Income Tax: Property Tax Flashcards

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1
Q

What are the three types of property assets for tax purposes?

A

Capital assets
Ordinary income assets
Section 1231 asset

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2
Q

What is a capital asset?

A

All assets are capital assets except ACID

  • Accounts and notes receivable
  • Copyrights and creative works (if held by the creator of such works
  • Inventory
  • Depreciable property used in a trade or business
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3
Q

What is an ordinary income asset?

A
  • assets that, when sold, result in ordinary income to the owner of the asset
  • inventory, accounts receivable, creations in the hands of the creator, copyrights in the hands of the owner.
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4
Q

What are section 1231 assets?

A
  • 1231 assets are assets used in a trade or business
  • they are either (1) depreciable personal property, section 1245 or (2) depreciable real property section 1250
  • property must be held for 1 year
  • qualify for depreciation deductions
  • specifically included certain property such as:
timber
coal
Iron Ore 
Certain livestock and 
I harvested crops
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5
Q

What is the recovery of capital doctrine?

A

-basis is usually returned to the taxpayer tax free, either as a result of the sale or as a result of depreciation deductions.

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6
Q

What is cost basis?

A
  • Cost basis is the amount paid in cash, debt obligations, other property, or services.
  • also includes amount paid for the following items:
Sales tax 
Freight 
Installation and testing 
Excise taxes 
Legal and accounting fees 
Revenue stamps 
Recording fees, and 
Real estate taxes
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7
Q

What is cost of a property acquired in a taxable exchange?

A

Fair market value (FMV) of the property given in exchange for what is received

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8
Q

What is the basis in property acquired as a dividend in kind or as compensation for services?

A

FMV of the property at the time of acquisition.

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9
Q

Adjustments to Basis

A
  • before determining gain or loss on a sale, exchange, or other disposition, certain adjustments must be made to the basis of the property.
  • see chart for items that increase or decrease the basis of an asset
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10
Q

How is tax basis adjusted to property acquired by non taxable exchange?

A
  • when property is exchanged for property of equal value - new property will have a carryover basis
  • property exchanged for more valuable asset - boot is paid - new asset will have a carryover basis (basis of exchanged property) plus any boot paid.
  • property exchanged for a less valuable asset - boot is received - new asset will have a carryover basis reduced by any boot received that was greater than the gain
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11
Q

How are capital gains treated on inherited property?

A
  • Holding period for capital gains is always long term for inherited property.
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12
Q

What is the general rule for basis of gifted property?

A

General rule is that the donee’s basis in the gifted property is the same as the donors basis in the gifted property.

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13
Q

What is the first exception to the general rule for basis of gifted property?

A
  • first exception occurs when the FMV of the gifted asset is less than the donors basis in the property
  • the basis to the donee is the FMV of the property on the date of the gift.
  • if Asset is later sold by the donee and amount realized is between the FMV at time of the gift and the original basis of the donor, no gain or loss is recognized. (Double Basis Rule)

if amount realized from sale is more than original adjusted basis of the donor, the sale is taxed at a gain and the original holding period of donor can be used.

If amount realized is less than the fmv of the gifted asset, the sale is a loss and holding period on date of gift must be used.

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14
Q

What is the second exception to the general rule for basis of gifted property?

A
  • second exception occurs when gift tax has been paid.
  • if gift tax been paid and the asset has appreciated in the hands of the donor, portion of tax which is associated with the appreciation is added to the donors basis to determine the donees basis.
  • memorize formula attached
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15
Q

What is donee’s basis in property received from a gift?

A

Lesser of:

  • donors basis
  • fair market value of the property at the time of the gift
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16
Q

What is the holding period for gifted property?

A
  • generally holding period for donee is the holding period of donor.
  • if gifted assets FMV is less than the donors basis and is sold for a loss, holding period for donee is the date of gift
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17
Q

What is the basis of property transferred between spouse incident to divorce?

A
  • treated same as gifts, carryover basis applies
  • no gain or loss is recognized between spouses or former spouses.
  • must occur within one year of the date in which marriage legally ended and is related to the cessation of the marriage
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18
Q

Related Party Transactions (section 267) Rule

A
  • only affects transactions where there is a loss.
  • transferee takes asset with double basis rule (FMV of asset less than basis of the donor).
  • holding period always begins on the date of the sale
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19
Q

Bargain sales to Charity

A
  • if taxpayer sells property to a charity for less than FMV, basis of property must be allocated between portion of the property sold and portion given to charity.
  • see formula
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20
Q

What is the Medicare contribution tax?

