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Flashcards in Property Transactions Deck (54):
1

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.

3

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 but 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.

4

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

5

What property is eligible for like-kind exchange treatment?

Real for real or personal for personal business property only

US property only

Property held for business use may be exchanged for investment property or vice versa

6

What is BOOT in a like-kind exchange?

Cash received

+ unlike property received

+ liability passed to other party

7

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

8

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.

9

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

10

What is a wash sale?

30 Day rule applies - before or after date of sale

Disallowed loss adds to basis of new stock - it is NOT deductible

New stock takes on date of acquisition of old stock

Does NOT apply to gains

11

What assets are NOT capital assets?

The following are NOT capital assets, except where indicated:

Inventory; Business interest; Accounts Receivable/Notes Receivable; Covenant not to compete (the purchaser of this covenant will recognize it as a Section 197 intangible)

Goods held primarily for sale to customers in the normal course of business

Depreciable or real property used in a trade or business

Copyrights or artistic, literary, compositions created by taxpayer (However: These ARE capital assets only if purchased by the taxpayer)

Patents ARE generally capital assets in the hands of the inventor

Goodwill (internally generated) IS a capital asset

12

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

13

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 to an unrelated party. The disallowed loss gets off-set again the gain

However, if the related party sell the property (i.e. stock) to an unrelated property and a LOSS results; they CANNOT off-set the disallowed loss against the loss incurred from selling to an unrelated party

Related party's holding period begins when they acquire the property.

In-laws are NOT related parties.

14

What are the steps in applying a capital gain or loss?

Net all STCG and STCL

Net all LTCG and LTCL

Add together

Deduct $3,000

15

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.

16

Which property is governed by section 1231?

Real or Personal Business Property held more than a year

Inventory is NEVER 1231 Property

17

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

18

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

19

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

20

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

21

When are 1231, 1245 and 1250 gains or losses always ordinary?

When the asset is held less than one year.

22

What items DO NOT apply to like-kind exchanges?

The following items does NOT apply to like-kind exchanges:

1. Property held for personal use

2. Inventory

3. Stocks

4. Bonds

5. Notes

6. Intangible evidences of ownerships

7. Interests in a partnership

8. Exchange of personal property for real property DOES not apply

23

How do you calculate the basis of new property received in a Like-kind exchange?

To calculate the basis of the new property received in a Like-kind exchange, you do the following:

OLD Basis

+ Gain Recognized (gain recognized "steps up" your basis because you paid taxes on the gain, which increases your basis)

+ Boot Paid (Boot paid is a "P", which is a plus to the basis)

(Boot received starts with an "R" so it is a reduction to basis)

= New Basis

24

How do you calculate the basis of new property received in an Involuntary conversion?

To calculate the basis of the new property received in an Involuntary conversion, you do the following:

Cost of the new property received

(Gain NOT Recognized of the realized gain - this is the deferred gain)

= New Basis

25

What ARE capital assets?

The following are capital assets:

1. Investment property - including investment in securities

2. Property held for personal use (ONLY)

3. Goodwill (internally generated)

26

How are losses on worthless stock and securities treated?

Losses on worthless stock and securities are treated as a:

Capital loss - if sold on the last day of the taxable year they become worthless

Ordinary loss - if stock and securities are those of an 80% or more owned corporate subsidiary that derived more than 90% of its gross receipts from active-type sources

27

How do you calculate the basis of new shares purchased in a Wash sale transaction?

To calculate the basis of new shares purchased in a Wash sale transaction, you do the following:

Amount paid for new shares (FMV)

+ Disallowed Loss - if the loss is not allowed, it will "step up" your basis; so when you sell the shares you'll recognize the loss if you sell the shares for less than basis, you'll recognize the loss then

= New Basis

28

What does "boot received" do to Basis?

Boot received DECREASES basis

29

How is the gain and/or loss treated from property that is exchanged solely for other like-kind property?

If property is exchanged solely for other LIKE-KIND property, NO gain or loss is recognized

The term like-kind means the same class of property (i.e. real estate must be exchanged for real estate, personal property must be exchanged for personal property within the same general asset or product class)

The basis of the property received is the same as the basis of the property transferred

30

What does "boot paid" do to Basis?

Boot paid INCREASES basis

31

In a like-kind exchange transaction, if a person receives UN-LIKE kind property; how would this be treated?

If a person receives UN-LIKE property in a like-kind exchange transaction, the un-like property received would be considered boot received.

For example, if a person is exchanging investment real estate for land to be held for investment - this is like-kind property.

However, if one person gives cash and a sailboat in addition to the land; then the cash and sailboat is considered to be un-like property.

Un-like property is considered boot and is received at its FMV

32

In regards to Non-taxable and Like-Kind Exchanges, what is the recognized gain rule?

