Module 6: Tax Consequences of Property Transactions

Question 1

What are the primary noncapital assets or ordinary income assets?

Answer 1

Think ACID: Accounts receivable, Copyrights, Inventory, and Depreciable and real property used by a business

Question 2

What are the specifics wrt holding periods?

Answer 2

The day of disposition is included in the determination, but the day of acquisition is not.

Question 3

What is the first day of the holding period for a gift?

Answer 3

For the donee, it is the day after the gift, and the holding period includes the date of disposition.

Question 4

What is the maximum tax rate for a collectible? What is the holding period required?

Answer 4

One year, and a maximum of 28%.

Question 5

What is the maximum capital gain tax rate on Section 1250 gain on depreciable real property?

Answer 5

25%

Question 6

How is qualified dividend taxed?

Answer 6

At capital gains rates.

Question 7

What is the stipulation for a gift holding period as it relates to its basis?

Answer 7

If the basis transfers to the donee, the donor’s holding period is also added on.

Question 8

How is inherited property treated wrt

Answer 8

Inherited property from a decedent is treated as long term regardless of the actual original holding period.

Question 9

What is the holding period stipulation for Section 1031 nontaxable exchanges?

Answer 9

The holding period of the property surrendered carries over and adds to the holding period of the like-kind property received.

Question 10

How are regulated futures contracts and certain other contracts treated wrt taxes?

Answer 10

They are treated as though they were sold on the last day of the taxable year; capital gains or losses are treated as 40% short term and 60% long term.

Question 11

How are worthless securities treated?

Answer 11

As though they were sold or disposed of on the last day of the tax year.

Question 12

Do dividends from qualified foreign corporations also qualify for preferential treatment?

Answer 12

Yes.

Question 13

What is the holding period requirement for stock to have the dividend qualify for preferential treatment?

Answer 13

It must be held for more than 61 days during the 121-day period beginning 60 days before the ex-dividend date.

Question 14

What happens to the basis of an asset when received as an inheritance?

Answer 14

The heir’s basis is stepped up to the date of death value.

Question 15

How do acquisition costs affect an asset’s basis?

Answer 15

The taxpayer must capitalize these costs and include them in the basis.

Question 16

What is the one exception to the rule of using the donor’s basis for a donee’s basis for a gift?

Answer 16

When the fair market value of the asset on the day of the gift is less than the donee’s basis, then the fair market value is used for purposes of determining a loss on the sale of the asset.

Question 17

What is the formula for basis when the property has appreciated, and gift tax must be factored in?

Answer 17

The formula is: (donor’s basis + appreciation / FMV - gift tax exclusion ) x gift tax paid = donee’s basis.

Question 18

What factors into original or cost basis?

Answer 18

The amount of the taxpayer’s original funds used to make the investment, plus any improvements made, legal fees, and permits to build.

Question 19

What is adjusted basis?

Answer 19

Cost basis (increased by any capitalized costs), reduced by any cost recovery deductions, amortizations, or depletion.

Question 20

What is carryover basis?

Answer 20

Basis that is transferred or carried over from one party to another: most notably appreciated property gifted from the donor to the donee.

Question 21

Stepped-up basis

Answer 21

Basis increased to some point in time, free of income taxation.

Question 22

How do improvements and repairs affect basis differently?

Answer 22

Improvements increase original basis and repairs do not add to or impact original basis.

Question 23

How do mortgages affect basis?

Answer 23

They do not.

Question 24

Are personal expenditures (e.g., home maintenance cost and life/home insurance premiums) generally deductible?

Answer 24

No.

Question 25

How are repairs deductible?

Answer 25

In the year incurred.

Question 26

What property is eligible for capital recovery or depreciation?

Answer 26

Real property, personal property, and intangibles used in a trade or business. The property must have a determinable useful life.

Question 27

What are the four types of property and their useful lives per MARCS?

Answer 27

Autos, light duty trucks, and computers (5 years), Office furniture and fixtures (7 years), residential rental property (27.5 years), and commercial rental property (39 years).

