What is the basic calculation for basis in property?
Cost of property \+ Purchase expenses \+ Debt assumed \+ Back taxes and interest paid = Basis
Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
What is the recipient or donee’s basis on gifted property?
Sold at a gain: use donor’s basis
Sold at a loss: use lesser of donor’s basis or FMV at time of distribution
Sold in between donor’s basis and FMV: No gain or loss
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later)
If alternate date is elected by property is sold before 6 month window, use FMV at date of death.
Property inherited is LTCG property regardless of how long it is held by the recipient.
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only
US property only
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
In a like-kind exchange, how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received
Ignore the boot paid amount from the mortgage completely
What is an involuntary conversion? When does it not result in a gain?
Occurs when you receive money for a property involuntarily converted
There is no gain if you reinvest the proceeds completely
If proceeds not completely reinvested, gain is LESSER of realized gain or amount not reinvested.
What are the requirements for exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years
Loss on sale of home is NOT deductible
What is a wash sale?
30 Day rule applies
Disallowed loss adds to basis of new stock
New stock takes on date of acquisition of old stock
Who is considered a related party in a property transaction? How does it affect the transaction?
Ancestors, siblings, spouse, descendants, corporation or partnership where you’re a 50% shareholder
Seller cannot take a loss on sale to a related party, but gain is always recognized.
Related party gets to use the disallowed loss when they sell.
Related party’s holding period begins when they acquire the property.
In-laws are NOT related parties.
How are capital losses taken in a corporation?
capital losses only offset capital gains
Carryback 3 years - if you elect NOT to carryback, you lost the option in the future
Carry forward 5 years - only as STCL
What assets are NOT capital assets?
Inventory, Business interest, Accounts Receivable, Covenant not to compete
Goodwill IS a capital asset
What are the steps in applying a capital gain or loss?
Net all STCG and STCL
Net all LTCG and LTCL
How much ordinary income can be offset by an INDIVIDUAL’s capital losses?
$3,000 per year. Unused is carried forward and taken $3,000 each year.
No carryback is allowed.
Which property is governed by section 1231?
Real or Personal Business Property held more than a year
Inventory is never 1231 Property
How are section 1231 gains and losses handled?
Casualty Losses on 1231 Property - Net the losses
- Net Loss = Ordinary Loss
- Net Gain = Combine with other 1231 Gains
1231 Net Loss - If 1231 Losses exceed gains, treat as Ordinary Loss
1231 Net Gain - If 1231 Gains exceed losses, treat at LTCG
1231 Gain = LTCG
1231 Loss = Ordinary Loss
How is section 1245 depreciation recapture handled, and when does it apply?
To the extent of depreciation, treat as ordinary gain
Remainder is 1231 gain, which is LTCG - There are no 1245 Losses
1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG
1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary
What property qualifies for section 1250 treatment, and how are gains/losses handled?
1250 property is Real Estate that is not 1231 Property
Use 1250 for Gain only. For losses, use 1231
Individuals: Post-1986 property with a gain is 1231 LTCG
If Straight Line depreciation is used, don’t use 1250 - Entire gain is 1231
Corps: Section 291 requires 20% of depreciation classified as ordinary gain
Remainder is 1231 LTCG
When are 1231, 1245 and 1250 gains or losses always ordinary?
When the asset is held less than one year.