Bryant - Course 4. Tax Planning. 7. Tax Consequences on Sale of Assets Flashcards

Question

What is the rate gain for collectibles and the rate for unrecaptured Section 1250 gain (i.e., gain from real estate used in a trade or business)?

Answer 1

ANCG is net capital gain (NCG) without regard to the 28% rate gain (for collectibles) and the 25% unrecaptured Section 1250 gain (i.e., gain from real estate used in a trade or business). **The 28% rate gain is the sum of collectibles gain and IRC Section 1202 gain over the sum of collectibles loss, NSTCL, and LTCL carried forward from a preceding year**. As a general rule, gains resulting from the sale of collectibles such as artwork, rugs, antiques, stamps, and most coins are not taxed at the lower tax rates of 0%, 15%, or 20% but may be taxed at a maximum rate of 28%. **Newly minted gold and silver coins issued by the U.S. government qualify for the 0%/15%/20% rates**. **Recall that NCG is reduced by collectibles gains to determine ANCG.**

Answer 2

Recall that **NCG is reduced by collectibles gains to determine ANCG**.

Answer 3

To compute her total tax for 2023, ordinary rates would be applied to the $100,000, and then the tax on ANCG (15% X $12,000) is added.

Answer 4

Danny's NLTCG is $18,000, and his NCG is $18,000. His ANCG is $8,000 since $10,000 of the NCG is a collectibles gain. His tax on the capital gains is $4,000 [(15% x $8,000) + (28% x $10,000)].

Answer 5

IRC Section 1202 provides that** non-corporate taxpayers may exclude 50% of the gain resulting from the sale or exchange of qualified small business stock (QSBS) issued after August 10, 1993, if the stock is held for more than five years**. A corporation may have **QSBS only if it is a C corporation, and at least 80% of the value of its assets must be used in the active conduct of one or more qualified trades or businesses**. Normally, the excluded gain is 50% of any gain resulting from the sale or exchange of qualified small business stock held for more than five years, and the remaining half of the gain is taxed at a maximum rate of 28%. **However, the excluded gain may be less than 50% of the gain, because the amount of gain that a taxpayer for one corporation may exclude is 50% of the greater of $10,000,000 or ten times the aggregate basis of the qualified stock**. If the gain on the sale of qualified small business stock is $11.4 million and $5 million of the gain is excluded, $5 million is taxed at 28%, and the remaining $1.4 million gain is taxed at 15%.

Answer 6

The exclusion for QSBS had been 50% for many years, but pursuant to several tax bills in recent years, the exclusion percentage increased to 75%, then to 100% as follows: Acquisition Date Exclusion Percentage * Before February 18, 2009 50% * February 18, 2009 – September 27, 2010 75% * September 28, 2010 – December 31, 2011 100% * After December 31, 2011 100%

Answer 7

He excludes $2.85 million of the gain (i.e., 75%), and the remaining $1.150 million of gain is Section 1202 gain taxed at 28%. Alternatively, if Rodger purchased the stock on July 11, 2017, and sold it in 2023, he could exclude 100% of the gain.

Answer 8

To have a capital loss, one must sell or exchange the capital asset for an amount less than its adjusted basis. As in the case of capital gains, the one-year period is used to determine whether the capital loss is short-term or long-term. If total short-term capital losses (STCLs) for the tax year exceed total short-term capital gains (STCGs) for that year, **the excess is defined as a net short-term capital loss (NSTCL)**. If the NSTCL exceeds the NLTCG, the capital loss may be offset, in part, against other income. **The NSTCL may be deducted in full (i.e., on a dollar-for-dollar basis) against a non-corporate taxpayer's ordinary income for amounts up to $3,000 in any one year** ($1,500 for MFS).

Answer 9

Bob has gross income of $60,000 before considering capital gains and losses. If Bob has a NLTCG of $10,000 and a NSTCL of $15,000, he has $5,000 of NSTCL over NLTCG and may deduct $3,000 of the losses from gross income. **Assuming no other deductions for AGI, Bob's AGI is $57,000 ($60,000 - $3,000).** In Bob's case, $10,000 of the NSTCL is used to offset the $10,000 of NLTCG, and $3,000 of the NSTCL is used to reduce ordinary income. However, **$2,000 of the loss is not used. This net capital loss is carried forward for an indefinite number of years**. The loss retains its original character and will be treated as a STCL occurring in a subsequent year. If a taxpayer dies with an unused capital loss carryover, it expires.

Answer 10

If total long-term capital losses (LTCLs) for the tax year exceed total long-term capital gains (LTCGs) for the year, the excess is defined as **net long-term capital loss (NLTCL)**. If there is both a NSTCG and a NLTCL, the NLTCL is initially offset against the NSTCG on a dollar-for-dollar basis. **If the NLTCL exceeds the NSTCG, the excess is offset against ordinary income on a dollar-for-dollar basis up to $3,000 per year**.

Answer 11

If an individual has both NSTCL and NLTCL, the NSTCL is offset against ordinary income first, regardless of when the transactions occur during the year.

Answer 12

In the current year, Gordon has a NLTCL of $9,000 and a NSTCG of $2,000. He must use $2,000 of the NLTCL to offset the $2,000 NSTCG, and then use $3,000 of the $7,000 ($9,000 - $2,000) NLTCL to offset $3,000 of ordinary income. Gordon's carryforward of NLTCL is $4,000 [$9,000 - ($2,000 + $3,000)]. This amount is treated as a LTCL in subsequent years.

Answer 13

Taxpayers separate their long-term capital gains (LTCGs) and long-term capital losses (LTCLs) into three tax rate groups: * 28% group: This group includes capital gains and losses when the capital asset is a **collectible held for more than one year** and, if applicable, **either half or a quarter of the gain from the sale of qualified small business stock (Section 1202) held for more than 5 years**. * 25% group: This group consists of **unrecaptured Section 1250 gain and there are no losses for this group**. * 0/15/20% group: This group, **depends upon the taxpayer's taxable income, includes capital gains and losses when the holding period is more than one year and the capital asset is not a collectible or Section 1202 small business stock**.

Answer 14

When a taxpayer has NSTCL and NLTCG, the **NSTCL is first offset against NLTCG from the 28% group, then the 25% group, and, finally, the 0/15/20% group**. This treatment of NSTCL is **favorable for taxpayers because the NSTCL offsets the higher-taxed NLTCG first**. Note that a taxpayer could have NLTCLs in one group, except the 25% group, and NLTCGs in another group. A net loss from the 28% group is first offset against gains in the 25% group and then net gains in the 15% (or 20% or 0%) group. A net loss from the 15% group is first offset against net gains in the 28% group then gains in the 25% group.

Answer 15

In addition, **the 20% LTCG rate could increase to 23.8% based on the net investment income tax rules**. **The NII tax on individuals is calculated using a 3.8% tax rate and is imposed on the lesser of "net investment income" for such taxable year**, or * (i) the excess (if any) of the individual’s modified adjusted gross income for such taxable year, over * (ii) a threshold amount ($250,000 for a married taxpayer filing a joint return, $125,000 for a married taxpayer filing separately, and $200,000 in all other cases).

