T4-M1 Nontaxable Dispositions

Question 1

what are the 6 different types of transactions that you can exclude or defer gains?

Answer 1

HIDE IT
- Homeowner’s exclusion
- Involuntary conversions
- Divorce property settlement
- Exchange of like-kind property
- Installment sales
- Treasury and capital stock transactions

Question 2

what are the 3 losses are NOT deductible?

Answer 2

WRaP
- Wash sale losses
- Related party losses
and
- Personal losses

Question 3

what are tax rules for Homeowner’s Exclusion?

Answer 3

1. Amount of exclusion:
   - $250K for single, married filing separately, and head of household
   - $500K for MFJ and surviving spouse if selling the property within 2 years after his/her spouse’s death
2. Qualify for the exclusion:
   - owned and used property as a principal residence for at least 2 years during the 5-year period ending on date of sale or exchange (the 2 year periods does not need to be continuous nor same 2-year period)
   - in MFJ, the OWNERSHIP requirement can be met by EITHER spouse. However, BOTH must meet the USE requirement to take full $500K exclusion
   - No age requirement to receive this exclusion
   - No requirement that a taxpayer has to purchase another personal residence
   - a taxpayer may use this exclusion as often as available over his/her lifetime
3. Hardship Provision:
   - instead of NOT being able to claim the exclusion at all due to FAILED to meet the requirement of 2 year period or ownership use requirement, taxpayers are eligible for a reduced exclusion if property is sold due to a change in place of employment, health, or other unforeseen circumstances

• formula:
  maximum exclusion (depends on status) x (number of qualified months / 24 months)
• To meet hardship requirement for change in employment, the taxpayer’s new location must be at least 50 MILES farther from the sold residence

4. Nonqualified use provision:
   - applies if a taxpayer has nonqualified use of the home on or after Jan. 1 2010
   - nonqualified use is any use other than use as a principal residence
   - if taxpayers has nonqualified use of the home, the exclusion amount is not adjusted, but the portion of the gain attributable to nonqualified use is NOT eligible for the exclusion
   - formula:
   gain portion NOT eligible for exclusion = total gain x (period of nonqualified use / total period of time taxpayer owned the property)

Question 4

what are tax rules for Divorce Property Settlement?

Answer 4

• when divorce settlement provides for a lump-sum payment or one-time property settlement, it is NONTAXABLE event
• NO gain is recognized as it is a simple division of assets because the couple already owns the assets
• basis is NBV

Question 5

what are tax rules for Involuntary Conversions?

Answer 5

• this applies when taxpayers’ property is either involuntarily taken away or destroyed. ex: government can take property from property’s owner due to a compelling need with compensation. this is called condemnation or eminent domain
• If compensation is more than the basis and the extra amount is NOT reinvested, it’s considered boot => taxable
• If compensation is more than the basis and the extra amount is reinvested => gain is deferred => nontaxable (new property basis = cost of new property - deferred gain)
• No gain is recognized when:
  + other similar property is received to replace the property taken or destroyed (involuntarily converted)
  + all insurance or condemnation proceeds are reinvested in similar property with similar function within 2 years. The basis and holding period of the new property is the same as the old one
  + for principal residence property destroyed is in federal declared areas, replacement time is up to 4 years
  + for real property held for business in converted by seizure, requisition, or condemnation, BUT NOT THEFT or destruction, the replacement period is 3 years
• the basis of similar property received is the SAME as the involuntarily converted property (old one)
• for loss:
  + loss is recognized immediately
  + basis of the new property is its replacement cost

Question 6

what are tax rules for Like-Kind Exchange?

Answer 6

• A like-kind exchange is the term used to describe the exchange of once piece of real property for another piece of real property
  + physical exchange of real property
  + reinvestment of money, including the gain, from sale of real property into a new real property within a certain period of time
• Requirements for qualifying like-kind exchange property:
  + real property used in a business or held for investment when exchanged for other similar real property used in business or held for investment
  + like-kind exchanges of personal property (used in business such as equipment,…) do NOT qualify for like-kind exchange
• Timing requirements:
  + taxpayers must identify like-kind replacement property within 45 days of giving up property
  + like-kind property must be received by the earlier of:
  a. 180 days (6 months) after taxpayers transfer property (the sale); or
  b. the due date of taxpayer’s income tax return for the year in which the transfer occurs. ex: sale of property at year end 12/31 when tax return is due by 3/15 or 4/15. in this case, the timing for this like-kind exchange is the due date of tax return (NOT 6 months)
• calculations:
  + realized gain/loss = FMV of everything received - NBV of everything given up
  + recognized gain = lesser of realized gain or boot received/positive net COD. ***LOSS is never recognized; instead it’s deferred.
  + deferred gain/loss = realized gain/loss - recognized gain/loss
  + new property basis = FMV of property received - deferred gain + deferred loss

Question 7

what are tax rules for Installment Sales and Treasury Stock Transactions?

Answer 7

1. Installment Sales: applies to sales made by a “nonmerchant” in personal property and “nondealer” in real estate
   - is like a loan because sellers allow buyers to pay over time
   - report gains, NOT LOSSES, on sales when partial payments received in a tax year after the year of sale
   - taxpayers can elect to recognize the entire gain in the year of sale (for planning, if taxpayers have a large amount of expenses in the year)
   - not treated on accrual basis
   - treated on cash basis, even if it’s on accrual basis taxpayer
   - does not change the type of gain that will be reported
   - calculations:
   + gross profit (GP) = sales price - adjusted basis
   + gross profit % = GP / sales price
   + gain recognized = cash received (excluding interest) x GP% (for each payment received)
   - for INTEREST:
   + sellers are required to charge interest on an installment sale. if no or lower than normal rate interest is charged, portion of installment payment will be taxed as ordinary income.
   + interest is reported SEPARATELY from each installment payment as ORDINARY income
   * Gain related to section 1245 depreciation recapture is NOT eligible for installment sale
2. Treasury and Capital Stock Transactions:
   - corporations are NOT allowed to recognized gain or loss from buying or selling its own stock because of easy manipulation
   - 3 corporate transactions are EXEMPT from recognizing gain/loss:
   + sale of stock by the corp
   + repurchase stock by corp (treasury stock)
   + reissuance of stock