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Flashcards in Federal Taxation: Property Transactions Deck (26):

3 Types of Assets. Briefly describe.

1. Ordinary Asset: Receivables, Inventory, Trade/business assets owned < 1 year
2. Section 1231 Asset: Ordinary asset owned > 1 year
3. Capital Asset: All other assets, personal/investment most common


Formula for Realized Gain/Loss

Amount Realized
- Adjusted Basis
=Realized Gain/Loss


What is included in "Amount Realized" for property transactions (4)?

Amount realized includes:
Cash received
FMV of property received
Liabilities assumed by the buyer
Less: Selling expenses


What is included in the "Adjusted Basis" for property transactions (3)?

Acquisition basis equals cost of the property, and includes:
Any liabilities or expenses connected to acquisition
Less: Depreciation, amortization, and depletion
Plus: Capital improvements


What are the 4 costs associated with placing an asset into service?



Alternative valuation date

6 months after death


2 Bases used for gifted property

Gain basis - donor's adjusted basis
Loss basis - lower of adjusted basis or FMV


2 General rules about gains and losses.

All realized gains and/or losses should be recognized unless specific rule excludes or defers.

Losses from sale of personal use assets are not recognized.


5 Things you need to know for every property transaction

1. Realized Gain or Loss
2. Recognized Gain or loss
3. Character of the gain or loss (property type)
4. Holding period for retained asset
5. Basis in the retained asset


4 Gift Basis Rules

1. Gain basis = Adj basis of the donor
2. Loss basis = FMV at date of gift or Adj basis of donor
3. Depreciable basis = Gain basis
4. Add adjustment for gift tax paid for appreciation
Adj = (Unrealized appreciation)/(FMV at date of gift - Annual exclusion) x Gift tax paid


Holding period for gifts and inheritances.

Gifts - If sold for gain, donor holding period carries over; if loss, holding period does not carry over.

Inheritance - always LT.


What kind of loss is Section 1244 loss? It is not computed as what kind of loss?

Ordinary loss

Not computed as Net Capital Gain/Loss


When are worthless securities deemed worthless?

Last day of tax year (December 31)


What type of gain is eligible for preferential rates?



What is the maximum deduction for section 1244 losses?

$50,000 single
$100,000 married filing jointly


To what extent are corporate capital losses deductible?
What is the carry back and carry forward timelines?

Only to the extent of capital gains.
Carry back 3 years; Carry forward 5 years


How is net capital loss treated for carry back and/or carry forward?



To what extent are individual capital losses deductible?

The lower of $3,000 or the extent to which CL exceed CG's.
[Is there any carry back/forward?]


3 Rules for Section 1244 Stock

1. Gains treated as LTCG; Losses treated as Ordinary losses ($50K/$100K Max for single/MFJ)
2. Stock of domestic small business corporation: a) Receipts 50% receipts from sales rather than investment income, c) during previous 5 tax years
3. Seller had to be original holder for 1244 stock to apply (no inheritance, gift, resale)


2 Types of Section 1231 Recapture.
What does each refer to?
How is it recharacterized?

1. 1245 Recapture - refers to depreciable realty; re-characterizes gains on personalty as ordinary income to the extent of accumulated depreciation.
2. 1250 Recapture - refers to depreciable real estate (buildings); re-characterizes accumulated accelerated depreciation in excess of straight-line depreciation as ordinary income. Depreciation in excess of SL depreciation is taxed at 25% rate for individuals, 20% rate for corporations.


What does the look back provision state for Section 1231 Gains?

Any Section 1231 gains must be offset by net Section 1231 losses from the previous 5 years that have not been previously recaptured.


For MACRS Personalty, what depreciation method is used, and how many years for what type of property classifications? (3)

1. 200% declining-balance method with half-year convention; Mid-quarter if >40% of assets placed in service last quarter of year.

2. 5 year property - trucks, autos, computers, machinery, equipment

3. 7 year property - office furniture and fixtures


For MACRS Realty, what depreciation method is used, and how many years for what type of realty classifications? (4)

1. Straight-line depreciation with mid-month convention.

2. Residential property - 27.5 years

3. Commercial property - 39 years

4. Land is not depreciable; only buildings and/or improvements


(3) Section 179 Rules:
- Type of asset
- Limits
- Affect on basis

1. Elect to expense certain tangible personalty in trade or business (Section 1231 Assets - Section 1245 Assets); not investment; can be new or used
2. 2 Rules: 1) Cannot exceed annual threshold-no carry forward, 2) Cannot exceed business income - excess can carry forward.
3. Basis is reduced for cost recovery purposes.


Intangible Assets
- Classification
- Include (6)
- Type of depreciation and period

Intangible assets acquired, not created
Include: goodwill, franchise, trademark, covenant not to compete, patents, copyrights
Straight line depreciation over 15 years


What is the recognized gain in a like-kind exchange?

The lesser of realized gain or boot.