Answer 16

The $20,000 NSTCL is offset against $20,000 of the collectibles gain in the 28% group. Leroy's tax liability for his capital gain is $4,100 [($5,000 x 28%) + ($18,000 x 15%)].

Answer 17

**Taxpayers who own mutual funds must recognize their share of capital gains even if no distributions are received**. Many mutual fund shareholders reinvest their distributions instead of withdrawing assets from the mutual fund. **Mutual funds must classify the gains as short-term or long-term, and long-term gains will need to be separated by rate groups**. **When shareholders of a mutual fund recognize their share of capital gains (and are thus liable for the income tax on the gains) when no distribution is actually received, the basis for their shares is increased by the amount of the gain they recognized but did not receive**.

Answer 18

The increase in her taxes as a result of her ownership of the mutual shares is $631 [($200 x 15%) + ($300 x 32%) + ($1,000 x 28%) + ($1,500 x 15%)]. The basis for her shares is increased by the amount of the gain recognized, but not received, or, $26,000 ($23,000 + $200 + $300 + $1,000 + $1,500).

Answer 19

28% The 28% rate is in force for certain types of capital gain such as collectibles.

Answer 20

Taxpayers generally recognize a capital gain or loss on the sale of stock or securities. The tax law provided an **exception for losses from the worthlessness of small business corporation (IRC Section 1244) stock**. **Taxpayers may deduct these losses as ordinary losses up to a maximum of $50,000 per tax year** ($100,000 for married taxpayers filing a joint return). **Any remaining loss for the year is a capital loss.**

Answer 21

To qualify as ordinary under Section 1244, the following requirements must be met: * The stock must be owned by an individual or a partnership. * The stock must have been originally issued by the corporation to the individual or to a partnership in which an individual is a partner. * The stock must be stock in a domestic (U.S.) corporation. * The stock must have been issued for cash or property other than stock or securities. Stock issued for services rendered is not eligible for Section 1244 treatment. * The corporation must not have derived over 50% of its gross receipts from passive income sources during the five tax years immediately preceding the year of the sale or worthlessness. * The amount of money and property contributed to both capital and paid-in surplus may not exceed $1 million at the time that the stock is issued.

Answer 22

The 1244 loss limits ($50k/$100k) are annual limits. For instance, a couple filing jointly with a 1244 loss of $200,000 would most likely be **better off selling half of their stock in two tax years**. **Selling the entire amount in one tax year would cause $100,000 of the loss to be treated as a capital loss.** At a **limit of $3,000 capital loss per year**, it could take years or even decades to use the capital loss in full.

Answer 23

Tax treatment for both corporate and non-corporate taxpayers is the same in the case of rules for capital gains and losses, determining holding periods, and the procedure for offsetting capital losses against capital gains. **However, a major difference is that the lower tax rates of 0%, 15%, and 20% on net capital gain for non-corporate taxpayers do not apply to corporations.** A second significant difference relates to the treatment of capital losses. Unlike the non-corporate taxpayer, who may offset capital losses against ordinary income up to $3,000, **corporations may offset capital losses only against capital gains**. **Corporate taxpayers may carry capital losses back to each of the three preceding tax years (the earliest of the three tax years first and then to the next two years) and forward for five years to offset capital gains in such years**. When a corporate taxpayer carries a loss back to a preceding year or forward to a subsequent year, the **loss is treated as a short-term capital loss.**

Answer 24

The remaining $16,000 of NSTCL may not be offset against the $200,000 of other income but may be carried back three years and then forward five years to offset capital gains arising in these years. If Peach Co. has NLTCG and/or NSTCG in the previous three years, a refund of taxes paid during those years will be received during the current year.

Answer 25

The Tax Cuts and Jobs Act (TCJA) set the corporate income tax rate at a **flat 21%**. Corporations do not receive the same favorable tax rates on capital gains as non-corporate taxpayers.

Answer 26

non-corporate taxpayers - up to $3000 corporate taxpayers - none

Answer 27

The length of time that an asset is held before it is disposed of is called the holding period and is an important factor in determining whether any gain or loss resulting from the disposition of a capital asset is treated as long-term or short-term. To be classified as a long-term capital gain or loss, the capital asset must be held for more than one year. To determine the holding period: * the day of acquisition is excluded * the disposal date is included If the date of disposition is the same date as the date of acquisition, but a year later, the asset is considered to have been held for only one year. If the property is held for an additional day, the holding period is more than one year. Holding Period Example: Arnie purchased a capital asset on April 20, 2022, and sells the asset at a gain on April 21, 2023. **The gain is classified as a long-term capital gain (LTCG)**. If the asset is sold on or before April 20, 2023, the **gain is a short-term capital gain (STCG)**.

Answer 28

If a person receives property as a gift and uses the donor's basis to determine the gain or loss from a sale or exchange, the donor's holding period is added to the donee's holding period. In other words, the donee's holding period includes the donor's holding period. If the donee's basis is the fair market value (FMV) of the property on the date of the gift, the donee's holding period starts on the date of the gift. This situation occurs when the FMV is less than the donor's basis on the date of the gift, and the property is sold at a loss.

Answer 29

Cindy's basis is the donor's cost because the FMV of the property is higher than the donor's basis on the date of the gift. Because Cindy takes Marc's basis, Marc's holding period is tacked on.

Answer 30

In a nontaxable exchange, the basis of the property received is **determined by taking into account the basis of the property given in the exchange**. **If the properties are capital assets or Section 1231 assets, the holding period of the property received includes the holding period of the surrendered property**. In essence, the holding period of the property given up in a tax-free exchange is tacked on to the holding period of the property received in the exchange.

Answer 31

If a shareholder receives nontaxable stock dividends or stock rights, **the holding period of the stock received as a dividend or the stock rights received includes the holding period for the stock owned by the shareholder**. However, **if the stock rights are exercised, the holding period for the stock purchased begins with the date of exercise.**

Answer 32

Any gain or loss on the sale of the rights is long-term, regardless of whether any basis is allocated to the rights, because the holding period of the rights includes the holding period of the stock. If Paula exercises the stock rights and receives shares of Circle Corporation stock, her holding period for the stock begins with the day she exercised the stock rights.

Answer 33

Other IRC Provisions Relevant To Capital Gains And Losses include: * Provisions for dealers dealing in securities * Real property subdivided for sale * Non-business bad debts

Answer 34

When the holding period is more than one year, when a property is received as a gift, when a property is received from a decedent, or in the case of nontaxable exchanges, the asset is considered long-term.

Answer 35

Short-Term To determine the holding period, the day of acquisition is excluded and the disposal date is included. John held the property for exactly one year, not more than one year, therefore it will be classified as short-term.

Answer 36

Automobile used in a trade or business Property used in a trade or business and subject to allowances for depreciation under Section 167 or real property used in a trade or business is not a capital asset. (i.e., automobile used in a trade or business)

Answer 37

True Net capital gain (NCG), which may receive favorable tax treatment, is defined as the excess of net long-term capital gain over net short-term capital loss.

