TAX- Other Nonrecognition Transactions

Question 1

What is a wash sale? How does that impact the realized loss?

Answer 1

An individuals who sells stock or securities at a realized loss and within 30 day BEFORE or AFTER requires that same stock. Total is a 61 day window.

The realized loss will be disallowed.

Question 2

In a washed sale, what is the basis for the newly acquired stock or security?

Answer 2

Cost + Disallowed Loss

Question 3

What is the holding period for the new stock or security?

Answer 3

Includes the holding period of the old stock or security

Question 4

WASH SALE EXAMPLE:

Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. Common Stock for $15,000 on December 15 YR 1 and an additional 100 shares for $13,000 of December 30 YR 1.

On December 31, YR 1 Smith sold the shares purchased on December 15, for $13,000.

What amount of loss from the sale of Core’s stock is deductible on Smith’s YR 1 Income Tax Return?

Answer 4

12/15:
SHARES: 100, BASIS $15,000

12/30
SHARES: 100, BASIS: $13,000

12/31- Sale
SHARES: 100, BASIS: 13,000

Amount realized $13,000
Adjusted Basis: $15,000
Realized Loss: (2000)

Recognized Loss: 0

Basis of stock bought on December 30:
Basis in remaining shares 13,000
+Disallowed Loss 2000
Basis: 15,000

Question 5

What are related party losses? Who is a related party?

Answer 5

Realized losses from sales or dispositions of property between related taxpayers is not recognized.

Related parties:

• Spouse
• Decadents
• Ancestors- parents/grandparents/great-grandparents/siblings

Not considered:

• In-laws are NOT considered
• Aunts/uncles/cousins

Question 6

What is a right of offset? What is the limit?

Answer 6

The loss that was disallowed because of the related party can use the loss to offset any gains.

Limit: Can only reduce the gain to zero.

Question 7

What is the holding period in a related party transaction?

Answer 7

Holding period of the original buyer does not tack on

Question 8

What are the relationships that apply to a corporation for related party losses?

Answer 8

Related parties include:

• A corporation and a more than 50% shareholder
• A partnership and a partner that owns more than 50% of the capital or profits interest of the partnership

Question 9

What are the rules for a Sale of a Principal Residence? What is a principal residence?

Answer 9

An individual can EXCLUDE up to $250,000 (married coupled is $500,000) of gain from the sale of a Principal Residence

Principle Residence:

• Owned for two years of the last 5 years
• Occupied for two years of the last 5 years
• Can only apply this credit every two years