Flashcards in Property Transactions Deck (59):
What is the basic calculation for basis in property?
Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
What is the recipient or donee's basis on gifted property?
Sold at a gain: use donor's basis
Sold at a loss: use lesser of donor's basis or FMV at time of distribution
Sold in between donor's basis and FMV: No gain or loss
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later)
If alternate date is elected by property is sold before 6 month window; use FMV at date of death.
Property inherited is LTCG property regardless of how long it is held by the recipient.
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only
US property only
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received
Ignore the boot paid amount from the mortgage completely
What is an involuntary conversion? When does it not result in a gain?
Occurs when you receive money for a property involuntarily converted
There is no gain if you reinvest the proceeds completely
If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.
What are the requirements for exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years
Loss on sale of home is NOT deductible
What is a wash sale?
30 Day rule applies
Disallowed loss adds to basis of new stock
New stock takes on date of acquisition of old stock
Who is considered a related party in a property transaction? How does it affect the transaction?
Ancestors; siblings; spouse; descendants; corporation or partnership where you're a 50% shareholder
Seller cannot take a loss on sale to a related party; but gain is always recognized.
Related party gets to use the disallowed loss when they sell.
Related party's holding period begins when they acquire the property.
In-laws are NOT related parties.
How are capital losses taken in a corporation?
capital losses only offset capital gains
Carryback 3 years - if you elect NOT to carryback; you lost the option in the future
Carry forward 5 years - only as STCL
What assets are NOT capital assets?
Inventory; Business interest; Accounts Receivable; Covenant not to compete
Goodwill IS a capital asset
What are the steps in applying a capital gain or loss?
Net all STCG and STCL
Net all LTCG and LTCL
How much ordinary income can be offset by an INDIVIDUAL's capital losses?
$3;000 per year. Unused is carried forward and taken $3;000 each year.
No carryback is allowed.
Which property is governed by section 1231?
Real or Personal Business Property held more than a year
Inventory is never 1231 Property
How are section 1231 gains and losses handled?
Casualty Losses on 1231 Property - Net the losses
* Net Loss = Ordinary Loss
* Net Gain = Combine with other 1231 Gains
1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss
1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG
1231 Gain = LTCG
1231 Loss = Ordinary Loss
How is section 1245 depreciation recapture handled; and when does it apply?
To the extent of depreciation; treat as ordinary gain
Remainder is 1231 gain; which is LTCG - There are no 1245 Losses
1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG
1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary
What property qualifies for section 1250 treatment; and how are gains/losses handled?
1250 property is Real Estate that is not 1231 Property
Use 1250 for Gain only. For losses; use 1231
Individuals: Post-1986 property with a gain is 1231 LTCG
If Straight Line depreciation is used; don't use 1250 - Entire gain is 1231
Corps: Section 291 requires 20% of depreciation classified as ordinary gain
Remainder is 1231 LTCG
When are 1231; 1245 and 1250 gains or losses always ordinary?
When the asset is held less than one year.
Define "Long Term Holding Period."
More than 1 year.
Define "capital assets."
Assets other than:
assets used in a trade or business owned for more than 1 year, or
creative works (in the hands of the creator).
Define "Section 1231 assets."
Realty and depreciable property used in a trade or business owned more than one year.
How does one determine the basis of gifts?
1. Generally have a carryover basis;
2. A gift with adjusted basis > Fair Market Value (FMV) takes FMV basis if property is sold at a loss.
How does one determine the basis of inheritances?
1. Fair market value;
2. Always long-term holding period (except for 2010 when there was no estate tax).
Define "return on capital."
The cost of goods or property sold is recovered before any gain is realized.
What is the maximum tax rate for capital gains from the sale of collectibles?
The maximum rate is 28%.
How can corporations use their capital loss deduction?
1. Can only use capital losses to offset capital gain net income; no deduction for net capital losses;
2. Unused losses are carried back three years and forward five years.
Describe the elements of the net capital loss deduction for individuals.
1. Deductible up to $3,000 per year;
2. For AGI;
3. Also limited to taxable income;
4. Excess loss carries forward; no limit on carryforward period.
Define "long-term assets."