Answer 38

$3,000 of ordinary income and have a $3,500 LTCL carryforward Short-term losses are deducted first. The NSTCL may be deducted in full (i.e., on a dollar-for-dollar basis) against any non-corporate taxpayer's ordinary income for amounts up to $3,000 in any one year.

Answer 39

Specifically, you need to determine when a gain resulting from the sale of a principal residence is excluded. You will need to determine what is your adjusted basis for your residence and what will happen if you have an excess amount over the property's adjusted basis.

Answer 40

Congress uses the tax law to encourage homeownership in many ways: * Real estate taxes and interest on a mortgage used to acquire a principal or second residence are deductible, * Part or all of the interest on home equity debt may be deductible, and * Taxpayers may elect to exclude up to $250,000 ($500,000 on a joint return) of gain from the sale of a principal residence.

Answer 41

**Individuals who sell or exchange their personal residence after May 6, 1997, may exclude up to $250,000 of gain if it was owned and occupied as a principal residence for at least two years of the five-year period before the sale or exchange**. A married couple may exclude up to $500,000 when filing jointly if both meet the use test, at least one meets the ownership test and neither spouse is ineligible for the exclusion because he or she sold or exchanged a residence within the last two years. **Any gain not excluded is capital gain because a personal residence is a capital asset.** **A loss on the sale or exchange of a personal residence is not deductible** because the residence is personal-use property.

Answer 42

**Taxpayers who expect to sell their homes for more than $250,000, or $500,000 if a joint return is filed**, still need to maintain records. Also, taxpayers who convert their personal residence to business property or rental property **will need to know the property's correct adjusted basis to compute depreciation**.

Answer 43

The amount of gain on the sale of the property is called realized gain. Gain realized is the excess of the amount over the property's adjusted basis. The amount realized on the sale of the property is equal to the selling price less selling expenses. Selling expenses include commissions, advertising, deed preparation costs, and legal expenses incurred in connection with the sale.

Answer 44

The amount realized is $112,200 [($30,000 + $90,000) - ($7,000 + $800)]. The realized gain is $12,200 ($112,200 - $100,000).

Answer 45

Deed Preparation Costs Commissions Legal Expenses Selling expenses include commissions, advertising, deed preparation costs, and legal expenses incurred in connection with the sale.

Answer 46

The original basis of a principal residence, as with any capital asset, is a function of how the residence is obtained: * purchased, * received as a gift, or * inherited. The cost of a residence includes all amounts attributable to the acquisition including commissions and other purchasing expenses paid to acquire the residence. Capital improvements, but not repairs, increase the adjusted basis of the residence. The costs of adding a room, installing an air conditioning system, finishing a basement, and landscaping are capital improvements. Expenses incurred to protect the taxpayer's title in the residence are also capitalized.

Answer 47

For the Section 121 exclusion to apply, taxpayers must sell property that qualifies as their principal residence. Whether the property is used as the taxpayer's principal residence is determined on a case-by-case basis. Section 121 Principal Residence Example: Len, a 40-year-old college professor, owns and occupies a house in Oklahoma. During the summer, he lives in a cabin in Idaho. After owning the cabin for eight years, Len sells it for $50,000 and realizes a gain. Gain on the sale of the cabin in Idaho must be recognized because Len's principal residence is in Oklahoma. Condominium apartments, houseboats, and house-trailers may qualify as principal residences. Stock held by a tenant-stockholder in a cooperative housing corporation is a principal residence if the dwelling that the taxpayer is entitled to occupy as a stockholder is used as his or her principal residence.

Answer 48

As previously noted, the exclusion provided by Section 121 applies to only one sale or exchange every two years. **A portion of the gain may be excluded in certain circumstances even if the two-year requirement is not satisfied**. If a principal residence is sold within two years of a previous sale or exchange of a residence, **part of the gain may be excluded if the sale or exchange is due to**: * Job relocation * Employment change leaves you unable to pay your living expenses * Qualifying for unemployment benefits * Health issues * Divorce or legal separation * Birth of twins or other multiples * Damage to home from disaster * Condemnation or seizure of the property * Other unforeseen circumstances

Answer 49

The portion of the gain excluded is based on a **ratio with a denominator of 730 days and the numerator being the shorter of: The period during which the ownership and use tests were met during the five-year period ending on the date of sale, or The period of time after the date of the most recent prior sale or exchange for which the exclusion applied until the date of the current sale or exchange**. **The amount excluded is $250,000 or $500,000 times the above ratio.**

Answer 50

Winnie may exclude all of the gains because (254/730) of $250,000 is more than the $40,000 realized gain. She owns and uses the residence in Cleveland for 254 days, and the period between the sale of the residence in Detroit and the sale in Cleveland is 379 days.

Answer 51

If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health, or unforeseen circumstances (Click here for a complete list). **The portion of the gain excluded is determined by multiplying the amount of the exclusion (i.e., $250,000 or $500,000) by a fraction whose numerator is the number of days that the use and ownership tests were met and the denominator is 730 days.** For the two-year ownership rule, a taxpayer's period of ownership includes the period during which the taxpayer's deceased spouse owned the residence. When a taxpayer receives a residence from a spouse or an ex-spouse incident to a divorce, the taxpayer's period of owning the property includes the time that the spouse or ex-spouse owned the residence.

Answer 52

Because he owned and occupied the residence for 164 days and the sale was due to a change in his health, he may exclude $56,507 [$250,000 x (165 ÷ 730)].

Answer 53

True A taxpayer that owns and lives in her home for two years is eligible for Section 121 gain exclusion treatment.

Answer 54

Ordinarily, the involuntary conversion of a principal residence is governed by IRC Section 1033. **A gain due to an involuntary conversion of a personal residence may be deferred if the requirements of Section 1033 are satisfied**. The functional use test must be satisfied regardless of the type of involuntary conversion. **For purposes of Section 121, the destruction, theft, seizure, requisition, or condemnation of property is treated as a sale. Thus, taxpayers may exclude a gain of up to $250,000 or $500,000 due to the involuntary conversion of a principal residence if the use and ownership test is satisfied**. Taxpayers normally prefer to exclude gain if the use and ownership tests are satisfied rather than defer gains under the involuntary conversion provisions since the deferred gain will eventually have to be accounted for.

Answer 55

If taxpayers make a proper and timely replacement of the residence subject to the involuntary conversion, **gains may be excluded up to $250,000 or $500,000, and the remaining gain may be deferred.** For purposes of applying the involuntary conversion provisions, **the amount realized due to the involuntary conversion is reduced by any gain excluded under Section 121**.

Answer 56

If gain due to the involuntary conversion of a principal residence is deferred under Section 1033, **the holding period of the replacement residence includes the holding period of the converted property for purposes of satisfying the use and ownership tests of Section 121**. The Koach's satisfy the use and ownership requirements for Section 121 with respect to their new residence in the above example because gain is deferred under Section 1033. A loss due to a condemnation of a personal residence is not recognized. **If the loss is due to a casualty, the loss is deductible and is treated like other casualty losses of non-business property.**

Answer 57

The Koach's have a realized gain of $620,000 and may exclude $500,000 under Section 121. The remaining $120,000 gain may be deferred and the basis of their replacement residence is $780,000 ($900,000 - $120,000). Because the amount realized is reduced by the gain excluded, the Koach's could have deferred the $120,000 gain in the above example by investing $320,000 in a replacement residence.

