Flashcards in Property Transactions Deck (51):
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.
qualified acquisition indebtedness
Is debt that is incurred in acquiring, constructing, or substantially improving the principal or second residence of the taxpayer and is secured by such property. Construction loans and real estate acquisition loans can be “rolled” into a first mortgage if strict adherence to the required time frame is maintained.
Max Interest Exp that can be deducted is based on loan limit of $1M ($500 if married filing separate)
residential lease requirements
is not required to be in writing in most cases, but when a writing is included the document should at least contain a basic description of the leased premises. The document need not include a statement as to the due date for the payment of rent. The common law will presume that rent is due at the end of the term or period of tenancy unless otherwise agreed.
The General Business Credit (IRC Section 38(b)) is a combination of?
a combination of several tax credits to provide uniform rules for the current and carryback/carryover years
When should a corporation make estimated tax payments?
Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. Installment payments are required if the estimated tax is $500 or more.
If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.
Personal holding company
“Personal holding company” is a term used in relation to federal income tax to denote a corporation that is majority-owned by a small group of natural persons. It is commonly called an “incorporated pocketbook.”
A personal holding company is defined by IRC Section 542 as a corporation that is as follows:
Derives at least 60% of its gross income (after certain adjustments) from investments (dividends, interest, rents, royalties) and from certain personal service contracts
With stock that is more than 50% owned by five or fewer individuals.
They are allowed a deduction for both actual paid dividends and consent dividends.
What deduction(s) is (are) allowable in determining the decedent's taxable estate
In computing the taxable estate for estate tax purposes, a deduction is allowed for bequests to charitable organizations, and there is no percentage limitation.
A deduction is also allowed for funeral expenses, reducing the taxable estate.
what rate should capital gains be taxed?
Long-term capital gains are taxed at a maximum of 15% for sales after May 5, 2003, except that individuals in the 39.6% bracket would be taxed at a maximum of 20%. (For taxable years 2007 to 2015, for long-term capital gains that would otherwise be taxed in the 10% or 15% bracket, the maximum rate is 0%.)
What is earned income tax credit (EIC)?
The earned income tax credit (EIC) is a refundable credit available to qualifying low-income taxpayers. The amount of the EIC is based on a percentage of earned income and the number of qualifying children the taxpayer supports (0, 1, 2, or 3 or more), with the income limits changing depending on how many qualifying children a taxpayer has.
When determining whether a child is a qualifying child for purposes of computing the EIC, the support test is not included, and the relationship, residency, and age tests are modified (see Dependent). The refund decreases as earned income rises after reaching a given amount.
In order to be eligible for the earned income credit, a taxpayer must have an AGI below a certain level, a valid Social Security number, a filing status other than married filing separately, a U.S. citizen or resident alien designation, no foreign income, and limited investment income.
When is a charitable contribution deduction on an estate’s fiduciary income tax return is allowable?
An unlimited charitable contribution deduction is allowed for an estate if the contribution is provided for in the will of the decedent, the charity is a qualified charity, and if the contribution is paid in the year of deduction or the year following the deduction.
There are no other limits on the charitable contribution deduction of an estate.
What is the percentage depletion rate allowed by the Internal Revenue Code for the recovery of capital invested?
5% for Mining Clay
10% for Mining Coal
15% for Gold, Silver, copper and iron ore.
Under Regulation D of the Securities Act of 1933, what is the maximum time period during which an exempt offering may be made?
For income tax purposes, the estate's initial taxable period for a decedent who died on October 24:
Income earned by an estate is subject to income tax. Generally, income of the decedent up to the date of death is reported on the final Form 1040. Income earned after death is reported by the estate's fiduciary on Form 1041. An estate may adopt either a calendar year or fiscal year. Trusts, on the other hand, must use a calendar year. (IRC Section 644)
Gross negligence (constructive fraud)
is the extreme, flagrant, or reckless departure from the standards of due care and competence in performing or reporting upon professional engagements. There need not be actual intent to deceive (scienter). Ordinary negligence is a lesser offence than gross negligence. There is no necessity to identify any third-party users.
The federal estate tax may be reduced by a credit for:
*(unified) tax credit—the maximum amount is $2117,800 for 2015, which is equivalent to $5,430,000 worth of property in 2015. The estate tax was reinstated in 2011 by the Tax Relief Act of 2010 and made permanent by the Taxpayer Relief Act of 2012.
*federal gift taxes paid on gifts included in the donor-decedents' taxable estate. Only taxable gifts made before 1976 are added to the donor's taxable estate.
*A credit is allowed against the federal estate tax if a person inherits from someone who also paid a federal estate tax and died within the prior 10 years (credit for tax on prior transfers).
