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Enrolled Agent Part 1 > Part 1 - Video 3 > Flashcards

Part 1 - Video 3 Flashcards

(92 cards)

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1
Q

What are the types of property covered in capital gains?

A
  • Investment property
  • Business property
  • Tangible property
  • Intangible property
  • Depreciable property
  • Real property
  • Personal property

Each type of property has unique tax implications and treatment under capital gains rules.

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2
Q

Define investment property.

A

Property that produces investment income, such as stocks, bonds, Treasury bills, and notes.

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3
Q

What is depreciable property?

A

Property subject to depreciation expense, typically used for business or rental purposes.

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4
Q

What is the definition of a capital asset?

A

Any asset not considered a noncapital asset, resulting in a capital gain or loss upon sale or disposal.

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5
Q

What are noncapital assets?

A

Specific categories of assets that do not result in a capital gain or loss upon sale or disposal; gains are considered ‘ordinary’.

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6
Q

List three examples of what is not considered a capital asset.

A
  • Property held for sale to customers (inventory)
  • Depreciable property used in a trade or business
  • Real property used in a trade or business

This distinction is important for tax treatment.

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7
Q

What is the basis of an asset?

A

The amount used to determine a gain or loss when the asset is sold or otherwise disposed of.

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8
Q

How do you determine gain or loss on sale?

A

Subtract your basis in the asset from the sales price.

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9
Q

What is included in the ‘cost’ when determining basis?

A
  • Purchase price
  • Expenses of sale (commissions, fees, closing costs, sales tax)

These costs are critical for accurately reporting gains or losses.

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10
Q

What is Fair Market Value (FMV)?

A

The price at which property would change hands between a willing buyer and a willing seller, both having reasonable knowledge of all relevant facts.

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11
Q

What are the two categories of capital assets?

A
  • Capital assets held for investment
  • Capital assets held for personal use
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12
Q

What tax treatment applies to capital gains on assets held for investment?

A

Gains on sale are taxed as capital gains.

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13
Q

What happens to losses on the sale of personal-use property?

A

Losses are not deductible.

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14
Q

Define long-term capital assets.

A

Assets held for more than 1 year, taxed at favorable capital gains rates.

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15
Q

What is the maximum amount of capital losses you can deduct in a year?

A

$3,000 per year ($1,500 if married filing separately).

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16
Q

What is a capital loss carryforward?

A

Excess capital losses can be carried forward indefinitely to offset future gains.

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17
Q

What is the treatment of net short-term capital gains?

A

Taxed at ordinary income rates.

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18
Q

Fill in the blank: The basis of inherited property is the _______ at the date of death.

A

[FMV]

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19
Q

What happens to the basis when nondividend distributions occur?

A

It reduces the basis of your stock.

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20
Q

What is the basis of gifted property?

A

Same as the donor’s basis (carryover basis), unless sold at a loss.

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21
Q

True or False: Almost everything you own as an individual is a capital asset.

A

True.

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22
Q

What adjustments can decrease the basis of an asset?

A
  • Depreciation expense
  • Casualty or theft loss
  • Rebates
  • Money received to reimburse for loss

These adjustments are important for accurately reporting gains or losses.

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23
Q

What is the tax treatment for net long-term capital losses?

A

Deductible loss up to $3,000 ($1,500 MFS); remainder carried forward.

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24
Q

What happens to excess capital losses above the $3,000/$1,500 limit?

A

They can be carried forward indefinitely, but are lost if the taxpayer dies.

Carryforward losses can offset future capital gains or ordinary income.