Answer 58

False If gain due to the involuntary conversion of a principal residence is deferred under Section 1033, the holding period of the replacement residence includes the holding period of the converted property for purposes of satisfying the use and ownership tests of Section 121.

Answer 59

Special provisions are made when the taxpayer's principal residence or any of its contents is compulsorily or involuntarily converted and the residence is located in an area that warrants assistance by the federal government under the Disaster Relief and Emergency Assistance Act. **Part of the gain resulting from the receipt of insurance proceeds is excluded if the President's declaration is after August 31, 1991**. **No gain is recognized due to the receipt of insurance proceeds for damaged personal property located in the residence if the property was unscheduled property for the purpose of such insurance**. Although proceeds received for property that is not separately scheduled are excluded from gross income, other proceeds received, including those received for scheduled property, are treated as being received as a common fund for a single item of property. Separately scheduled property typically consists of items such as computers, jewelry, artwork, and pianos.

Answer 60

The $10,000 ($25,000 - $15,000) gain on the unscheduled personal property is excluded from gross income. The $135,000 gain attributable to the house and the piano is excluded under Section 121.

Answer 61

Paula should plan her activities in a manner that will allow her to occupy the Boston residence more than the Philadelphia residence so the Boston residence will qualify as her principal residence and thus be eligible for the tax exclusion under Section 121.

Answer 62

**Taxpayers only have to report the sale of a residence when some of the gains will be taxable.** If the taxpayer does not qualify to exclude all the gain or elects not to exclude all the gain, **the entire gain realized is reported on Schedule D either on line 1, if the residence is held for one year or less, or on line 8**. The taxpayer should indicate on the following line the amount of the gain that is being excluded as a loss (that is, shown in parentheses). IRS Publication 523 (Selling Your Home) provides the following worksheet that may be used to determine if any gain is recognized. If the taxpayer has to utilize the exceptions to the two-year ownership and use tests, a different worksheet is provided.

Answer 63

$0 They meet the requirements of Section 121 to exclude all of the gain.

Answer 64

Two years According to new provisions under IRS, the exclusion is determined on an individual basis. An individual may claim the exclusion even if the individual's spouse used the exclusion within the past two years.

Answer 65

$ 3,000 Realized Gain = (Selling Price - Selling Expenses) - Adjusted Basis. Using this equation, the amount realized is $103,000 ($25,000 + $90,000) – ($5,000 + $7,000). The realized gain is $3,000 ($103,000 - $100,000)

Answer 66

Depreciation recapture states that all recognized gains and losses must eventually be designated as either capital or ordinary income. However, gains or losses on certain types of property are designated as Section 1231 gains or losses, which are given preferential treatment under the tax law. This lesson discusses the important rules dealing with Section 1231 gains and losses and depreciation recapture.

Answer 67

Real or depreciable property that is held for more than one year and is either used in a trade or business or is held for the production of income is considered as IRC Section 1231 property. Certain property such as inventory, U.S. government publications, copyrights, literary, musical or artistic compositions, and letters are excluded from the IRC Section 1231 property definition.

Answer 68

The Tax Reform Act of 1986 eliminated the 60% long-term capital gain deduction for net long-term capital gains. Favorable long-term capital gain treatment was reinstated into the tax law in 1991 as a 28% maximum tax rate applying to net capital gains for non-corporate taxpayers. The Taxpayer Relief Act of 1997 significantly increased the preferential tax treatment by reducing the maximum rate to 20% for net capital gain that is adjusted net capital gain. However, to qualify for the 20% rate, the holding period was increased to greater than 18 months. Finally, the IRS Restructuring and Reform Act of 1998 eliminated the more than 18-month holding period requirement. **In 2003, the tax rate for most capital gain was reduced to 15% (5% for taxpayers in the 10% or 15% tax bracket). ** In 2023, capital gain rates are either 0%, 15%, or 20%, depending on taxable income. In addition to favorable tax rates, it may also be advantageous to have gains classified as capital or Section 1231 if taxpayers have capital losses or capital loss carryovers because of the limitations imposed on the deductibility of capital losses. Furthermore, there are other situations where it may be important for the property to be Section 1231 property (e.g., a contribution of appreciated property to a charitable organization).

Answer 69

At the end of the tax year, Section 1231 gains are netted against Section 1231 losses. **If the overall result is a net Section 1231 gain, the gains and losses are treated as long-term capital gains (LTCGs) and long-term capital losses (LTCLs) respectively.** **For tax years beginning after 1984, however, a portion or all of the net Section 1231 gain may be treated as ordinary income rather than as LTCG because of a special five-year lookback rule.** In essence, net Section 1231 losses previously deducted as ordinary losses are recaptured by changing what would otherwise be a LTCG into ordinary income. **The excess of Section 1231 losses over Section 1231 gains for the previous five-year period is the net non-recaptured Section 1231 losses**. To determine the amount of non-recaptured net Section 1231 losses, **compare the aggregate amount of net Section 1231 losses for the most recent preceding five tax years with the amount of such losses recaptured as ordinary income for those preceding tax years**. **The excess of the aggregate amount of net Section 1231 losses over the previously recaptured loss is the non-recaptured net Section 1231 loss.**

Answer 70

After the gains and losses are offset, there is an $8,000 net long-term capital gain (NLTCG).

Answer 71

If the netting of Section 1231 gains and losses at the end of the year **results in a net Section 1231 loss, the Section 1231 gains and losses are treated as ordinary gains and losses**. For expediency, it is often stated that the net Section 1231 loss be treated as an ordinary loss.

Answer 72

The Section 1231 gains and losses are treated as ordinary gains and losses and David's AGI is $27,000 ($37,000 salary - $10,000 of ordinary loss). The $40,000 of ordinary losses offsets the $30,000 of ordinary gains and $10,000 of David's salary.

Answer 73

True. **Section 1231 gains and losses treated as ordinary income are fully deductible in the current year**. **If the gains and losses were classified as long-term capital gains and losses, only $3,000 of the NLTCL would have been deductible against other income.**

Answer 74

In general, Section 1231 gains are taxed similarly to the taxation of capital gains. Thus, **a Section 1231 gain will be subject to a maximum tax rate of 20% (or, 0%/15%, depending on the taxpayer's taxable income)**. Section 1231 property must have a holding period of more than one year. Adjusted net capital gain (ANCG) is net capital gain (NCG) determined without regard to: * The 28% rate gain, and * Unrecaptured Section 1250 gain-taxed at no more than 25%, as explained later. ANCG might be taxed at 20%, 15%, or 0% if Section 1231 property is sold at a gain. **However, all or part of this gain is unrecaptured Section 1250 gain if the asset is a building. Thus, net Section 1231 gain might be taxed today at 0%, 15%, 20%, or 25% depending on the taxpayer's tax rate and whether or not the gain is unrecaptured Section 1250 gain.**

Answer 75

Savannah has net Section 1231 gain of $25,000 that is NLTCG and her NCG is $25,000. Her ANCG is $25,000 taxed at a rate of 15%.