A
  • 3.8% tax on investment income for taxpayers with AGI over $200,000 (single) or $250,000 (MFJ)
  • imposed on the lesser of an individuals net investment income for the tax year or modified AFI in excess of limits
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21
Q

How is un-recaptures section 1250 gains taxed? (Straight line depreciation)

A

25%

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22
Q

Capital gain holding period

A

Long term capital gains rates - asset held for more than a year

***day of disposition is included in holding period, day of acquisition is not

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23
Q

What is the difference between realization and recognition of gain?

A
  • recognition occurs when a realized gain is taxed
  • an asset must be sold or exchanged for a gain to be realized.
  • realized gains are recognized unless an exception can be found in the internal revenue code:

Gain is exempt from taxation, or
Gain is deferred to a future time

24
Q

Formula for determine gain or loss of an asset

A
25
Q

Calculation of amount realized:

A

Amount Realized = Cash received + FMV of property received in exchange + liabilities “shed”

-if you give up debt that adds to your amount realized

If you assume debt , you will have payed that amount in the exchange

26
Q

When does recognition of gain occur?

A
  • at the disposition of property
  • when debt is relieved
  • when money is taken out of an investment as a loan when the individual is not personally liable for the loan
  • net gifts (transfers where the donee agrees to pay the gift tax)
27
Q

What are some situations in which gains/loss are realized but not recognized?

A

Like-kind exchanges of real property held for productive use or investment.

Certain exchanges where cash received is quickly reinvested in similar property.

Transfer of property to controlled corporation.

Exchange for plans of corporate reorganization.

Transfers to, or distributions from, partnerships.

28
Q

How are losses generated on the sale or exchange of property used for personal purposes treated?

A

-losses in assets used for personal purposes are never deductible and result in a permanent loss of capital for the taxpayer

29
Q

What is a wash sale rule?

A
  • when a taxpayer sells a security at a loss and buys a substantially identical security within 30 days before or after the date of the loss sale.
  • disallowed loss is then added to the cost basis of the new stock or security to determine the new basis.
  • does not apply to trades of commodity futures and foreign currency’s.
30
Q

What dictates if a stock is substantially identical for the wash sale rules?

A
  • ordinarily, securities of one corporation are not considered substantially identical to securities of another corporation.
  • bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation.
31
Q

What makes factors make preferred stock substantially identical to common stock? (Wash sale rules)

A

If the preferred stock:

  • convertible to common stock
  • has same voting rights as common stock
  • same dividend restrictions
  • traded at prices that do not vary greatly from conversion ratio
  • unrestricted as to convertability
32
Q

How is a loss on a personal residence treated?

A

-loss is not deductible and not recognized as it is a personal asset

33
Q

What is section 121 exclusion? ( Qualified home gain exclusion)

A

Single tax payers may exclude up to $250,000 of gain from sale of principal residence

Married taxpayer may exclude up to $500,000 of gain from sale of principal residence

34
Q

What are the two requirements to qualify for the section 121 exclusion? (Qualified home sale gain exclusion)

A
  1. Property must have been owned and occupied as a principal residence for 2 out of last 5 years
  2. Exclusion can only be used once every 2 years

For married taxpayers - must both meet the use requirement but either may meet the ownership requirement.

35
Q

Section 121 (Qualified home sale exclusion) - reduced exclusion

A

Reduced exclusion may be available if:

  • change in employment forced move
  • a change of health for you or family member

Amount excluded is based on the period of ownership between the last sale and the current sale (pro rata)

36
Q

How are losses from worthless securities treated?

A
  • losses from worthless securities are deductible in the year in which the securities become completely worthless, long term or short term depending on holding period.
  • the artificial sale date for worthless securities is the last day of the year in which the security becomes worthless
37
Q

Treatment of capital gains chart

A
38
Q

How do you net out capital gains?

A

Two step process:

  1. Net gains and losses by holding period
  2. If excesses losses result, they are shifted to category carrying highest tax rate.
39
Q

Are net capital losses deductible?

A

Yes you can deduct up to $3,000 of capital losses per year from AGI.

Excess is carried over indefinitely and retain their classification (short term or long term)

40
Q

What is section. 144: capital losses on small business stock?

A

*don’t worry about remembering requirements, just basic rule

Single taxpayer can deduct up to $50,000 ($100k MFJ) of the loss in small business stock as ordinary loss .

41
Q

What is section 267?

A

-section 267 disallows losses from direct or indirect sales or exchanges of property between related parties.

Related parties:

Siblings (half/not step)
Children & grandchildren
Parents & grandparents
Spouse

42
Q

what are the two types of section 1231 assets?

