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Investments > Taxes > Flashcards

Taxes Flashcards

1
Q

What are the three property classifications?

A
  1. Capital Asset
  2. Ordinary Income Asset
  3. Section 1231 Asset
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2
Q

Generally, what are capital assets, 1231 assets, and OI assets?

A

Capital assets are most personal use assets, and investment assets.

1231 - assets used in a trade or business

OI assets - anything that, when sold, results in income for the owner: inventory, accounts receivable, creative works and copy rights in the hands of the owner.

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3
Q

What is not a capital asset (ACID)?

A

Accounts receivable
Copyrights and creative works, held by the owner.
Inventory
Depreciable property used in a trade or business

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4
Q

Besides being ‘assets used in a trade or business’ what are 1231 assets?

A
  • depreciable property
  • real property
  • timber, coal, iron ore, livestock, and unharnessed crops (the last two sometimes).
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5
Q

What is the recovery of capital doctrine?

A

Basis is returned to taxpayer tax free, whether by deduction or depreciation.

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6
Q

What is included in basis?

A

Cost, freight, sales tax, installation cost, testing cost, excise tax, legal and accounting fees, revenue stamps, recording fees, property tax assumed by the seller.

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7
Q

What are adjustments that increase basis (5)?

A

Capital improvements, assessments for local improvements, zoning costs, cost of restoring damaged property after a casualty loss, legal fees including title defense.

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8
Q

What are deductions from basis (7)?

A

Exclusion from income of subsidies for energy conservation measures
Casualty or theft loss deductions and insurance reimbursements (business only)
Deductions for clean fuel vehicles and refueling property
179 deductions
Credit for electric vehicles
Depreciation
Non-taxable corporate distributions

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9
Q

What is the adjusted basis for property received in a non-taxable exchange when boot is paid?

A

Carryover basis + any boot paid.

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10
Q

What is the adjusted basis for property in a non-taxable exchange when boot is received?

A

Carryover basis - any boot received that is greater than the gain.

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11
Q

What is the holding period for inherited property?

A

Always LT

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12
Q

What is the double basis rule for gifted property?

A
  1. Usually the donee’s basis is the same as the donor’s basis except:
  2. For loss property
    — sold at a gain, use the donor’s basis.
    — sold at a loss, use the FMV.
    — If sold between donor basis and FMV, no gain or loss is recognized.
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13
Q

What is the adjusted basis of a gift when gift tax has been paid?

A

Donor’s basis + (appreciation in gift ÷ value of gift) x gift tax paid.

Thus the fraction of gift tax that is associated with the value of the gift is added to the donor’s basis.

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14
Q

What is the holding period for gifted property?

A

Generally it’s the combined holding period.

For loss property sold at a loss, the holding period starts at the date of the gift.

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15
Q

How is basses treated when property is transferred in a divorce? How is divorce defined?

A

No gain or loss is recognized.

Divorce is within one year of divorce and related to it.

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16
Q

What are the tax rules for sale of loss property to a relative? What is the consequence?

A

Double basis rule applies. Long-term holding for gains, short term holding for losses.

The consequence is the donor loses their tax deduction on the loss property.

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17
Q

What is the Medicare contribution tax?

A

3.8% on the lesser of investment income or MAGI in excess of the limits.

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18
Q

What is the tax rate on collectibles?

On un-recaptured section 1250 gain?

On qualifying small business stock?

A

28%
25%

For QSBS, exclude 50% of gain if purchased before 2/18/09
75% if acquired between 2/19/09 and 9/28/10
100% if acquired after 9/28/10

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19
Q

How is LT holding period determined?

How are short term gains taxed?

A

1 yr, counting the day of disposition, but not the day of acquisition.

As ordinary income.

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20
Q

Can natural disasters or bankruptcies cause capital gains?

A

Yes

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21
Q

Is index fund for actively managed large-cap fund a wash sale?

A

No.

22
Q

How are disallowed wash sales taxed?

A

The disallowed loss is added to the basis of the new purchase.

23
Q

Do wash sale rules apply to contracts and options?

To futures and foreign currencies?

A

Yes

No.

24
Q

Are losses on a personal residence deductible?

A

No.

25
Q

What are the tax consequences of a gain on a personal residence due to casualty, theft, or condemnation?

A

Deferred under 1033, or excluded under 121 if

  • primary residence for 2 of the last 5 yrs.
  • can only use this exclusion every 2 years.
  • appreciation during non-qualified use periods not subject to exclusion
26
Q

General rules for gains on a personal residence

A

You can exclude up to 500k MFJ or 250k single if:

  • you lived there 2 out of the last 5
  • you don’t exclude gain from when you weren’t living there
  • you haven’t used this deduction in 2 years.
  • Married taxpayers must BOTH meet these requirement.
27
Q

If you don’t meet the 2 out of 5, and once every 2 years criteria, can you still get the exclusion on the sale of a personal residence?