Question 28

What is the double declining method?

Answer 28

The asset is depreciated at twice the rate that it would be for straight line depreciation. The first year is depreciated normally, and then you use 2x the normal rate.

Question 29

What is the straight-line depreciation method?

Answer 29

Assumes uniform depreciation throughout the life of the

Question 30

What are the relevant declining balances for MACRS depreciation?

Answer 30

200% for <10 year, 150% for 15 and 20, and a straight-line for everything else.

Question 31

When does the mid-quarter convention apply?

Answer 31

When the taxpayer places more than 40% of all property placed in service within the three final months of the tax year.

Question 32

What is the ADS and when does it apply?

Answer 32

It applies to listed property that is used 50% or less in business (e.g., passenger automobiles, entertainment, computers, and phones). Must also be used for purposed of making certain AMT adjustments. Based on the straight-line method.

Question 33

What is the useful life of intangible assets?

Answer 33

15 years.

Question 34

What kind of deduction is allowed for depletion of a natural resource?

Answer 34

An above the line AGI deduction.

Question 35

What are the two depletion methods?

Answer 35

Cost and percentage. Cost is the asset basis is divided by the total number of recoverable units of the assets and then multiplied by the number of units sold to determine the amount of the deduction for the year. Percentage is a percentage of gross income that is used for deduction. This is more aggressive.

Question 36

What is bonus depreciation?

Answer 36

Taxpayers may place 100% first-year bonus depreciation on any amount of asset.

Question 37

What is cost recovery?

Answer 37

Another word for depreciation.

Question 38

How does depreciation affect ordinary income?

Answer 38

It offsets it. When selling the property for a gain, the businessowner must look back and recapture all or part of those previous recovery deductions.

Question 39

How does depreciation affect ordinary income?

Answer 39

It offsets it. When selling the property for a gain, the businessowner must look back and recapture all or part of those previous recovery deductions.

Question 40

What are the three types of business property that are relevant for the purposes of recapture calculations?

Answer 40

Section 1231, Section 1245, and Section 1250.

Question 41

What is section 1231 property?

Answer 41

Any depreciable real property or personal property used in a trade or business or for the production of income.

Question 42

How is a loss resulting from a sale of Section 1231 property handled?

Answer 42

It is treated as ordinary income loss and is fully deductible against Schedule C income.

Question 43

How is a gain resulting from a sale of Section 1231 property handled?

Answer 43

It is treated as a capital gain. However, if a busines has reported Section 1231 losses at anytime in the previous 5 years, they must use this gain to offset it.

Question 44

How are the depreciation recaptures handled for sale of Section 1231 property?

Answer 44

They are treated as ordinary income to the extent that previous depreciation has been taken exceeding any recognized gain.

Question 45

Why is Section 1245 Property also called full recapture?

Answer 45

Any previous depreciation in the property is reported as ordinary income at time of disbursement.

Question 46

What is Section 1250 Property?

Answer 46

Real estate used in a trade or business or for the production of income.

Question 47

How is Section 1250 property taxed?

Answer 47

The unrecaptured Section 1250 gain (attributable to straight-line depreciation) is taxed at the maximum 25% capital gain tax rate, or the marginal capital gain rate. The other gain (due to appreciation) is subject to LTCG taxation.

Question 48

What does the Section 179 expense election allow? Why is it less relevant these days?

Answer 48

It allows an annual expensing of the cost of tangible personal property in any one year up to a certain amount. It is less relevant because of the 100% immediate expensing allowed by the bonus depreciation provision.

Question 49

What is the stipulation for the property under Section 179?

Answer 49

It must be used at least 50% for business in the first year that it is placed in service, with only the actual business percentage eligible for the election.

Question 50

What are the two annual limitations associated with the use of the Section 179 expense election?

Answer 50

If the total amount of qualifying property placed in service is more than $2.7 million, the allowance is reduced dollar for dollar for any amount greater. Also, the amount of the deduction cannot exceed the taxable income from the trade or business of the taxpayer, although a carryover is allowed. No loss can be created using the election.