A

Section 1245: tangible property used in a trade or business that is or has been subject to an allowance for depreciation. (Equipment, patents, machines, etc…)

Section 1250: real property used in a trade or business. (Buildings and real estate)

For both the holding period must be more than a year to qualify for 1231 treatment.

43
Q

How is section 1245 property treated?l for tax purposes?

A
  • gain on the sale of section 1245 is treated as ordinary income to the extent of depreciation taken.
  • any gain that exceeds the depreciation taken is treated as section 1231 gain (long term capital gains)
  • any loss taken on a section 1245 property is treated as an ordinary loss.
  • any sale amount in excess of the original purchase price of section 1245 is a section 1231 gain
44
Q

How are section 1231 assets taxed?

A
  • gains qualify for long term capital gains tax rate

- losses are treated as ordinary income losses with no limitation like capital gains

45
Q

How is section 1250 treated for tax purposes?

A
  • see page 25-26
  • difference between depreciation taken and straight line depreciation is taxed at ordinary income rates
  • remaining depreciation taxed at 25%, called un-recaptured section 1250 depreciation.
  • any gain in excess of the above is taxed at capital gains rates.
46
Q

What is the 5 year look back rule?

A

-section 1231 gain in the current year will be taxed at ordinary income tax rates to the extent of any section 1231 losses claimed in the last 5 years

47
Q

What is a section 1031 exchange?

A
  • Only applies to real property. Properties must be of similar character and nature, however they do not have to have similar uses.
  • if property is exchanged for like-kind property, no gain or loss is recognized if the property is held for:

productive use in a trade or business

as an investment (rental Property)

48
Q

What are the requirements of a 1031 exchange transaction?

A
  1. Proceeds from the sale of the original property must be held by an escrow agent (property owner cannot receive the proceeds from sale of the property)
  2. Replacement property must be identified within 45 days of the sale of the original property.
  3. Closing on the replacement property must take place by the earlier of:
    - 180 days from the sale of the original property, or
    - the due date (including extensions) if the tax return for the year the original property was sold.
49
Q

What is boot and how is it taxed?

A
  • Non like kind property and cash or money received in an exchange.
  • gain realized in a 1031 exchange will be taxable to the extent of boot.

To extent that boot exceeds the gain realized, remaining boot is not taxed but treated as a tax-free return of basis.

50
Q

Summary of income tax consequences of a section 1031 exchange:

A
  1. Determine wether your client is trading up or down?
  2. Party trading up recognizes no gain and adds to their old basis any boot/cash given to the other party
  3. The party trading down (receiving less like kind property than giving up) will be required to recognize gain to the extent of boot received. If the boot exceeds gain, the amount of boot in excess of the gain is reduces basis of the new asset
  4. Debt relief is treated as boot, gain recognized for party no longer responsible for paying back the loan. Party assuming the debt will increase their basis in the replacement property by a like amount.
51
Q

Basis adjustments like kind exchange

A
52
Q

What are the rules regarding like kind exchanges and related parties?

A
  • if either related party disposed of property received in an exchange within 2 years, both parties are required to recognize any gain/loss that was not recognized in the year of the exchange.
  • does not apply if:

Either party dies before the sale occurs, or

Taxpayer can demonstrate that that avoidance of taxation was not a principal purpose of the sequence transactions.

53
Q

What is section 1032?

A

No gain or loss is recognized when a corporation receives money or property in return for its stock.

54
Q

What is section 1033 (involuntary conversion)?

A

Section 1033 permits non taxable treatment of gains if the amount of reinvestment in replacement property equals or exceeds amount realized.

-involuntary conversion is defined as sale or exchange of a property due to threat of condemnation.

Example: government taking property or natural disaster.

Requirements:

-Replacement property must be acquired within a specific period

Period starts when involuntary conversion occurs, &

Ends 2 years (3 years for condemnation) from year end of year the gain is realized.

Replacement property must meet the:

Functional use test (owner users) - replacement property must meet the same functional use as original property, or

Taxpayer use test (owner investors) - replacement property must be used by the taxpayer in a similar activity as the original property.

55
Q

Transfers between spouses - post divorce

A
  • transfers incident to a divorce are non taxable and basis is carried over.
  • transfer incident to a divorce if it occurs within one year of the date the marriage has legally ended.
56
Q

How do section 1231 assets apply to corporations?

A
  • Corporations do not receive any benefit from the section 1231 gains.
  • Section 1231 Losses, the loss will be considered an ordinary loss, and may be deducted in full against other income.
  • Corporations can only deduct Capital Losses from Capital Gains. However with 1231 they can recognize losses without having the gains to offset them.