What is the tax treatment of capital gains/losses?
Net capital losses are deducted up to a maximum of $3,000 per year against non-capital income.
Any excess can be carried forward. - Capital gains are fully taxable (but at lower tax rates).
Holding period: Short term - one year of less vs. Long term - more than one year.
In general, how is the donees basis of a gift determined? How is the holding period determined?
1) In general, the donees basis of a gift is the same as donors basis
2) If the sale is greater than the donors basis, then the gain is the difference between the donors basis and the sales price.
3) If the sale is less than the FMV, the loss is the difference between the FMV at the date of the gift and the sales price.
4) If the sale is at less than basis but greater than FMV, no gain or loss is recognized. 5
) The holding period includes the donors holding period unless basis becomes FMV, then holding period starts at date of gift.
In general, how is the basis of inherited property determined? How is the holding period determined?
1) FMV at date of death OR
2) FMV at alternate lower valuation date (if elected), which is:
A) 6 months from date of death
B) Disposal date (if disposed of less than 6 months from date of death).
The holding period is auto deemed long term for all inherited property, regardless of how long the deceased owned the property.
When is gain not taxed? HIDE IT
1) H - Homeowner's exclusion.
2) I - Involuntary conversions
3) D - Divorced property settlement
4) E - Exchange of like-kind business/investment assets (tangible)
5) I - Installment sale
6) T - Treasury and capital stock transactions (by corporation)
Describe the homeowner's exclusion
The sale of the taxpayer's personal principal residence is subject to an exclusion from gross income for gain:
- $500,000 is available for MFJ
- $250,000 is available for S, MFS, and HOH
To qualify, must pass both tests:
- Ownership test: a taxpayer must have owned the property as a principal residence for 2 years or more during the 5 yr period
- Use test: a taxpayer must have used the property as a principal residence for 2 years or more during the 5 yr period
- MFJ: one spouse may meet the ownership requiremment, but BOTH must meet the use requirement. If only one qualifies for use, then $250,000
- Widow: if widow sells a house that the surviving spouse owned and occupied with the decendent spouse, the surviving spourse is entitled to the full $500k exclusion if they sell the house within 2 years after the date of death
- there is a nonqualified use provision (limits gain & remainder is treated as capital gain)
- and a partial exclusion if the sale is due to a change in place of employment, health, or unforseen event (limits exclusion, $250k or $500k)
Describe the involuntary conversions
No gain is recognized for insurance proceeds from Destruction, theft, condemnation (the seizure of a property by a public authority for a public purpose), except when:
- if you keep any insurance proceeds for other purposes (pocket it), it is boot/loot and is taxable
- the ins proceeds you use for same purposes, then the gain is deferred
Must reinvest within 3 years from year end
The basis of the replacement property is its cost less the gain not recognized
All losses are recognized and the basis of the new property is its replacement cost
Describe exchange of like-kind business/investment assets (tangible)
Nonrecognition treatment is applied to exchange of like-kind business/investment assets (tangible), except
- p-ship interests
- real property in different countries
Real property (land and building) used in a trade or business or investment that is exchanged for other real property qualifies as like-kind.
More stringent: Personal property (machine, equip, and auto) must be exchanged for other personal property that has the same general use (i.e. same assest class).
- taxpayers must identify like-kind replacement property within 45 days of giving up their property
- like-kind property must be received by the earlier of:
- 180 days after taxpayer transfers property
- the due date of the taxpayer's income tax return
Gain when boot is received, the lower of:
- the realized gain
- boot received
Give formula for basis in like-kind property received when boot is received
FMV of Like-kind property received
+ Deferred Loss
= Basis in like-kind property received when boot is received
How to calculate realized gain when determining if gain recognized is the lesser of boot received or realized gain for like-kind exchange
FMV of new property received
+ FMV of boot received
(FMV of boot paid)
1. Amount realized
Original Cost of old
(Depreciation of old)
2. Adjusted Basis
1. Amount realized
2. (Adjusted Basis of property given up)
How to calculate boot received AND boot paid when determining if gain recognized is the lesser of boot received or realized gain for like-kind exchange
+ FMV of non-like-kind property received
+ net relief from liability
+ FMV of non-like-kind property paid
+ Net liability assumed
Identify the major tax provisions of involuntary conversions of property?
Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within 2 years for personal property or 3 years for business property. A realized gain exists when insurance proceeds are greater than the adjusted basis in the converted property. Note the difference between realized gain versus recognized gain: 1) Gain not recognized if proceeds reinvested in qualified replacement property. 2) Basis is cost of replacement property less any gain not recognized. 3) Losses recognized and basis is replacement cost. Holding period includes period that original property was held.
What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?
Gain exclusion for personal residence: 1) $250,000 for single taxpayers 2) $500,000 for married taxpayers
Identify the criteria for the exclusion provision on the sale of personal residence.