Note: This only applies if boot is received

To determine how much of a gain is taxable, the Recognized gain is the LESSOR of the realized gain and boot received

33

In an Involuntary conversion, how do you treat the gain that is NOT recognized of the realized gain?

In an involuntary conversion, the recognized gain rule is that you take the lessor of the Realized gain and the Amount not invested

The difference between the realized gain and the amount not invested is the deferred gain. The deferred gain DECREASES basis because it is the amount of the realized gain that is not recognized

In general, Gains ALWAYS increase basis, but they have to be Recognized. Unrecognized or deferred gains DECREASE basis

34

In a related party transaction, if a father sells stock to his daughter at a loss; he can't recognize the loss (disallowed loss). The daughter can use the disallowed loss to off-set her gain when she sells the stock to an unrelated party.

What happens if the daughter uses the disallowed loss to offset a smaller gain when she sells to an unrelated party?

In this situation, the daughter can use the disallowed loss to off-set her gain. However, she can only use amount of disallowed loss, up to the Gain

If there is any "extra" disallowed loss that wasn't used, it is lost

This means that the daughter CANNOT use the remaining disallowed loss to offset against future gains from the sale of stock to an unrelated party

No carrybacks or carry forwards! - it's gone

35

In regards to capital gains and losses:

Can you net STCG's with LTCG's?

Can you net STCL's with LTCL's?

Nope!

You can only net the following:

LTCG's with LTCL's

&

STCG's with STCL's

Note: You do the netting of capital losses and gains above to determine:

Net STCG or Net STCL

&

Net LTCG and Net LTCL

Then, the above 2 net together to determine net capital gain or los:

NCG or NCL

36

What is the rule regarding:

1. Excess of 1231 Gains over 1231 Losses

2. Excess of 1231 Losses over 1231 Gains

If you have excess of 1231 Gains > 1231 Losses = LTCG

If you have excess of 1231 Losses > 1231 Gains = Ordinary Loss

37

What is a section 1245 gain?

A section 1245 gain is the depreciation that you take on personal property used in a trade or business for more than 1 year, assuming you sold it for a gain

So, whatever depreciation you took on the asset that is "recaptured", it is ALWAYS an ordinary income gain

Now, if you sold the property at a loss, then there wouldn't be any recapture and this would be a section 1231 Ordinary loss

Note: A section 1245 gain is basically the depreciation taken on a section 1231 asset. So what ever the depreciation taken, it is section 1245 ordinary income. If the selling price is greater than the cost or basis; then that gain (called the "excess gain") is considered section 1231 LTCG

38

What is a section 1245 gain?

A section 1245 gain is the depreciation that you take on personal property used in a trade or business for more than 1 year, assuming you sold it for a gain

So, whatever depreciation you took on the asset that is "recaptured", it is ALWAYS an ordinary income gain

Now, if you sold the property at a loss, then there wouldn't be any recapture and this would be a section 1231 Ordinary loss

Note: A section 1245 gain is basically the depreciation taken on a section 1231 asset

39

What is a section 1231 gain?

Section 1231 assets are personal and real property used in a trade or business that is held for more than 1 year.

Likewise, a 1231 gain would be the sale of this kind of asset if it was held for more than a year

However, if this type of asset is held for Less than a year; then the gain or loss would be Ordinary

40

What is the amount of recapture when an individual taxpayer holds real property for 12 months or more and then sells it?

If an individual taxpayer holds real property for 12 months or more and then sells it; all of the gain (assuming they sold it for a gain) is section 1231 LTCG

No recapture when you have real estate used in a trade or business held for more than 1 year and that's held by an individual taxpayer

41

What is the amount of recapture when a Corporation holds real property for 12 months or more and then sells it?

If a Corporation holds real property for 12 months or more and then sells it; the recaptured amount would be 20% of the depreciation taken (whatever the amount is) and this is called ordinary income under section 291

The remaining amount, called the excess gain, is a section 1231 LTCG

42

What is a section 1250 asset?

Section 1250 assets deal with real estate held for 12 months or more that was purchased before 1987 (when ACRS was used)

The difference between depreciation taken under ACRS (old method) and MACRS SL (new method) is called excess of ACRS depreciation over MACRS (assuming that ACRS method had more depreciation)

This difference in depreciation between both methods is treated as a section 1250 recapture; which is ordinary income if the asset is sold for a gain

The remaining amount of the gain is called a section 1231 LTCG



43

What is a section 1245 asset?

Section 1245 property generally include depreciation tangible and intangible property such as:

1. Desks, machines, equipment, cars and trucks, office furniture

2. Special-purpose structures, storage facilities, and other property

Note: Not buildings and structural components like: oil & gas storage tanks, grain storage bins & silos, and escalators and elevators

44

A loss resulting from a nonbusiness deposit in an insolvent financial institution can deducted in what ways?