Answer 76

Her net Section 1231 gain is $18,000. Her NCG is $18,000 and her ANCG is $18,000 taxed at a rate of 15%.

Answer 77

Section 1231 property includes the following types of property: * Real property or depreciable property used in a trade or business or held for the production of income that is held for more than one year * Timber, coal or domestic iron ore * Livestock * Unharvested crops

Answer 78

Real property or depreciable property used in a trade or business or held for the production of income is **treated as Section 1231 properties if held for more than one year**. **When held for fewer than one year, neither category is considered a capital asset nor Section 1231 property. Any gain or loss resulting from the disposition of such assets is ordinary.**

Answer 79

The land used as a parking lot is a Section 1231 asset if held for more than one year.

Answer 80

As described later, a portion or all of any gain realized on the sale of the truck **may be taxed as ordinary income due to the Section 1245 depreciation recapture provisions**.

Answer 81

Certain types of property do not qualify as Section 1231 property, even if used in a trade or business. For example, inventory is not Section 1231 property, and, as a result, the sale of inventory results in ordinary gain or loss. Also, publications of the U.S. Government received other than by purchase at its regular sale price; copyrights; literary, musical, or artistic compositions; letters or memorandums; or similar properties held by certain taxpayers are not classified as Section 1231 property.

Answer 82

IRC Section 631 allows taxpayers to elect to treat the cutting of timber as a sale or exchange of such timber. **To be eligible to make this election, the taxpayer must own the timber or hold the contract right on the first day of the year and for more than one year. Furthermore, the timber must be cut for sale or for use in the taxpayer's trade or business.** **The gain or loss is determined by comparing the timber's adjusted basis for depletion with its fair market value (FMV) on the first day of the tax year in which it is cut. If the timber is eventually sold for more or less than its FMV (determined on the first day of the year the timber is cut), the difference is ordinary gain or loss**.

Answer 83

If the election is made to treat the cutting of timber as a sale or exchange, the timber is considered Section 1231 property. Thus, the **$140,000 of gain in the above example is a Section 1231 gain**. **If the taxpayer does not make the election, the character of any gain or loss depends on whether the timber is held for sale in the ordinary course of the taxpayer's trade or business, held for investment, or held for use in a trade or business**.

Answer 84

Recognition of Section 1231 gain of $200,000. Recognition of a gain at the time of sale if the timber is later sold with the gain equal to the sales price, less the basis in timber. The gain or loss is determined by comparing the adjusted basis of the timber for depletion with its FMV on the first day of the tax year.

Answer 85

The disposal of coal (including lignite) or iron ore mined in the United States must be treated as a **Section 1231 transaction if both of the following apply: * The coal or iron ore was owned longer than 1 year before its disposal. * The owner retained an economic interest in the coal or iron ore.** For this rule, the date the coal or iron ore is mined is considered the date of its disposal. An economic interest is owned when one acquires by investment, any interest in mineral in place and seeks a return of capital from income derived from the extraction of the mineral. Gain or loss is the difference between the amount realized from the disposal of the coal or iron ore and the adjusted basis used to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). This amount is included on Form 4797 along with other Section 1231 gains and losses.

Answer 86

Livestock held by the taxpayer for draft, breeding, dairy, or sporting purposes is considered Section 1231 property if held for 12 months or more from the date of acquisition. However, cattle and horses must be held for 24 months or more from the date of acquisition to qualify as Section 1231 property.

Answer 87

An unharvested crop growing on land used in a trade or business is considered Section 1231 property if * the crop and the land are both sold at the same time, * to the same person, and * the land is held for more than one year. Section 1231 does not apply to the sale or exchange of an unharvested crop if the taxpayer retains any right or option to reacquire the land. If Section 1231 applies to the sale or exchange of an unharvested crop sold with the land, no deductions are allowed for expenses attributable to the production of the unharvested crop. **Instead, the costs of producing the crop must be capitalized.**

Answer 88

An involuntary conversion occurs when a property is destroyed, stolen, condemned, or disposed of under the threat of condemnation, and other property or money in payment is received, such as insurance or a condemnation award. Involuntary conversions are also called “involuntary exchanges.”

Answer 89

Gain or loss from an involuntary conversion of a property is usually recognized for tax purposes unless the property is one's main home. The gain is reported, or loss deducted, on the tax return for the year in which the amount was realized. One cannot deduct a loss from an involuntary conversion of property it was held for personal use unless the loss resulted from a casualty or theft. However, depending on the type of property received, it may not necessary to report a gain on an involuntary conversion. Generally, the gain is not reported if the property that is received is similar or related in service or use to the converted property. The basis for the new property is the same as the basis for the converted property. This means that the gain is deferred until a taxable sale or exchange occurs. If the money or property received is not similar or related in service or use to the involuntarily converted property and qualifying replacement property is purchased within a certain period of time, one can elect to postpone reporting the gain on the property purchased. If a portion of a MARCS asset you own is involuntarily converted and gain is not recognized in whole or in part, the partial disposition rules in Treasury Regulations Section 1.168(i)-8 apply.

Answer 90

Condemnation is the process by which private property is legally taken for public use without the owner's consent. The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. **The owner receives a condemnation award (money or property) in exchange for the property taken**. A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer.

Answer 91

**Gains and losses resulting from condemnations of Section 1231 property and capital assets held for more than one year are classified as Section 1231 gains and losses**. As indicated above, the capital **assets must be held in connection with a trade or business or with a transaction entered into for profit**.

Answer 92

The $10,000 gain due to condemnation of the land is a Section 1231 gain and the $14,000 loss due to condemnation of the capital asset is a Section 1231 loss.

Answer 93

Gains or losses resulting from an involuntary conversion arising from fire, storm, shipwreck, other casualties, or theft are **not classified as Section 1231 gains or losses if the recognized losses from such conversions exceed the recognized gains**. In these situations, **involuntary conversions are treated as ordinary gains and losses**. However, **if the gains from such involuntary conversions exceed the losses, both are classified as Section 1231 gains and losses**.

Answer 94

Because the $8,000 ($42,000 - $50,000) recognized loss exceeds the $5,000 ($35,000 - $30,000) recognized gain, the recognized loss and gain are both treated as ordinary.

Answer 95

Steps for Analyzing Section 1231 Transactions * Step One Determine net gain from casualty or thefts of Section 1231 property and non-personal use capital assets held more than one year. * Step Two Combine the following gains and losses: Net casualty and theft, sale or exchange of Section 1231 property, and condemnation of Section 1231 property and non-personal use capital assets held more than 1 year. * Step Three If a net Section 1231 gain results from Step Two, determine if the taxpayer has any non-recaptured net Section 1231 losses. * Step Four Any net Section 1231 gain in excess of non-recaptured Section 1231 loss is treated as LTCG.

