25% gain, and (3) Sec. 1231 gain on the sale of Sec. 1250 property by a non corporate taxpayer calculated?

Answer 24

Ordinary Income = MACRS accumulated depreciation - straight-line depreciation

25% gain = lesser of recognized gain OR Straight-Lin accumulated depreciation

Sec. 1231 gain = Recognized gain - Ordinary income - 25% gain

Question 25

On whom is the gift tax imposed?

Answer 25

The gift tax is a tax of the transfer of a gift imposed on the donor.

Question 26

How is gift amount calculated?

Answer 26

FMV of transferred property given
- FMV of consideration (property, money, etc.) received
= Gift amount

Question 27

State the annual exclusion of gifts in calculating the gift tax.

Answer 27

The first $15,000 (for 2021) of gifts of present interest to each donee is excluded from taxable gift amounts.

Question 28

What are the two exclusions from taxable gifts?

Answer 28

Amounts paid directly to the third part on behalf of another individual for (1) medical care costs or (2) tuition costs are excluded from taxable gifts.

Question 29

What are the two deduction in computing taxable gifts?

Answer 29

• Marital deduction
  
  • Gifts between married spouses are deductible in full (after applying the annual exclusion)
• Charitable deduction
  
  • FMV of gifts to a qualified charitable organization is deductible in full (after applying the annual exclusion)