Property Transactions

Question 1

Is cost basis the sum of capitalized acquisition costs?

Answer 1

Yes, initial basis in purchased property is the cost of acquiring it. Only capital costs are included. Common capitalized costs include the purchase price, major improvements, closing costs, and other miscellaneous costs

Question 2

Costs for construction of real or tangible personal property to be used in trade or business are capitalized?

Answer 2

Yes, costs for construction of real or tangible personal property to be used in trade or business are capitalized. Capitalize all costs necessary to prepare it for its intended use, both direct and most allocable indirect costs, e.g., for permits, materials, and equipment rent. Construction period interest and taxes must be capitalized as part of building cost.

Question 3

Cost basis includes the book value of property given up?

Answer 3

No, cost basis includes the fair market value (FMV) of property given up. If it is not determinable with reasonable certainty, use FMV of property received. Capital acquisition expenditures may be made by cash, by cash equivalent, in property, with liability, or by services.

Question 4

Basis in inherited property is the FMV on the date of death with no exceptions?

Answer 4

No, basis in inherited property is the FMV on the date of death or 6 months after if the executor elects the alternate valuation date for the estate tax return.

Question 5

Adjusted basis is the original cost of an asset increased or decreased to reflect fair-market value?

Answer 5

No, initial basis is adjusted consistent with tax relevant events not increased or decreased to solely reflect FMV.

Question 6

The basis of stock acquired in a nontaxable distribution is allocated a portion of the basis of the stock upon which the distribution was made?

Answer 6

Yes, the basis of stock acquired in a nontaxable distribution is allocated a portion of the basis of the stock upon which the distribution was made. If the FMV of the stock rights is less than 15% of the FMV of the stock upon which it was issued, the rights have a zero basis (unless an election is made to allocate basis).

Question 7

Are real estate taxes capitalized?

Answer 7

No, they are expensed.

Question 8

Are attorney fees and title insurance included in the cost of the property?

Answer 8

Yes, because they are necessary expenses incurred in the acquisition of the property.

Question 9

Are warehousing costs capitalized under the Uniform Capitalization Rules of Code Sec. 263A?

Answer 9

Yes, storage of an asset prior to its intended use would qualify as a cost incurred to bring it to its full use and should be capitalized under UNICAP.

Question 10

The basis of property received in exchange for service is determined by what?

Answer 10

The FMV of the property received.

Question 11

Fred Berk bought a plot of land with a cash payment of $40,000 and a $50,000 mortgage. In addition, Berk paid $200 for a title insurance policy. Berk’s basis in this land is?

Answer 11

$90,200.

Question 12

What is the difference between inherited and gifted property in regards to basis?

Answer 12

Property received by inheritance (bequeathed) has a basis equal to the FMV on the date of death or FMV 6 months after if the executor elects the alternate valuation date for the estate tax return.The basis of property acquired by gift is usually the donor’s adjusted basis, increased by any gift tax attributable to appreciation.

Question 13

Will a stock split reduce a per share basis?

Answer 13

Yes, it does reduce a per share basis.

Question 14

How do gain/loss calculations work when a transferee has a dual basis from receiving property with a basis greater than FMV on the date the gift is received?

Answer 14

The basis of property received by gift is the donor’s basis (transferred or carryover basis). If the fair market value of the property at the time of the gift is lower, however, the basis for purposes of determining a loss is the fair market value. The basis used to determine a gain will be the donor’s basis/transferred basis.

Question 15

When asset acquisition of personal property occurs mostly at the end of the year, the mid-quarter convention applies?

Answer 15

Yes, the mid-quarter convention applies when asset acquisition is bunched at the end of the year. Each asset is treated as placed in service at the midpoint of the quarter in which it actually was placed in service.

Question 16

Under MACRS, residential rental property has a 27 1/2-year recovery period?

Answer 16

Yes, under MACRS, residential rental property has a straight-line rate based on a 27 1/2-year recovery period. Residential rental property is real property with at least 80% of gross rents coming from dwelling units

Question 17

Under MACRS, nonresidential real estate is assigned a 39-year recovery period?

Answer 17

Yes, nonresidential real estate is assigned a 39-year (31.5-year for property placed in service before May 13, 1993) recovery period. It is real property that is not residential rental property. It also includes real property with an ADR midpoint of less than 27 1/2 years

Question 18

A Sec. 179 deduction is a double-benefit item because it allows the cost of an item to be deducted without reducing the assets’ basis?

Answer 18

No, a person may elect to deduct all or part of the cost of Sec. 179 property acquired during the year, up to a maximum of $510,000 in 2017. Section 179 expense is treated as depreciation. It reduces basis in the property (but not below zero) prior to computation of any other depreciation allowable for the first year, but only if, and to the extent that, Sec. 179 deduction is elected.

Question 19

Acquisition costs of leases are amortized over a 10-year period or the lease term, whichever is less?

Answer 19

No, costs of acquiring a lease are amortized over the lease term. Renewal options are included in the term if less than 75% of the cost is attributable to the period prior to renewal.

Question 20

Is goodwill amortized in tax accounting?

Answer 20

Yes, the cost of certain intangibles acquired (not created) in connection with the conduct of a trade or business or income-producing activity is amortized over a 15-year period. Qualified intangibles include acquired goodwill and covenants not to compete.

Question 21

How is the depreciation deduction of nonresidential real property, placed in service in 2017, determined for regular tax purposes using MACRS?

Answer 21

Nonresidential real estate placed in service in 2017 has a 39-year recovery period using the straight-line depreciation method.