Answer 96

The $10,000 casualty gain is classified as a Section 1231 gain because gains resulting from casualties or thefts of Section 1231 property exceed losses. Danielle has $32,000 ($10,000 + $22,000) of Sec. 1231 gains and a $19,000 Section 1231 loss. **Danielle's $13,000 net Section 1231 gain is treated as a LTCG**. No portion of the $13,000 LTCG is recaptured as ordinary income because Danielle does not have any non-recaptured net Section 1231 losses during the preceding five-year period.

Answer 97

The $10,000 casualty loss is an ordinary loss, not a Section 1231 loss because losses resulting from casualties or thefts of Section 1231 property exceed gains. Because the loss is a business loss, it is deductible from AGI. Due to the $19,000 condemnation loss and the $22,000 of Section 1231 gain, she has a $3,000 net Section 1231 gain that is treated as a long-term capital gain (LTCG).

Answer 98

In 1962, Congress enacted IRC Section 1245, which **substantially reduced the advantages of Section 1231**. A gain from the disposition of Section 1245 property is treated as ordinary income to the extent of the total amount of depreciation (or cost-recovery) deductions allowed since January 1, 1962. The gain recaptured as ordinary income cannot exceed the amount of the realized gain. **The recapture provisions of Section 1245 apply to the total amount of depreciation (or cost recovery) allowed or allowable for Section 1245 property**. It makes no difference which method of depreciation is used. **Generally, the entire gain from the disposition of Section 1245 property is recaptured as ordinary income because the total amount of depreciation (or cost recovery) is greater than the gain realized. A portion of the gain will receive Section 1231 treatment if the realized gain exceeds total depreciation or cost recovery**.

Answer 99

The entire $35,000 ($95,000 - $60,000) gain is treated as ordinary income because the total amount of depreciation taken ($50,000) is greater than the $35,000 realized gain.

Answer 100

For individuals, Section 1245 recapture prevents net Section 1231 gain from being treated as long-term capital gain (LTCG) and being taxed at a maximum 20% rate. An increase in the maximum tax rates for high-income individuals in 1993 and subsequent years from 31% to 35% to 37% (currently the highest marginal tax rate for individuals) increased the negative effect of the Section 1245 recapture provisions for such individuals. The conversion of Section 1231 gain to Section 1245 ordinary income also prevents taxpayers from possibly using capital losses.

Answer 101

If Coastal sells the equipment for $72,000, **the entire $30,000 ($72,000 - $42,000) gain, which is due to the depreciation deductions, is Section 1245 ordinary income**. **Without Section 1245, the $30,000 gain is a Section 1231 gain that could be offset by $30,000 of the corporation's capital loss.** Note that **Section 1245 does not apply to losses**. In the above example, if Costal Corporation sells the equipment in the above example for $40,000, **a $2,000 ($40,000 - $42,000 basis) Section 1231 loss is recognized**.

Answer 102

True For individuals, Section 1245 recapture prevents net Section 1231 gain from being treated as long-term capital gain (LTCG) and being taxed at a maximum 20% rate.

Answer 103

Pursuant to IRC Section 1245, **recognized gain attributable to depreciation claimed with respect to Section 1245 property must be recaptured as ordinary income**. Section 1245 property includes tangible and intangible property (with the exclusion with some exceptions of buildings and their structural components). **The recognized gain in excess of the aggregate amount of depreciation is treated as Section 1231 gain potentially subject to capital gains tax rates**. **If taxpayers elect to expense certain depreciable property under Section 179, the amount deducted is treated as a depreciation deduction for purposes of the Section 1245 recapture provisions**.

Answer 104

Of the $2,500 gain, $1,000 reflects the depreciation deductions claimed with respect to the table. Pursuant to IRC Section 1245, that amount is recaptured and taxed as ordinary income. The balance of the gain, $1,500 is treated as Section 1231 gain. Depending on whether the company has other Section 1231 gains and losses, the character of that gain could be long-term capital gain.

Answer 105

In 1964, IRC Section 1250 was **enacted to extend the recapture concept to include most depreciable real property**. Unlike Section 1245, where the recapture is based upon the total amount of depreciation (or cost recovery) allowed, **Section 1250 applies solely to additional depreciation**. Additional depreciation, also referred to as excess depreciation, **is the excess of the actual amount of accelerated depreciation (or cost-recovery deductions under ACRS) over the amount of depreciation that would be deductible under the straight-line method**. For property held for a year or less, the additional depreciation is the total amount of depreciation taken on the property. Although Section 1250 was enacted in 1964, it is no longer necessary to consider additional depreciation for pre-1970 years.

Answer 106

Section 1250 has the effect of converting a portion of the Section 1231 gain into ordinary income when real property is sold or exchanged. The incremental benefits from using accelerated depreciation or accelerated cost recovery system (ACRS) cost recovery may be recaptured when the property is sold.

Answer 107

Non-corporate taxpayers can avoid Section 1250 recapture by either using the straight-line method of depreciation or cost recovery or holding the Section 1250 property for its entire useful life or recovery period.

Answer 108

When the Section 1250 recapture rules are applied solely to the additional depreciation amount instead of total depreciation claimed (as is the case for Section 1245 property), real property that is not Section 1245 property gets more favorable treatment. Despite a number of changes making Section 1250 more restrictive, Section 1250 still affords taxpayers more favorable tax treatment than Section 1245.

Answer 109

ordinary income When real property is sold or exchanged, Section 1250 converts a portion of the Section 1231 gain into ordinary income.

Answer 110

Section 1250 property is any depreciable real property other than Section 1245 property and includes the following: * All other depreciable real property except non-residential real estate that qualifies as recovery property (that is, placed in service after 1980 and before 1987) unless the straight-line method of cost recovery is elected. * Low-income housing. * Depreciable residential rental property. For non-corporate taxpayers, depreciation recapture is not required on real property placed in service after 1986 because such property must be depreciated under the straight-line modified accelerated cost recovery system (MACRS) rules.

Answer 111

Her realized gain is $600,000 and $80,000 is Section 1250 ordinary income due to excess depreciation. Since this is non-residential real estate, placed in service prior to 1981, the remaining $520,000 gain is Section 1231 gain. $420,000 of the gain in the above example is taxed at 25% and $100,000 is taxed at 15% or 20% (depending on the taxable income) if there are no Section 1231 losses, no unrecaptured Section 1231 losses, and no capital gains and losses from other transactions. Note that the tax rate on long-term capital gains (LTCG) may be 20%, 15%, or 0%.