*A credit is allowed for foreign death taxes paid.
What is the maximum allowable traditional IRA deduction?
The maximum annual contribution allowed has been increased to $5,500 for 2015 with an additional $1,000 contribution allowed for taxpayers age 50 and over.
What is an express Trust?
An express trust is created when funds or property are distributed to a trustee. The trustee holds the funds or property for the recipient. The express trust must generally fulfill the requirements within the legal trust.
What is a Remainderman in a Trust?
The people or organizations that receive the property at death of original person that inherited the property
The Small Tax Case Appeals is
is a simplified and informal option that is available to a taxpayer within the structure of the Tax Court. The taxpayer can request and, with the Tax Court's approval, have the case conducted under the simplified small tax case procedures. To qualify for this appeal procedure, the tax dispute cannot exceed $50,000 for any one tax year.
The method used to depreciate partnership property is an election made by:
the partnership and may be any method approved by the IRS.
Schedules L, M1 and M2 filing requirements
if their total assets at the end of the taxable year and the corporation's total receipts for the tax year are more than $250,000
Schedules M3 filing requirements
Corporations with assets of $10 million or more must use Schedule M-3 instead of M-1.
What is the Applicable Credit (Unified Credit)?
It is defined as a credit that allows donors and decedents to transfer a limited amount of property without being subject to the gift or estate tax. For 2015 the unified credit is $2,117,800, which exempts $5,430,000 in 2015 in transfers from the gift or the estate tax.
Research and Experiments Expenses
These may be amortized over 60 months or longer. However, the taxpayer can choose to deduct the cost in the first year in which they are paid or incurred.
Individuals may generally avoid the penalty for failure to pay estimated tax for 2015 by:
paying at least 90% of the tax shown on the current year's return,
paying 110% of the tax shown on the prior year's return (for individuals with AGIs of more than $150,000 in the previous year), or paying installments on a current basis under an annualized income installment method. An individual may not use the 100%-of-prior-year's-tax safe harbor if the prior year was not a 12-month period or if the individual did not file a return for such preceding taxable year.
Dividends-Received Deduction (DRD)
*A corporation may deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the distributing domestic corporation.
* A corporation may deduct (within certain limits) 80% of the dividends received if it owns 20% or more, but less than 80%, of the paying domestic corporation.
A corporation may deduct (within certain limits) 100% of the dividends received if the corporation receiving the dividend owns more than 80% of the distributing domestic corporation.
Alternative Minimum Tax (AMT) Exemption
The 2012 American Taxpayer Relief Act provides permanent alternative minimum tax (AMT) relief. The AMT exemption amounts (retroactive to January 1, 2012) are in the table below.
For tax years beginning after 2012, these exemptions are indexed for inflation.
Corporate taxpayers $40,000
Ind: MFJ $83,400
Ind: S & HOH $53,600
Ind: MFS $41,700
Estates and trusts $23,800
The AMT exemption is phased out for taxpayers with high amounts of alternative minimum tax income (AMTI).
Alternative Minimum Taxable Income (AMTI)
The alternative minimum taxable income (AMTI) is used to arrive at the alternative minimum tax (AMT). Generally, AMTI starts with the taxpayer's taxable income. To this amount, the individual taxpayer adds preference items and adds or subtracts adjustments to arrive at AMTI. A corporate taxpayer adds preference items, adds or subtracts adjustments, and subtracts any alternative minimum tax net operating loss (AMTNOL) deduction to arrive at AMTI.
The amount of the reduction of the maximum $40,000 exemption is $15,000. The $40,000 exemption must be reduced by 25% of the excess of AMTI over $150,000
Voluntary dissolution of a corporation
occurs when the board of directors passes a dissolution resolution. The officers do not have the authority to dissolve a corporation—only the board of directors does. Amending a certificate of incorporation will not result in the dissolution of the corporation. The stockholders may vote on dissolution, but unanimous consent is not required
To what extent is the fee paid to a trustee of a trust deductible on Form 1041?
Indirect expenses of a trust such as trustee fees are considered to apply to all income. The ratio of taxable income to total income (not including income allocated to corpus) is used to determine the deduction.
For example, if a trust had total income of $20,000, of which $15,000 was taxable and $5,000 was tax-exempt interest, then 75% of the trustee fees would be deductible ($15,000 taxable ÷ $20,000 total = 0.75).
Uniform Inventory Capitalization (UNICAP)
The uniform capitalization rules applicable to resellers require that certain indirect costs be capitalized. The indirect costs most often incurred by resellers are purchasing, handling, and storage costs. Handling costs include repackaging costs, and storage costs include off-site storage costs.