A

Yes, you can get a reduced exclusion for:

  • change of job
  • change of health
  • other unforeseen circumstances (broadly defined)

The reduced exclusion is pro rata based on period of ownership

28
Q

What is deferred under section 1033?

What is section 1033?

A

Capital gain on a personal residence, if you buy another soon enough.

Section 1033 is ‘involuntary conversion’ property that is destroyed or condemned.

29
Q

What is the sale date for stocks that have become worthless?

A

The last day of the year in which they were sold. This gives you a greater chance at a long-term capital loss.

30
Q

What is the treatment for net capital losses?

A

Deducted against net capital gains + $3,000 for AGI

Carried over indefinitely in same LT or ST.

31
Q

Do gains and gains net?

A

No!

32
Q

What is the additional loss available for small business stock?

A

50k/year as an ordinary loss if:

  • domestic corp.
  • < 1M in total capital
  • incorporated after 11/78
  • loss sustained by original owner of stock who purchased it w/ money or property
  • for the past 5 years, co. Earned more than 50% of income from OTHER THAN royalties, rents, dividends, interest, annuities, and cap gains.
33
Q

Loss deductions on the sale to whom are disallowed under section 267?

A
  • siblings (including half, but not step)
  • Ancestors
  • descendants

The loss is disallowed, and the buyer gets double basis.

34
Q

Besides being depreciable property used in a trade or business, what else must a 1231 asset be?

A

Owned for more than a year.

35
Q

What is the tax advantage of 1231 assets?

A

For individuals or pass-through entities gains are taxed as capital gains and losses are ordinary income losses. This means that you not only get the favorable cap gains rate, but losses are not limited to $3k over cap gains the way capital losses are.

Corporations pay the same cap gain and income tax rates, but still benefit from the ordinary income deduction. This is an extra benefit since they don’t get to deduct $3k of cap losses against ordinary income; they can only deduct cap losses against cap gains.

36
Q

What is section 1245 property?

A

Tangible personalty used in a trade or business that is depreciable (equipment), plus patents, copyrights.

Real property (land and buildings) is not 1245 property.

37
Q

How is the sale of a depreciated 1245 asset taxed?

A

Any depreciation recaptured is OI.

Any gain above that is 1231 gain.

Any loss is an OI loss.

38
Q

What is the only way to have 1231 gain on 1245 property?

A

Sell it for more than you originally purchased it for.

39
Q

How are real 1231 assets (buildings and property) depreciated?

A

Presently, straight line depreciation.

However, property purchased and placed into service before January 1, 1981 and between 1981 and 1986 was eligible for accelerated depreciation.

40
Q

How are the sale of real 1231 assets with accelerated and straight line depreciation taxed?

A

Accelerated depreciation is taxed as OI.

Straight line depreciation recapture is taxed at 25%

1231 gain is taxed at 15% (or cap gain rates).

41
Q

What is the 1231 5-year look back?

A

A rule that forces you to net 5-yrs of gains and losses and pay OI on the gains.

42
Q

In what transactions is gain not recognized?

A

Like-kind exchanges of personal residence, investment real estate, life insurance.

43
Q

What is section 1031?

A

Deferred taxation of gains in like-kind exchanges of real property.

44
Q

Is section 1031 mandatory if your like-kind exchange qualifies for it?

How similar must the properties be?

A

Yes.

Improved realty may be exchanged for unimproved.

US property may NOT be exchanged for foreign.

45
Q

Can you do a 1031 like-kind exchange on tangible property or tangible personalty?

A

No, not since TCJA 2017.

46
Q

Must a like-kind exchange be simultaneous?

What conditions must be met?

A

No.

$ must be held in escrow.
New property must be acquired either 180 days from sale or before the due date (including extensions) of the tax return for the year the sale was made.

47
Q

How is boot taxed in a 1031 exchange?

A

Gain is taxable to the extent of boot.

If boot exceeds gain, it’s considered a return of basis—tax free but basis goes down.

48
Q

How are debt relief and losses treated in 1031 exchanges?

A

Debt relief is treated as boot.

Losses are deferred

49
Q

4 Simple rules for 1031 exchanges?

Hint: trading up, trading down, losses, debt relief.

A
  1. The person getting the more valuable property and adds the boot to their basis.
  2. The party getting the less valuable property recognizes gain to the extent of boot received. If boot exceeds gain it’s considered a reduction of basis.
  3. Losses are added to basis of the replacement property.
  4. Debt relief = boot.
50
Q

What about 1031 exchanges between related parties?

Who constitutes related parties?

A

If either party sells w-in 2 years all gain must be recognized.

Related parties can include corporations controlled by the other party.

51
Q

How is the sale of stock by a corporation taxed?

A

It’s not under 1032. It’s considered an infusion of capital.

52
Q

What about 1033 gains, when your property is purchased under eminent domain or under threat of condemnation?

A

You don’t have to recognize gain (though you can choose to) provided:

  • New property is similar in function and use.
  • Reinvestment is made by end of year of realization, plus 2 years

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