1) Taxpayer must have owned and used the property as the principal residence for 2 years or more during the 5 year period ending on the date of the sale or exchange. Periods of nonqualified use cause a portion of the gain to be taxable (sales/periods after 2008). 2) Either spouse for a joint return must meet the ownership requirement, and both spouses must meet the use requirement with respect to the property. 3) Taxpayers may be eligible for a partial (on a prorated basis) exclusion if the sale is due to a change in place of employment, health, or unforeseen circumstances, when claimed within the previous 2 years or fail to meet the ownership and use requirements. 4) No age requirement. 5) No rollover to another house is required. 6) Renewable, can be utilized more than one time.
Criteria for a classification as like-kind exchange.
1) Tangible real or personal property 2) Used in trade or business 3) Held for investment (except inventory, stock, and securities)
In a like-kind exchange, what is the basis of the property received?
The basis of property received retains the basis of property given up. Formula: (Basis of property given up + any boot paid + any boot received (at FMV) + any gain recognized = Basis of property received) Recognize gain to the extent of the lower of the realized gain or boot received.
Form for Like-Kind exchanges?
Describe installment sale
Installment method is a Tax method of reporting gains (not losses) for sales made by a "nonmerchant in personal property and "nondealer" in real estate. Not available for sales of stocks or securities traded on an established market
- Recognize when cash is received
- Reportable Installment Sale Gain/Income
- Gross Profit = Sales - COGS
- GP % = GP/Sales
- Earned Revenue (TI) = Cash Collections x GP %
Describe treasury and capital stock transactions by a corporation
The following corp transactions are exempt from gain (and any losses are disallowed)
- sales of stock by corporation
- repurchase of stock by corporation
- reissue of stock
Form for installment sale income?
Identify nondeductible losses. WRAP
1) W - Wash sale loss 2) R - Related party transactions 3) A - And 4) P - Personal Loss
Tax treatment given to wash sales?
1) Losses are disallowed if the same security is bought within 30 days before or after the sale.
2) The disallowed loss increases the basis in the property (security).
3) Gains are taxable.
Tax treatment given to related parties?
1) No deduction is allowed for losses on sales to related parties. 2) On a later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss.
What are the corporate capital gain/loss rules for C Corporations?
1) Net capital gains (long term or short term) A) Corporate net capital gains are added to ordinary income and taxed at the regular rate. B) Section 1231 gains are entitled to capital gain treatment. 2) Net capital losses (long term and short term) A) Corporate net capital losses are carried back three years and forward five years as short term capital loss. B) They are deducted from capital or Section 1231 gains.
For assets acquired after 1986, what is the recovery method 3-,5-,7- and 10-year property (MACRS)?
200% Declining Balance - est salvage value is not considered. Notes:
1) Taxpayer may choose straight line depreciation in lieu of 200% declining balance.
2) 20-year property uses the 150% declining balance method.
What is the half year convention?
Six months of depreciation is taken in the year of acquisition and the year of disposal.
Note: When SLD is elected, the half year convention is still applicable. The method of depreciation used must be used for ALL personal property acquired that year in a given property class.
What is the mid quarter convention?
Mid quarter convention replaces the half year convention if greater than 40% of a taxpayers property (other than real property) is placed in service during the last three months of a tax year. The mid quarter convention treats all property placed in service during any quarter of the tax year as being placed in service on the mid point of the quarter.
What is the mid month convention?
Mid month convention is used for calculating depreciation of real property (27.5 year residential rental real estate and 39 year nonres real property). The real property is treated as placed in service in the middle of the month of acquisition.
What is the expense deduction (Section 179) in lieu of depreciation?
$125,000 (for 2012; $25,000 for post 2012 years) of acquisition cost of personal property used in a trade or business may be deducted in any one year.
1) Reduced $1 for each $1 of qualifying property placed in service in excess of $500,000 (for 2012; $200,000 for post 2012 years).
2) Deduction is not permitted when a net loss exists or if the deduction would create a net loss (limited to taxpayer's taxable income from trade or business.)
What are section 1231 assets?
Generally, depreciable or real property used in trade or business and held over 12 months.
1) Net all Section 1231 gains and losses.
2) If gain > losses, treat the net amount as long term capital gain.
3) If losses > gains, treat the net amount as ordinary loss.
What is the tax treatment of Section 1245 assets?
Generally depreciable personal property or amortizable personal property (patents, copyrights, leaseholds, and professional sports contracts) used in a business over one year. Nonres real property acquired after 1980 but before 1987 if ACRS depreciation was claimed.
1) Recapture all accumulated depreciation as ordinary income under Section 1245.
2) Any excess gain is Section 1231 gain.
Identify the tax treatment given Section 1250 assets.
Generally real property used in a business and held for more than one year.
1) Gain/loss is treated ("recaptured") as ordinary income to the extent of the excess of accelerated depreciation over SLD.
2) Note that, bc MACRS uses SLD for real property, there is not Section 1250 recapture on disposition of real property placed in service after 1986 and depreciated under the MACRS rules