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25
How are short-term and long-term carryover losses netted against current year gains?
Short-term carryover losses are netted against current year short-term gains, and long-term carryover losses are netted against current year long-term gains.
26
What is Jerry's net long-term loss based on his capital transactions?
($6,000) ## Footnote Jerry's long-term transactions include a $2,000 gain and two losses totaling $8,000.
27
What is Julie's net long-term gain for 2024?
$2,000 ## Footnote Calculated from $3,000 gain, $2,000 gain, $1,000 loss, and $2,000 carryforward from 2023.
28
What are the capital gains tax rates for single filers with taxable income up to $47,025 in 2024?
0% ## Footnote This rate applies to long-term capital gains.
29
What is a 1099-B form used for?
It reports capital gains transactions involving securities, including sales price and basis.
30
How are capital gain distributions from mutual funds reported?
As long-term capital gains, regardless of the holding period.
31
What occurs during a liquidating distribution from a corporation?
A return of capital (basis) is given first; any excess is a capital gain.
32
What is the treatment for worthless securities?
They are treated as sold for $0.00 on the last day of the tax year.
33
What is a wash sale?
Occurs when stocks are sold at a loss and substantially identical stocks are purchased within 30 days.
34
Are wash sale losses deductible?
No, wash sale losses are not deductible.
35
What defines an incentive stock option?
Statutory stock options with no income until the stock is sold or exchanged.
36
What is a qualified Employee Stock Purchase Plan (ESPP)?
Allows employees to purchase stock at a discount with no income recognized until sold.
37
What is a Publicly Traded Partnership (PTP)?
A partnership with ownership units traded on a securities market, treated as a corporation by default.
38
What is Section 1244 stock?
Stock in a domestic small business corporation where losses can be treated as ordinary losses.
39
What is a Small Business Investment Company (SBIC)?
A company licensed under the Small Business Investment Act of 1958, where losses are treated as ordinary losses.
40
What is Section 1202 QSB stock?
Qualified Small Business stock that can exclude all or a portion of the gain on sale, under certain conditions.
41
What defines an investor in securities?
Individuals who buy and sell securities expecting income from dividends, interest, or capital appreciation.
42
What is a trader in securities?
Individuals who buy and sell securities for profit from daily market movements, considered a business.
43
What is the mark-to-market election?
An election that allows traders to treat all gains and losses as ordinary and avoid capital loss limitations.
44
What is a section 1256 contract?
Includes regulated futures contracts, foreign currency contracts, and certain options.
45
How are digital assets treated for federal tax purposes?
They are treated as property, not currency, with general tax principles applied.
46
What transactions can result in taxable gain or loss for digital assets?
* Sale of a digital asset * Exchange for property or services * Exchange between digital assets * Receipt as payment * Hard forks * Mining or staking * Airdrops * Other dispositions
47
What happens if the FMV of crypto received exceeds the basis?
You have a gain.
48
What happens if the basis exceeds the FMV of crypto received?
You have a loss.
49
If cryptocurrency is received for services, how is it treated?
It is treated as gross receipts at FMV in USD at the time received.
50
What happens if the basis exceeds the fair market value (FMV) of crypto received?
You have a loss.
51
What is the limit for capital losses that can be deducted?
$3,000 ($1,500 if married filing separately).
52
How should crypto received by a self-employed person for services be treated?
As gross receipts in the business at the FMV in US dollars at the time received.
53
What should be recorded if crypto is used to pay business expenses?
The expense should be recorded at the FMV in US dollars at the time paid.
54
When should Form 1099-MISC be used?
If more than $600 worth is paid to an individual or partnership.
55
What types of assets are considered collectibles?
* Art * Rugs * Antiques * Metals * Gems * Stamps * Coins * Alcoholic beverages * Musical instruments * Historical objects
56
What is the maximum tax rate for collectibles?
28%.
57
Under what conditions are losses on collectibles deductible?
Only if held for investment.
58
What must be true for a nonbusiness bad debt to be deductible?
* Must be a genuine debt * Not intended as a gift * Must have basis in the debt * Must be cash loaned out
59
When can a bad debt be deducted?
In the year it becomes worthless.
60
How should sales of noncapital assets be reported?
On the appropriate business tax form, frequently Form 4797.
61
What is the tax implication of transactions between spouses?
Generally, no gain or loss is recognized on a transfer of property.
62
Who cannot deduct losses on sales between related parties?
