Unit 9: Disposition of Business Assets

Question 1

Related parties include:

Answer 1

Close family members, such as spouses, siblings, ancestors, and lineal descendants, and closely related businesses, such as two corporations under common control.

Question 2

4797

Answer 2

Used to report the disposition of an asset

Question 3

Section 1231:

Answer 3

Property that is classified as any type of real or personal property that is held for business or investment purposes that is held for more than one year, and is used in a trade or business

Question 4

Section 1231 examples:

Answer 4

Real property, intangibles, livestock, sale of unharvested crops

Question 5

With regards to sales of livestock, in order to be treated as Section 1231 property:

Answer 5

Cattle or horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer

Question 6

Section 1231: Look Back Rule

Answer 6

This recapture rule states that if there are any net 1231 losses in the prior 5 tax years, the prior five-year 1231 losses change the character of the 1231 gain in the current year from long-term capital gain to ordinary income.

Question 7

Section 1245:

Answer 7

Personal use property that is depreciable in businesses, such as machinery, vehicles, and equipment, where there is unrecaptured depreciation or amortization, but Section 1245 property does no include buildings and their structural components.

Question 8

Section 1250:

Answer 8

Is real property that can be depreciated. The most common examples of section 1250 property are commercial buildings and residential rental properties.

Question 9

The sale of depreciated real property can result in unrecaptured Section 1250 gain, which is taxed at:

Answer 9

A maximum rate of 25%

Question 10

Each payment received on an installment sale transaction may include the following components:

Answer 10

• Return or the seller’s adjusted basis in the property
• Gain on the sale
• Interest income (attributable to financing the sale over a period of time)

Question 11

6252

Answer 11

Used to report a taxpayer’s gain from an installment sale

Question 12

An installment sale does not apply to:

Answer 12

• The sale of inventory, even if the business receives payment after the year of sale
• A sale that results in a loss
• The sale of stock or securities traded on an established market

Question 13

Are installment sales allowed for related parties?

Answer 13

Yes, but if the buyer sells or disposes of the property within two years of the original sale, the taxpayer will lose the benefit of installment sale reporting.

Question 14

IRS regulations define “real property” for Section 1031 purposes as:

Answer 14

• Land and improvements to land (such as buildings, concrete parking lots, and foundations)
• Unsevered natural products of land
• Water and air space superjacent to land
• Certain intangible interests in real property 9such as leaseholds and options)
• Property that is real property under state or local law.

Question 15

8824

Answer 15

Used by a taxpayer to report a 1031 exchange in the year of the exchange

*Note, if the exchange is to a related party, they must file this form for each of the the following two years after the exchange

Question 16

1031: The two-year holding period rule does not apply if:

Answer 16

• If one of the parties involved in the exchange dies
• If the property is converted in an involuntary exchange (such as a fire or flood)
• If it can be established to the satisfaction of the IRS that the exchange and subsequent disposition were not done for tax avoidance purposes

Question 17

1031: The property to be received must be identified in writing within:

Answer 17

45 days

Question 18

1031: The replacement property must be received by the earlier of:

Answer 18

• The 180th day after the date on which the property was transferred, or
• The due date, including extensions, of the tax return for the year in which the transfer occurs

Question 19

1031: A taxpayer can defer reporting gain on an involuntary conversion if:

Answer 19

He receives proceeds from insurance or another source and invests in property similar to the converted property. The gain on the involuntary conviction is then deferred until a taxable sale or exchange of the replacement property occurs at a later date.

Question 20

1031: Replacement period for involuntary conversion:

Answer 20

Typically ends two years after the end of the first tax year in which any part of the gain is realized.

Question 21

1031: Replacement period of livestock involuntary conversion:

Answer 21

4 years

Question 22

1031: Replacement period of the main home in a federally declared disaster area

Answer 22

4-5 years

Question 23

What is the time period for replacing a condemned property for 1033 exchange?

Answer 23

Two years after the end of the first tax year which any part of the gain on the condemnation is realized. For real property held for business use or investment, the replacement period is three years instead of two.