Answer 112

For sales of real property after May 6, 1997, some or all of the Section 1231 gain may be a long-term capital gain (LTCG) that is unrecaptured Section 1250 gain taxed at a rate of 25%. Unrecaptured Section 1250 gain is the amount of LTCG not otherwise treated as ordinary income, which would be taxed as ordinary if Section 1250 provided for the recapture of all depreciation and not just additional depreciation. When a taxpayer sells Section 1250 property at a gain, any gain due to excess depreciation (accelerated versus straight-line) is ordinary income. Any remaining gain is Section 1231 gain and may be LTCG, however any of the LTCG due to depreciation other than excess depreciation is unrecaptured Section 1250 gain. Under prior tax law, the gain recognized upon the sale of Section 1250 was “recaptured” and taxed as ordinary income to the extent the depreciation claimed with respect to the property (a form of accelerated depreciation) exceeded the amount of depreciation that would have been claimed by using straight-line depreciation. **Under current tax law, straight-line depreciation is the only type of depreciation allowed with respect to real estate, however, there is no depreciation to be recaptured. As a result, all of the Section 1231 gain to the extent of straight-line depreciation is unrecaptured Section 1250 gain subject to a maximum tax rate of 25%.**

Answer 113

If she sells the building for $350,000, her $110,000 gain ($350,000 - $240,000) is Section 1231 gain and there is no depreciation recapture under Section 1250 because straight-line depreciation was allowed. The $110,000 Section 1231 gain in the above example is LTCG and is taxed at a rate of 25% because it is unrecaptured Section 1250 gain. If the selling price had been $450,000, then the entire $160,000 of depreciation taken would be taxed at the special gain rate of 25%; and only the $50,000 ($450,000 - $400,000) taxed at the most favorable gain rate of either 15% or 20%.

Answer 114

* Section 1231: Including the history of Section 1231, net gains, net losses, and tax rate for net Section 1231 gains. * Section 1231 Property: Real or depreciable property used in trade or business, timber, coal or domestic iron ore, livestock, un-harvested crops, and land. * Involuntary Conversions: Gains and losses from involuntary conversions of property used in a trade or business are generally classified as Section 1231 gains and losses. The property must be held for at least one year. * Procedure for Section 1231 Treatment outlines the effects of Section 1231 in association with Section 1245 and Section 1250. * Recapture Provisions of Section 1245 explains the purpose of Section 1245, Section 1245 property, and the application of Section 1245 to non-residential real estate. * Recapture Provisions of Section 1250 outlines the purpose of Section 1250, Section 1250 property defined, and unrecaptured Section 1250 gain.

Answer 115

True The entire gain from the disposition of Section 1245 property is recaptured as ordinary income because the total amount of depreciation (or cost recovery) is greater than the gain realized.

Answer 116

Under Section 1231 Under Section 1245 recapture, gain is characterized as ordinary income to the extent of total depreciation deductions. Therefore, if the gain realized is greater than depreciation the tax treatment should be under Section 1231.

Answer 117

Holding the Section 1250 property for its entire useful life or recovery period. After the entire useful life of the property, accelerated depreciation will be equal to straight-line depreciation.

Answer 118

$10,000 ordinary income Due to the five-year lookback rule, $10,000 of the non-recaptured Section 1231 loss is recaptured as ordinary income.

Answer 119

**IRC Section 1091 disallows losses incurred on wash sales of stock or securities in the year of sale**. For purposes of Section 1091, a wash sale occurs when: * A taxpayer realizes a loss on the sale of stock or securities, and * The taxpayer acquires "substantially identical" stock or securities within a 61-day period of time that extends from 30 days before the date of sale to 30 days after the date of sale. Wash Sales Thus, the **purpose of the wash sale rule is to prevent taxpayers from generating artificial tax losses in situations where taxpayers do not intend to reduce their holdings in the stock or securities that are sold**.

Answer 120

Only the acquisition of **substantially identical stock or securities** will cause a disallowance of the loss. The Internal Revenue Code and the Treasury Regulations do not define the term substantially identical. Judicial and administrative rulings have held that **bonds issued by the same corporation are generally not considered substantially identical if they differ in terms** (e.g., interest rate and term to maturity). However, bonds of the same corporation that differ only in their maturity dates (e.g., the bonds do not come due for 16 years and mature within a few months of each other) have been held to be substantially identical. **The preferred stock of a corporation is generally not considered substantially identical to the common stock of the same corporation**. However, convertible bonds and options have in the past been considered identical (ability to convert bonds to underlying common and to buy or sell stock via an option contract).

Answer 121

**If a loss is disallowed because of the wash sale provisions, the basis of the acquired stock that causes the non-recognition is increased to reflect the disallowance**. This increase means that the **disallowed loss is merely postponed and will eventually be recognized either in the form of a reduced gain or an increased loss upon the subsequent sale or disposition of the stock that causes the loss disallowance**. Because the amount of the increase in basis is equal to the postponed loss, the taxpayer eventually recovers the cost of the original shares of stock. If there has been more than one purchase of replacement stock and the amount of stock purchased within the 61-day period exceeds the stock that is sold, the stock is deemed to have caused the disallowance of the loss and is accounted for chronologically. **The holding period of the replacement stock includes the period of time that the taxpayer held the stock that was sold**.

Answer 122

Because Ingrid bought substantially identical stock, she cannot deduct the loss of $250 on the October 2nd sale. However, the disallowed loss of $250 is added to the cost of the new stock ($800) to obtain Ingrid's new basis in the PAC stock, which is $1,050.

Answer 123

IRC Section 267 places transactions between certain related parties under special scrutiny because of the potential for tax abuse. For instance, a taxpayer could sell a piece of property at a loss to a corporation owned or controlled by the taxpayer. Without any restrictions on the deductibility of the loss, the individual could recognize the loss while still retaining effective control of the property. Under Section 267, related taxpayers may not take current deductions on two specific types of transactions between them. These transactions are: * Losses on sales of property * Accrued expenses that remain unpaid at the end of the tax year

Answer 124

Section 267 defines the following relationships as related parties: * Individuals and their families. The term family includes an individual's spouse, brothers and sisters (including half-brothers and half-sisters), ancestors, and lineal descendants. * An individual and a corporation in which the individual owns more than 50% of the value of the outstanding stock. * Various relationships between grantors, beneficiaries, and fiduciaries of a trust or trusts, or between the fiduciary of a trust and a corporation if certain ownership requirements are met. * A corporation and a partnership if the same persons own more than 50% in value of the stock of the corporation and more than 50% of the partnership. * Two corporations if the same persons own more than 50% in value of the outstanding stock of both corporations and at least one of the corporations is an S corporation. * Other complex relationships involving trusts, corporations, and individuals.

Answer 125

If a loss is disallowed under Section 267, the original seller of the property receives no tax deduction. The disallowed loss has no effect on the purchaser's basis. The cost basis to the purchaser is equal to the amount paid for the property. However, partial relief is provided because, on a subsequent sale of the property, the related purchaser may reduce the recognized gain by the amount of the disallowed loss. This offsetting of a subsequent gain is available only to the related person who originally purchased the property. If the disallowed loss is larger than the subsequent gain, or if the purchaser sells the property at a loss, no deduction is allowed for the unused loss. This may result in a partial disallowance of an overall economic loss for the related parties because there is no upward basis adjustment for the previously disallowed loss (as is the case for a wash sale).