Family members, corporations and >50% owners, fiduciary and beneficiary of the same trust.
63
What is the general tax treatment for the sale of a primary residence?
The gain is taxable income unless certain conditions are met.
64
What is the maximum gain exclusion for a single filer on the sale of a primary residence?
$250,000.
65
What are the two tests to qualify for the gain exclusion on the sale of a primary residence?
* Ownership requirement: Owned the home for 2 years or more * Use requirement: Lived in it as main home for 2 years or more.
66
What is the exclusion amount for married couples filing jointly (MFJ) on the sale of a primary residence?
$500,000.
67
What is required for a partial exclusion of gain on the sale of a primary residence?
The main reason for sale must be due to a change in workplace location, health-related issues, or other unforeseeable events.
68
What happens if you do not meet the use test for the sale of a primary residence?
You must pay capital gains tax on the realized gain.
69
What is depreciation recapture?
Tax on the amount of depreciation taken when selling a home that was rented out or used for a home office.
70
How is depreciation recapture taxed?
At a rate of up to 25%.
71
What must be reported on Form 8949?
The sale of your primary residence if you cannot exclude all or part of the gain.
72
What is cancellation of indebtedness income?
Income realized when a debt is forgiven.
73
What are the criteria for exclusion of debt forgiveness on a foreclosure?
* Debt was to buy, build, or improve the home * Must be your main home.
74
What is the reporting requirement for installment sales?
Report on Form 6252 in each year payments are received.
75
What type of property qualifies for a Like-Kind Exchange under Section 1031?
Business or investment real property.
76
What is the time frame for identifying the property to be received in a Like-Kind Exchange?
Within 45 days after the date you transfer the property given up.
77
What type of property is eligible for a like-kind exchange?
Real property, specifically investment property (not personal-use) ## Footnote Personal-use properties do not qualify for like-kind exchanges.
78
What must property be in a like-kind exchange?
Like-kind ## Footnote Real estate for real estate is considered like-kind as long as both are in the U.S.
79
What is the time frame to identify the property to be received in a like-kind exchange?
Within 45 days after the transfer of the property given up ## Footnote This is a strict requirement for the exchange to be valid.
80
When must the property received in a like-kind exchange be received?
By the earlier of: * The 180th day after the transfer * The due date for your tax return for the year of the transfer
81
Can a like-kind exchange be partially taxable?
Yes ## Footnote This occurs if you receive money or not like-kind property ('boot') in addition to like-kind property.
82
What is the tax implication when receiving boot in a like-kind exchange?
You pay tax on the gain up to the amount of cash and FMV of the not like-kind property received ## Footnote This means that the gain is recognized to the extent of the boot received.
83
What defines an involuntary conversion under Section 1033?
Occurs when property is destroyed, stolen, condemned, or disposed of under threat of condemnation ## Footnote It involves receiving other property or money as compensation.
84
How is gain or loss calculated in an involuntary conversion?
Net payment received less adjusted basis = gain or loss ## Footnote Net payment is the total payment minus costs of obtaining it.
85
What is the general replacement period for most property in an involuntary conversion?
2 years ## Footnote This is the time frame to replace property to postpone gain.
86
What is the replacement period for real property used in a trade or business?
3 years ## Footnote This applies unless owned by a corporation of which you own 80%.
87
What is the treatment for losses on personal-use assets?
Generally not allowed ## Footnote There is an exception for casualty or theft loss in a federally declared disaster area.
88
What is the reduction for losses in a federally declared disaster area?
Reduce loss by $100 ## Footnote Only the remaining loss exceeding 10% of AGI can be deducted.
89
What is the deduction rule for certain major disasters declared under Section 401 of the Stafford Act?
Reduce the loss by $500 and deduct the rest without regard to AGI ## Footnote This rule applies to specific major disasters.
90
What is a condemnation?
The legal taking of private property by a government body for public use without the owner's consent ## Footnote It is a type of involuntary conversion.
91
What is the gain exclusion for a personal residence in a condemnation situation?
Up to $250,000 of gain ($500,000 for married filing jointly) ## Footnote This applies to personal residences affected by condemnation.
92
What can be done with the gain from condemned property?
Postpone the gain by buying replacement property within the replacement period ## Footnote This allows for deferral of taxes on the gain.

Enrolled Agent Part 1 (3 decks)

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