Tax - Property Taxation

Question 1

Asset terms

Answer 1

• Real property: realty, land or anything permanently attached to land; immovables.
• Personal property: personalty, property that is not real; movables
• Severance: conversion from real to personal property
• Attachment: conversion from personal to real property

Question 2

Gain or loss treatment

Answer 2

When gain or loss is to be recognized, must establish whether to treat as capital gain or loss or ordinary income or loss item.

Question 3

Capital assets

Answer 3

All property except for:
– Property held for resale (inventory)
– Depreciable property or real property used in trade or business
– Accounts or note receivable from normal business operations
– Copyright held by creator
– US government publications
– And some other items

So does include:
– Copyright held by person not creator
– Mineral/natural resource deposits sold in place
- Personal-use artwork

Question 4

Section 1231 assets

Answer 4

Provides LTCG treatment for certain non-capital assets. If there is a loss, it is ordinary loss.

Includes:
- Sale or exchange of real or depreciable business property
– Involuntary conversion of above or any capital asset held for more than one year in connection with trade or business

Holding: to qualify, property must be held for more than one year

Gains and losses must be grouped and compared:
– If gains exceed losses, net gain is ordinary income to extent of losses from previous five years. Remaining gain is LTCG
– If losses exceed gains, net loss is ordinary loss.

Special rule for casualty and theft losses:
– Must be separately grouped and compared
– If gains exceed losses, group with other Section 1231 items to compute net gain or loss
– if losses exceed gains, net loss is ordinary loss. Do not group with other items.

Question 5

IRC Section 263A

Answer 5

Requires capitalization of certain indirect costs related to inventory when qualifying business manufactures tangible, personal property.

Includes:
– Direct materials
– Direct labor, i.e. payroll
– Direct production
– Indirect production
- Service costs (recruiting, securities)

Does not include:
– Administration
– Selling/marketing
– Distribution
– Warranty
– Excise costs

Question 5

IRC Section 179

Answer 5

Provision allowing text fair to elect to expense up to a certain amount of tangible depreciable personal property placed in service during year.

Basis of asset is reduced by amounts of Section 179 property expensed.

– Must be purchased for use in active business
– Must be purchased from unrelated party

Question 7

Capital gains or losses holding period

Answer 7

Short-term: one year or less
Long-term: more than one year

Holding period normally begins on day basis originated.

If gifted:
– Donor’s basis is gift’s basis, holding period begins at original basis
– FMV is gift’s basis, holding period begins at date of gift

Statute provides that inherited property disposed of within one year shall be considered to have been held for more than one year.

Question 8

Property basis

Answer 8

– Must be reduced for depreciation, depletion, and other recoveries such as casualty losses.

Depends on acquisition method:
– Standard purchase
– Bargain purchase
– Inherited property
– Gifted property then sold
– Personal property converted to income production
– Property received as compensation for services
– Property transfer to corporation for stock

Question 9

Cost recovery

Answer 9

Includes depreciation, amortization, or depletion.

Depletion relates to natural resources.

No depreciation will cost recovery for:
– Land
– Inventory
– Personal property not used in business

Question 10

Modified Accelerated Cost Recovery System

Answer 10

For assets acquired after 1986. Computes depreciation including full cost of property and salvage value.

Cannot be used for intangible property and property not depreciated in terms of years.

Real estate: Straight-line method, midmonth convention
Personal property: 200% and 150% declining balance methods, half year and mid quarter convention

Question 11

Leasehold improvements depreciation

Answer 11

When made by the leasee in lieu of rent, is deductible as rent.

When not made in lieu of rent must be capitalized and written off of using MACRS over 39 years

Question 12

Intangibles amortization

Answer 12

Amortized over 15 years. On straight line basis.

Research and experimental expenditures may be:
– Expensed in year paid or incurred
– Capitalized and amortized over at least 60 months
– Capitalized and amortized ratably over 10 years, avoiding AMT

Question 13

Section 1245

Answer 13

Applies to sale of personal property at a gain.

Gains are ordinary income to extent of all depreciation taken. Excess gain is Section 1231 gain.

Primarily for equipment used in business.

Doesn’t include transfers by gift or death.

Question 14

Depreciation and recovery allowance recapture

Answer 14

While IRC Section 1231 provides LTCG treatment for certain non-capital assets, Sections 1245 and 1250 deny this special treatment.

These sections take precedence over Section 1231.

Question 15

Section 1250

Answer 15

Applies to sale of real property at a gain.

Depreciation in excess of straight line is recaptured as ordinary income. Unrecaptured gain on sale of building becomes Section 1231 gain.

U recaptured section 1250 gain maybe taxed at special rate of 25% and 15%.

Applies to buildings acquired before 1986, bc after, all must be straight-line.

Question 16

Section 291

Answer 16

Corporation’s ordinary income of sale of Section 1250 real property will be increased by 20% of the lesser of:
– Depreciation taken
– Recognized gain

IE: if sold at gain, must recognize $(20% x depreciation) of this gain as ordinary income.

Does not apply to S-corporations.

Question 17

Business equipment cost recovery methods

Answer 17

• First apply Section 179 expensing
  – Then 50% bonus depreciation for certain assets (50% x original cost - section 179 exp)
  – Then MACRS depreciation for remaining basis