Loss resulting from a nonbusiness deposit in an insolvent financial institution is generally treated as a nonbusiness bad debt deductible as a STCL

However, subject to limitations, an individual can elect to treat the loss as a casualty or miscellaneous itemized deduction

However, they can NOT deduct it as a LTCL

45

How do you calculate the cost of an equipment to determine adjusted basis?

The cost of equipment is:

Basis
+ depreciation (if it was deducted_
= Cost

Cost
- depreciation
= Adjusted basis

Selling price
- Adjusted basis
= Gain

46

How much gain can a taxpayer exclude on the sale of qualified small business stock?

A non-corporate tax payer can generally exclude 50% of the capital gain resulting from the sale of qualified small business stock held for more than 5 years

The amount of the excludible gain is subject to a cumulative limit of the greater of $10MM or 10x the investor stock basis

47

In a related party transaction, if a father sells stock to his son at a loss; he (father and son) can't recognize the loss (disallowed loss).

What happens if the son later sells the stock to an unrelated party at a loss?

Does the son recognize the loss when his father sold the stock to him in addition to the loss the son incurs selling the stock to an unrelated party?

Does the father's holding period of the stock get "tacked on" to the son holding period when he sells it to an unrelated party?

Losses are disallowed on sales between related taxpayers, including family members

If the son later sells the stock to an unrelated party at a loss, the son will only recognize that loss. The loss that the father had (the disallowed loss) does not get recognized by the son when he sells his stock to an unrelated party (at a loss)

The son's stock basis is determined by his cost (not by the father's cost) and there is no "tack-on" of the father's holding period. So, if the son only held the stock for 4 months and then sold it to an unrelated party, the loss would be a short-term capital loss even if the father held the stock for more than a year

48

How would you summarize Section 1250 property?

Section 1250 property applies to real property held more than one year and sold at a gain but only if straight line depreciation is NOT used

• Un-recaptured Section 1250 Gain = lessor of:
1. Gain on the sale of the property or

2. Total depreciation taken on the property

• Unrecaptured Section 1250 Gain is taxed at 25%

• If straight line depreciation is used, NO Section 1250 gain, entire gain is 1231 capital gain

Note: Section 1250 property applies to all real property (i.e. buildings and structural components) that is NOT section 1245 recovery property

49

In regards to gifts acquired from a decedent (property a tax payer inherits when someone dies), if the alternative valuation date is elected and the property is disposed of BEFORE that date, what basis of the property should be used and at what date?

The rule is to use FMV on date of disposition if alternate valuation is elected and property is distributed, sold, or otherwise disposed of during 6 months following death

So in this situation, the basis for the property would be its FMV at date of disposition (distribution) - b/c the property was distributed BEFORE the alternative valuation date, which is 6 months after death

Note: However, if the alternative valuation date was elected, but the property was actually distributed MORE than 6 months after death (i.e. 8 months), then the distributed basis to donee would be FMV 6 months AFTER date of death

50

How would you summarize Section 291?

Section 291 only applies to corporations

• A corporation’s ordinary income on the sale of IRC

Section 1250 property will be 20% of the lessor of:

1. Depreciation taken or
2. Recognized gain

• Remainder will be 1231 capital gain

51

What is the rule regarding the netting of assumed mortgages in like-kind exchanges (non-taxable)?

When another party assumes someone else's mortgage, it is considered "boot received" to that party

When you assume someone else's mortgage, it is considered "boot paid" to you

To determine what the recognized gain is, you have to take the lessor or the Realized gain and total Boot received

In determining boot received, you net the assumed mortgages and ADD cash (if cash was received as a form of boot). The rule:

1. If you net the assumed mortgages and it = Net Boot Received (will be a positive #); then you add the cash (boot received) to get total boot received

2. If you net the assumed mortgages and it = Net Boot Paid (will be a negative #); then you DO NOT offset it against cash (boot received). In other words, DO NOT add the cash amount to the net boot paid

Note: Net Boot Paid (assuming no cash boot received) does NOT affect the recognition of the gain

52

How do you calculate the Realized gain in like-kind exchange problems?

In like-kind exchange problems you sum up everything you received (i.e. land, un-like property, boot paid or the assumption of your mortgage by the other party) and you subtract everything that you gave up (i.e. your old basis, boot paid or your assumption of the other party's mortgage) to arrive at the realized gain

Then...you compare boot received to the realized gain amount and the lessor one = Recognized gain

53

What is the Recognized gain rule with respect to involuntary conversions?

With involuntary conversions, the Recognized gain is the lessor of the Realized gain and the Amount not invested

54

What is the Recognized gain rule with respect to involuntary conversions?

With involuntary conversions, the Recognized gain is the lessor of the Realized gain and the Amount not invested

55

How are losses from the sale or exchange of property between corporations that are members of the same CONTROLLED GROUP reported?

Any loss from the sale or exchange of property between corporations that are members of the same controlled group is DEFERRED (instead of disallowed) until the property is sold outside the group

Controlled group is entity with at least 80% or more ownership