Assets held over one year.
What is the net capital loss limit for individuals?
The loss limit is $3,000.
List the characteristics of ordinary loss deduction on sale of worthless small business stock.
1. Corporation issued stock for less than $1 million;
2. Corporation must conduct an active business;
3. Taxpayer received stock from corporation in initial offering.
What is the percentage of qualified small business exclusion of stock gain?
50% (increased to higher levels for certain temporary periods).
List the qualified small business stock exclusion of gain requirements.
1. Stock held for more than five years after initial issuance;
2. Stock from active corporation with assets less than $50 million.
What is the ordinary loss deduction limit on the sale of a worthless small business stock?
$50,000 ($100,000 if married filing joint).
What is the maximum tax rate for gain attributable to depreciation claimed on real estate?
25% for straight line depreciation recapture.
Define "Section 1245 property."
All property other than land and building.
What is the period of time that lookback rules apply to Section 1231 gains?
What depreciation is subject to recapture under Section 1250?
Excess depreciation (depreciation claimed over straight-line).
What depreciation is subject to recapture under Section 1245?
All depreciation claimed.
Define "listed property."
Assets, such as computers and vehicles (but not cell phones), that are commonly used for business and personal purposes.
List the alternatives to the Modified Accelerated Cost Recovery System (MACRS).
1. Straight line for personalty;
2. AMT system - 150% declining balance;
3. Alternative depreciation system-straight line over extended life;
4. Units of production.
What criteria should be considered in making a determination to expense an asset for income tax purposes?
1. Tangible Personalty;
2. Lesser of business income or $500,000 in 2012;
3. Phased out dollar for dollar if tangible personalty asset purchases exceed $2,000,000 in 2012.
List the qualifying property for like-kind exchanges.
1. Business or investment property;
2. Not inventory or receivables;
3. Must be "like-kind;"
4. Cannot be across US borders;
5. Special rules when related taxpayers.
Is realty considered like-kind property?
All Realty is considered to be like-kind; so land is like-kind with a building.
List the requirements for deferral due to involuntary conversion.
1. Disposition qualifies as involuntary conversion;
2. Must replace property with property similar or related in service or use;
3. Must be made within two years from end of tax year of conversion (three years in the case of condemnation or threat of condemnation of real property held for productive use in a trade or business or for investment);
4. Boot causes recognition of realized gain.
Define "involuntary conversion."
The result of a casualty (an unexpected, unavoidable outside influence like a storm, fire, shipwreck, a theft, or a condemnation).
What is the adjusted basis of replacement property after involuntary conversion?
Cost reduced by any deferred gain.
What are the requirements for the $250,000 exclusion on sale of a residence rule?
1. Frequency test;
2. Ownership test;
3. Use test
Describe the principal residence-frequency test.
The exclusion is available no more frequently than every two years; limited exceptions.
Describe the principal residence-ownership test.
The taxpayer must have owned the residence for at least two of the preceding five years.
Describe the principal residence-use test.
The residence is used by taxpayer as a principal residence for at least two of the preceding five years.
When can interest on Series EE savings bonds be excluded?
1. Taxpayer incurs higher education expenses in year bonds are cashed in;
2. The exclusion is available only for bonds that are issued to individuals who are at least 24 years old.
How does one determine the amount of property dividend that should be included in income?
Value received to extent paid from earnings and profits.
What is the tax treatment of proportionate stock dividends and splits?
1. Not a taxable event;
2. Taxpayer must adjust basis per share;
3. Option to receive cash instead triggers dividend income.
Describe the constructive receipt rule.
A cash-basis taxpayer must include property in income in the period in which the right to (or control of) the property is acquired, even if no actual cash receipt.
Describe the tax-benefit rule.
Requires a taxpayer to include an expense reimbursement in income if the expense was deducted in a prior period and provided a tax benefit in that period.
Describe the claim-of-right rule.
Requires the taxpayer to include property in income in the period in which an apparent claim to the property materializes, even if it is possible that this income may have to be returned in the future.