Taxation of Property Flashcards
Like Kind Exchanges
Personal Property does not count!!
Real Property - land, building
Normally nontaxable
5 Issues
1 - Amount Realized - what did you get out of it (what is good for owner)
2 - Basis of Old - what you got rid of
3 - Realized Gain - Amount Realized minus Basis of Old – the gain you would have had if you sold
4 - Recognized Gain - may not be (especially if there is boot)
5 - Basis of New Asset - what you got (basis of prior asset if boot is taxed OR old basis minus boot not taxed) also FV of new asset - deferred gain (what part of gain is not being taxed)
Additional items given when exchanged - boot
Taxable gain = lower of boot received or the realized gain (accounting type gain)
Debt Relief - could be boot if there is no or less mortgage in exchange
- for realized: add old mortgage with new property FMV
- for basis: add new mortgage to the old Basis
- debt relief acts as boot
Tax Depreciation Rules for Real Estate
MACRS (modified accelerated cost recovery system)
Real Property - land and anything permanently attached to the land
– Residential: 27.5 years
– Commercial: 39 years
– always straight-line
– no depreciation on land
– number of months in service for Year 1.
– Mid month convention in year 1 and final year
Tax Depreciation Rules for Personal Property
Personal Property - used in business other than real estate: computers, autos, equipment
Depreciable Basis is all of the cost associate with the purchase of the asset and getting ready for intended use
- further improvements are also capitalized and basis is reduced for accumulated depreciation
– Salvage Value is ignored
– autos, light trucks, computers, farming equipment - 5 year
– office furniture, machinery and equipment - 7 years
– 200% Declining Balance
– After 3 years (for 5): switch to straight line; After 4 years (for 7): switch to straight line
– half-year first year (straight line)
Tax Depreciation Rules for Qualified Improvement
“Qualified Improvement Property”
- Depreciated over 15 years
- major improvements to existing commercial buildings
- straight-line, half year convention
Tax Depreciation Rules for Luxury Autos
Max Depreciation:
- year 1 - $10,100
- year 2 - $16,100
- year 3 - $9,700
- Year 4 - 6 - %5,760
If used for 20% personal - only 80% or about $8000 of first year depreciation is allowed for business
Exceptions:
Exceptions
40% or more of personal property in service in last quarter of the year - use mid-quarter convention for MACRS
– acquisitions are segregated by quarter and treated as if placed in service in middle of each respective quarter (12.5%)
– not for Real Estate
Section 179 Deduction
First amount expended each year for machinery and equipment can be deducted immediately vs depreciation (varies annually)
- business must be profitable and new asset must be purchased from unrelated party
- first $1,160,000 (2023) new or used machinery, equipment and office furniture can be expensed immediately
- total spent over $2,700,000 (2023) the allowable amount is lost dollar for dollar
– Expanded to include improvements to non-residential real estate (roofs, heating, ventilation, AC and security systems)
– “qualified improvement property” can also be included because it is personal property and not real estate
Bonus Depreciation
- Once 179 is exhausted, left over can use Bonus depreciation
- 100% for 21 & 22
- 80% in 23
Amortization
- covenants not to compete
- customer lists
- trade names and trademarks
- goodwill
- over 180 months
- only months since purchase from year 1
Section 1231 Assets
Business Assets (for individual best assets)
- depreciated
- held longer than 1 year
- when sold capital gain, or ordinary loss
Casualty Gains and Losses:
- net these first
- losses: ordinary loss, no more netting
- gains: combined with other 1231 gains and losses
Lookback Rule:
- if 1231 Gains exceed losses, net gain is treated as LT capital gain but subject to ‘lookback limit’ for losses up to 5 years
- before you treat entire gain as capital gain, look back 5 years first
- if losses were claimed in 5 years, current gain must be recaptured as ordinary income before capital gain
Depreciation Recapture (Section 1245):
- machinery, equipment, furniture - sold at gain, depreciation taken is ordinary income
- any gain in excess of depreciation is Section 1231 gain
Sold before one year::
- ordinary income
- must be over 1 year for Section 1231
Real Estate Recapture - Section 1250
If sold as a gain:
- depreciation over straight line depreciation is ordinary income
Only Individuals:
- amount that has been depreciated is still taxed at a max of 25%
- any gain not taxed at 25% is taxed as Section 1231 gain
Corp:
- amount over straight line is added as ordinary income
- 20% of straight line is added as ordinary income
Installment Sales
- applies to gains only
- loss is recognized in year of sale
- interest income is a separate source of income and not used for calculation
Benefit: pay tax only on what is collected in cash and defer the gain based on what is yet to be collected
Gross Profit Percentage:
Gross Profit (Contract price + mortgage relief - selling expenses - any depreciation recapture - basis) / Contract Price
Cash Collected x Gross Profit Percentage = taxable amount (Section 1231 gain)
Depreciation Recapture: Full ordinary income in the year of sale - subtract from Gross Profit percentage gross profit (with straight line NO recapture)
Property as a Gift
- No income tax on the effect of the gift, at sale will determine basis
- gifter may have to pay tax
Sale of Gift -
- if sold above the prior owner’s basis: use prior owner’s basis (report gain)
- if sold for less than prior owner basis: lower of his basis or FV at the time of gift (report the loss)
- if sold for in between basis and FV at time of gift: no gain or loss
Sale of Primary Residence
- Report the first $500,000 in gain (joint) or $250 (single) as non taxable
– needed to be principal residence for 2 of the previous 5 years - only claim an amount every 2 years
- no requirement to buy another residence
Used as Home Office:
- any depreciation taken must be recaptured (taxed at max 25%)
Rental Use:
- live for 2 years and then rent - still can claim original non taxable gain
- if you live in it AFTER the 2 years - pro-rated tax free
- if depreciated, must be recaptured
Involuntary Conversions
natural disaster
- realized gain is the difference between basis and income from disaster
- if taxpayer spends all or more than received, no taxable gain
– Basis: old basis + what $ taxpayer put in - if taxpayer pays less than what was received, taxable amount is the lower of cash left or the realized gain
– Basis: cost of new - realized gain not taxed now
Replacement time:
Business Property - 3 years from proceeds
Personal Use - 2 years from proceeds
(December 31)
– if realized gain exceeds $100,000 - property acquired from related parties do not qualify for replacement property