Question 22

Residential rental property that was placed in service during 2017 using MACRS is depreciated over how many years, using which depreciation method and convention?

Answer 22

Section 168(c) provides that the recovery period for residential rental property is 27.5 years. Section 168(b)(3) provides that the straight-line method shall be used for residential rental property. Section 168(d)(2) provides that mid-month convention shall be used for residential rental property.

Question 23

Under the MACRS rules, when must the mid-quarter convention be used?

Answer 23

Under the MACRS rules, the mid-quarter convention must be used for all personal property placed in service during the year if substantial property was placed in service during the last 3 months of the year [Sec. 168(d)(3)]. Substantial property is defined as greater than 40% of the aggregate bases of personal property placed in service during the year.

Question 24

Do dividends reduce the shareholder’s basis in the stock?

Answer 24

No, they do not.

Question 25

Only assets identified as such by the code are capital assets?

Answer 25

No, all property is characterized as a capital asset, unless expressly excluded.

Question 26

All realized gains must be recognized unless the IRC expressly provides otherwise?

Answer 26

Yes, all realized gains must be recognized unless the IRC expressly provides otherwise. Conversely, no deduction is allowed for a realized loss unless the IRC expressly provides for it.

Question 27

All capital gains resulting from an individual selling property are taxed at a flat rate of 15%?

Answer 27

No, for individuals, capital transactions involving long-term holding periods are grouped by tax rates. The maximum capital gains rates are 0%, 15%, 20%, 25%, or 28%.

Question 28

An individual may use a net capital loss in the current year up to the lesser of $3,000 ($1,500 for married filing separately) or ordinary income?

Answer 28

Yes, an individual may use a net capital loss in the current year up to the lesser of $3,000 ($1,500 filing separately) or ordinary income. An individual may carry forward any excess capital losses indefinitely. The carryforward is treated as a capital loss incurred in the subsequent year. Net short term capital loss is treated as having been deductible in the preceding year before net long term capital loss.

Question 29

Up to $50,000 ($100,000 if joint return) of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss?

Answer 29

Yes, up to $50,000 ($100,000 if joint return) of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss.

Question 30

A gain recognized on an asset transfer to a related person in whose hands the asset is depreciable is ordinary income, while a loss realized on the sale or exchange of property to a related person is not deductible?

Answer 30

Yes, a gain recognized on an asset transfer to a related person in whose hands the asset is depreciable is ordinary income, while a loss realized on the sale or exchange of property to a related person is not deductible. The transferee takes a cost basis.

Question 31

The installment method is only used for financial reporting, and all gain on an installment sale is taxable in the first year?

Answer 31

No, the installment method must be used to report installment sales, unless election is made not to apply the method. An installment sale is a disposition of property in which at least one payment is to be received after the close of the tax year of the disposition. The amount of realized gain to be recognized in a tax year is that portion of payments received in the tax year that bears the same ratio to payments received in the tax year as does the gross profit to the total contract price.

Question 32

The seller recognizes as gain or loss any difference between the FMV of repossessed personal property and the adjusted basis of an installment sale obligation satisfied by the repossession?

Answer 32

Yes, if real property is repossessed, the taxpayer recognizes the lesser of

1) Cash and other property (FMV) received in excess of gain already recognized, or
2) Gross profit in remaining installments less repossession costs.

Question 33

Section 1031 defers recognizing gain or loss to the extent that property productively used in a trade or business or held for the production of income (investment) is exchanged for property of like-kind?

Answer 33

Yes, the IRC defers recognizing gain or loss to the extent that property productively used in a trade or business or held for the production of income (investment) is exchanged for property of like-kind. Properties are like-kind if each is within a class of like nature or character, without regard to differences in use, location, or proximity

Question 34

Qualified property received in a like-kind exchange has a basis to the recipient equal to its fair market value?

Answer 34

No, qualified property received in a like-kind exchange has an exchanged basis adjusted for boot and gain recognized.

Question 35

In a qualified like-kind exchange, realized gain is usually recognized only to the extent of boot (cash + FMV of other property + liability relief) received?

Answer 35

Yes, gain is recognized equal to the lesser of gain realized or boot received including cash, net liability relief, and other nonqualified property (its FMV).

Question 36

A taxpayer may elect to defer recognition of gain on an involuntary conversion if qualifying replacement property is acquired within a specified time period?

Answer 36

Yes, a taxpayer may elect to defer recognition of gain on an involuntary conversion if qualifying replacement property is acquired within a specified time period. Nonrecognition of gain is contingent on the involuntarily converted property being reinvested in qualified replacement property. An involuntary conversion of property results from destruction, theft, seizure, requisition, condemnation, or the threat of imminent requisition or condemnation.

Question 37

A taxpayer is allowed a one-time exclusion of gain on the sale of a principal residence?

Answer 37

No, Section 121 provides an exclusion upon the sale of a principal residence. The exclusion may be used only once every 2 years.

Question 38

Gain on the disposition of Sec. 1245 property is a capital gain?

Answer 38

No, gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized.

Question 39

Section 1231 gain or loss is determined each year without regard to prior years?

Answer 39

Yes, net gain on Sec. 1231 property is treated as ordinary income to the extent of unrecaptured net Sec. 1231 losses from preceding tax years. Unrecaptured net Sec. 1231 losses are the total of Sec. 1231 losses for the last 5 tax years, reduced by net Sec. 1231 gains characterized as ordinary income under Sec. 1231-1 (c).