Answer 126

In Scenario 1, Sam and Frank together have incurred an aggregate gain of $2,000 ($17,000 - $15,000). Thus, Frank's full disallowed loss reduces Sam's subsequent gain. In Scenario 2, the aggregate economic loss incurred by Sam and Frank is actually $3,000 ($12,000 - $15,000). However, the actual amount of the tax loss recognized for Sam and Frank is zero. In Scenario 3, the actual tax loss would have been $7,000 ($8,000 - $15,000) instead of $2,000 if Frank had held the land until its eventual sale.

Answer 127

Under Section 267, a related obligor of any unpaid expenses must defer the deduction for those expenses until the year in which the related payee (i.e., recipient) recognizes the amount as income. In effect, this rule prevents an accrual-method taxpayer from taking a deduction for an unpaid expense in the earlier year of accrual while the related cash-method taxpayer recognizes the payment as income in the subsequent year. For unpaid expenses, the definition of related parties in Section 267 is expanded to include a personal service corporation (PSC) and any employee-owner. A PSC is one whose principal activity is the performance of personal services that are substantially performed by employee-owners. An employee-owner is an employee who owns any of the outstanding stock of the personal-service corporation. For purposes of these unpaid expenses, the definition of related parties is also expanded to include various relationships involving partnerships or S corporations and any person who owns (either actually or constructively) any interest in these entities.

Answer 128

Because Michelle is a cash method taxpayer, she reports the interest income when she receives it in the following year. Although Hill is an accrual method taxpayer, it must defer the deduction for the interest expense until it pays the interest in February of the following year. The results are the same if Hill Corporation is a personal service corporation and Michelle is an employee and owns any of the Hill stock.

Answer 129

**Bargain sales are sales or exchanges of assets for less than fair market value**. When such a sale occurs there are often two separate transactions happening under the guise of a sale or exchange of property. The **transaction may be considered part sale and part gift**. The problem with this sort of sale or exchange is that **no loss can be recognized in such a part sale - part gift transaction**. Bargain sales may occur in areas other than charitable gifting. A transaction may be a part sale and part compensation if an employer sells an employee an asset for less than its fair market value. The amount of the fair market value in excess of the proceeds of the transaction is compensation to the employee.

Answer 130

Deduction for the company of $8,000 for compensation paid to CEO. The CEO's basis in the automobile is $15,000 ($7,000 he paid and the compensation of $8,000 on which he was taxed). Bargain sales are usually two transactions in one. The key is to divide the bargain sale into its parts, the sale or exchange, and the "bargain" component (gift, compensation, etc.). Losses are not recognized in bargain sales.

Answer 131

In this case, Jones would be treated as having sold the land and must declare a gain of $150,000 ($200,000 - $50,000). The remainder of the value is a gift to the charity with a zero basis. If Jones had a basis of $250,000 in the land, he would have no gain since the basis exceeds the proceeds, but the $50,000 loss would not be declared.

Answer 132

Wash sale If you sell stock at a loss, you'll have a wash sale (and won't be able to deduct the loss) if you buy "substantially identical" stock within the 61-day wash sale period consisting of the day of the sale, the 30 days before the sale and the 30 days after the sale. You'll also have a wash sale if, within the wash sale period, you enter into a contract or option to buy substantially identical stock. Section 1091 disallows losses incurred on wash sales of stock or securities in the year of sale.

Answer 133

False Robert cannot deduct the loss of $33 a share on the first block because within 30 days after the date of sale he bought 250 identical shares of X stock. In addition, Robert cannot reduce the gain realized on the sale of the second and third block of stock by this loss.

Answer 134

Father-in-law Suzy may sell the stock to her father-in law because he is not considered a related party according to Section 267. If stock is sold at a loss to a related person, the loss is not deductible. Unlike a wash sale, a sale to a related person prevents you or the related person from claiming a loss deduction on a later sale.

Answer 135

$500 Of the $3,500 of total gain [$5,500 (sale price) - $2,000 (depreciated basis)], $3,000 reflects the depreciation deductions claimed. Pursuant to IRC Section 1245, that amount is recaptured and taxed as ordinary income. The balance of the gain, $500 is treated as a capital gain under IRC Section 1231.

Answer 136

Qualifying for workers compensation benefits Taxpayers who meet the ownership or usage test or use the exclusion more than once in a two-year period may qualify for a reduced exclusion. IRC lists the following as acceptable reasons for a reduced exclusion: * Job relocation * Employment change leaves you unable to pay your living expenses * Qualifying for unemployment benefits * Health issues * Divorce or legal separation * Birth of twins or other multiples * Damage to home from disaster * Condemnation or seizure of the property * Other unforeseen circumstances

Answer 137

61-day A wash sale occurs when: * A taxpayer realizes a loss on the sale of stock or securities, and * The taxpayer acquires "substantially identical" stock or securities within a 61-day period of time that extends from 30 days before the date of sale to 30 days after the date of sale.

Answer 138

$0 Section 121 Exclusion = $250,000 x 257/730 = $88,014. Total gain = $75,000 ($300,000 - $225,000). Therefore, the entire $75,000 of gain is excluded. $0 is taxable.

Answer 139

$250,000 Taxpayers may elect to exclude up to $250,000 ($500,000 on a joint return) of gain from the sale of a principal residence.

Answer 140

$1,000 STCL Step 1: Separate short-term from long-term: Short-term ($4,500) +$3,000 Long-term ($1,500) +$2,000 Step 2: Net capital gains and losses in each basket: Short-term STCL ($1,500) - Ordinary Income Long-term LTCG $500 - 0/15/20% Step 3: Net capital gains and losses: STCL ($1,500) LTCG $500 STCL ($1,000)

Answer 141

excluded; included To determine the holding period of an asset: * the day of acquisition is excluded * the disposal date is included

Answer 142

$1,164 Reduced Exclusion: $500,000 X 283/730 = $193,836 Gain: $445,000 - $250,000 = $195,000 Taxable Amount: $195,000 - $193,836 = $1,164

Answer 143

No loss deduction is allowed; the amount of the disallowed loss will be added to the cost basis of the shares purchased on January 25th. January 25th occurs within 30 days of the December 30th sale and would be considered a wash sale. Harry is not a dealer in securities. His new basis is $20 plus the $15 per share loss or $35.

Answer 144

* Accounts or notes receivable acquired in the ordinary course of a trade or business for services. * Copyrights; a literary, musical, or artistic composition; a letter or memorandum; or similar property. * Depreciable property used in a trade or business and (e.g., Section 1231 assets). * Inventory or property held primarily for sale to customers in the ordinary course of a trade or business. The IRC describes capital assets by defining what is NOT a capital asset. Property that is not classified as a capital asset includes the following: * Accounts or notes receivable acquired in the ordinary course of a trade or business for services. * Copyrights; a literary, musical, or artistic composition; a letter or memorandum; or similar property * Inventory or property held primarily for sale to customers in the ordinary course of a trade or business. * Depreciable property used in a trade or business and (e.g., Section 1231 assets).

Bryant - Course 4. Tax Planning. 7. Tax Consequences on Sale of Assets Flashcards

(169 cards)