Taxes: Other Nonrecognition Transactions

Question 1

Taxes
Other Non-Recognition Transactions
Other Loss Disallowances
Wash Sales

Answer 1

Wash Sales

• sale of securities that occur near year-end
• not recognized if similar securities purchased within 30 days of sale
• apply only to losses, not gains
• adjusted basis equals cost plus deferred loss

Question 2

Taxes
Other Non-Recognition Transactions
Other Loss Disallowances
Related Parties

Answer 2

Related Parties

• losses from sale to related parties not recognized
• deferred loses create “right of offset” which can be used to offset later gains but can’t create loss
• holding period: begins on date of purchase
• ** only time loss on personal use property is deductible is when personal casualty***

Question 3

Taxes
Other Non-Recognition Transactions
Other Loss Disallowances
Short Sale

Answer 3

Short Sale

• transaction where taxpayer borrows and sells shares identical to those already owned
• essentially “marking to market”
• losses are deferred until short positions actually sold

Question 4

Taxes
Other Non-Recognition Transactions
Other Loss Disallowances
Sale of Personal Residence

Answer 4

Sale of Personal Residence

• exclusion of gains from principle residence once every two years
• up to $250,000 if the ownership and use tests are met
• MFJ up to $500,000 on sale if:
  
  • either meets ownership test
  • both meet use test
  • neither used on another residence in 2 years
• depreciation must be recaptured
• surviving spouse may exclude $500,000 up to 2 years after death of spouse
• not apply to extent a portion was not used a residence

Question 5

Taxes
Other Non-Recognition Transactions
Other Loss Disallowances
Sale of Personal Residence
Ownership and Use Tests

Answer 5

Use Test
- owned by taxpayer principle residence for at least 2
- need not be continuous
- short or temporary absence ignored
Ownership Test
- 5 years
if sold for changes in employment or health, max exclusion prorated for # qualifying months
home sales may result in capital gain

Question 6

Taxes
Other Non-Recognition Transactions
Other Loss Disallowances
Installment Sales

Answer 6

Installment Sales

• defers gains, not losses when payment made in later periods
• can elect to recognize gains currently
• prorates gain according to portion of cash received each year
• not taxpayers who are dealers
• all depreciation recognized in year one
• recognition of deferred gain is triggered by receipt of cash
  
  • proportion of contract price
  • gross profit = sales price - basis of asset sold
    
    • recognized income: cash collected x (gross profit/contract price)
    • contract price = cash from sale
• disposition of obligation will trigger recognition of gain