2012.10 property transactions

7/29/2019 2012.10 Property Transactions

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Property Transactions

Gain or Loss and Basis


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Gains/Losses from Property

Proceeds adjusted basis = gain/loss

Adjusted Basis:Generally Cost (unless gift, exchange, inheritance) +

capital additions depreciation, 179, casualty/theftloss taken to date

Includes exchange of common solely for preferred

stock in same corporation valued at FMV Real property traded for personal property: FMV

Exchanges of stock in different corporations: FMV

Exchange of partnership Interests: FMV


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Capital Gains/Losses

Capital asset: defined by what it is NOT: Inventory, A/R

Property depreciated in trade or business

Copyrights

U.S. Govt publications

Think of this as investments and personal

use property Exceptions: Securities dealers treat gain/loss on

investments as ordinary unless they pre-identifyinvestment securities

Similar exception for sub-dividers of real


4/37

Q. Which of the following assets is not

generally considered a capital asset?a. A personal residence

b. A computer used in a trade or business

c. Chrysler Corporation stock held forinvestment

d. U.S. Government securities held for

investment


5/37

Capital Gain Treatment

A capital asset does not necessarily getcapital gain/loss treatment (e.g. personaluse losses not deductible)

A non-capital asset may get capital gaintreatment (e.g. Sec. 1231: depreciableassets used in a trade or business sold at again)


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Capital Losses

Deductible up to $3,000 in excess of capitalgains.

Excess losses carried forward to futureyears until used.


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9. During the current year, F, an individual, hadlong-term capital losses of $2,000 and short-termcapital losses of $1,500. If this is the first year F

has experienced capital gains or losses, whatamount of these losses may F deduct this year?

a. $1,750

b. $2,500c. $3,000

d. $3,500


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Long- v. Short-term Capital

Short is held for one year or less Long-term has preferable rates for individuals:

(0% 2008 or 5% before, 15%), 25% for long-term real estate gains from trade or

business 28% for collectibles

1. Figure gain/loss per transaction2. Net by long-term tax bracket separately

3. Condense longs and shorts separately4. Net longs against shorts for one final #


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1. N sold a summer cabin to Y for $30,000 in cash anda recreational vehicle. Y had an adjusted basis in theRV of $15,000 at the time of the sale, although its fairmarket value was $22,000. N had an adjusted basisin the cabin of $44,000. Assume there were noselling costs. What was N's amount realized in thesale?a. $55,000b. $45,000

c. $52,000d. $44,000


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2. T purchased the following lots of ZYX Corporationstock:25 Shares Purchased 4/30/1998 Cost $1,80040 Shares Purchased 5/20/1998 Cost $3,00025 Shares Purchased 9/21/1998 Cost $2,000

T sold 70 shares in December, 1998, for $6,300, but wasunable to identify specific shares to be sold by certificatenumber and date of purchase. What was T's adjustedbasis in the shares sold?a. $5,200b. $5,250

c. $5,360d. $6,300


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When Basis Is Not Cost

If gift that has appreciated: use donors basis +gift tax paid on (appreciation/total taxable gift);holding period is donors date of purchase

If gift that has depreciated: use lower of donorsbasis or FMV at time of gift; holding periodbegins with gift

If inheritance: use step-up basis; holding period

always long-term If nontaxable exchange: substitute basis

If bargain purchase, use FMV


12/37

Q. The adjusted basis to the recipient of propertybequeathed by a decedent generally is which of thefollowing?

a. Fair market value on the valuation date of the

decedent's estate.b. Adjusted basis to the decedent on the valuation date ofhis or her estate.

c. Fair market value on the valuation date of the

decedent's estate, less estate taxes paid on the transfer.d. Adjusted basis to the decedent on the valuation date ofhis or her estate, plus estate taxes paid on the transfer.


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Basket Purchase Allocation

Similar to GAAP treatment http://www.youtube.com/watch?v=3Bc

QpOGpxcI

Relative FMV for discounts onbundled assets.

Goodwill figured last for

overpayments


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Gain/Loss Recognition

Sometimes, gain deferred (casualty gainreinvested)

Or not recognized (gain on sale of personalresidence up to $250k single, $500k MFJ)

Sometimes loss not deductible (personaluse assets) or limited/carried over (relatedparty transactions, wash sales +/-30 dayrule)


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Like-kind Exchanges Defer gains or losses U.S. real property for U.S. real property (often

using a 3rd party) Personal property much closely match function

of property given up Property held for productive use or investment

(excludes: inventory, investments, trusts;livestock of different sexes does not qualify)

If related party, 2-yr holding period Need not be simultaneous exchange, but must

be near-simultaneous identification of propertyto be exchanged

Mandatory treatment


16/37

TV Tax Green Acres

Oliver Douglas and his wife trade aManhattan penthouse for a farm in upstateNew York.

Does did qualifies as a like-kind exchange?

Would trading a Mercedes and tractor swapqualify?


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Effect of Boot on Like-kindExchanges

Boot is non-like-kind property, usually cash orassumed liability

If net boot received, gain recognized is lesser of realizedgain or boot received.

Basis of boot received is FMV

Basis of like-kind property is substitute basis +/- net boot

given +/- gain or loss recognized, or Amount after tax that youre out-of-pocket

Holding period for boot begins with exchange, like-kindproperty has carry-over holding period


18/37

Q. Which of the following exchanges ofproperty (used for business or investmentpurposes) are not like-kind exchanges?

a. Warehouse for condominiumb. Beach house for yacht

c. Cadillac business car for an Escort

business card. Apartment building for vacant lot


19/37

Netting Capital Gains and Losses,Individuals

Calculate capital gain or loss per property

Sort each gain/loss into 1 of 4 buckets:

Short-term Long-term, by tax rate:

28% (Collectibles)

25% (Gains on real estate used in business)

15%/5% (all other/most gains/losses)

Sub-total each of the 4 categories


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Netting Capital Gains and Losses,Individuals (cont.)

Net Long-term capital gains and losses:

Take (offset) the long-term capital losses (ifany) against the gains in the highest tax rate

category first, working your way down to the15% bracket.

28% (Collectibles)

25% (Gains on real estate used in business) 15%/5% (all other/most gains/losses)

Then, net the long-term gain/loss againstshort-term gains/losses, if theyre differentsi ns.


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Example

S/t 15% 25% 28%

Gains 1,000 4,000 2,000 6,000

Losses (8,000) (5,000) X (2,000)

Net ? ? ? ?


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Example

S/t 15% 25% 28%

Gains 1,000 4,000 2,000 6,000

Losses (8,000) (5,000) X (2,000)

Net (7,000) (1,000) 2,000 4,000

2nd Stage

Net

? ? ? ?


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Example

S/t 15% 25% 28%

Gains 1,000 4,000 2,000 6,000

Losses (8,000) (5,000) X (2,000)

Net (7,000) (1,000) 2,000 4,000

2nd Stage

Net

(7,000) 0 2,000 4,000

(1,000)

3,000


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ExampleS/t 15% 25% 28%

Gains 1,000 4,000 2,000 6,000

Losses (8,000) (5,000) X (2,000)

Net (7,000) (1,000) 2,000 4,0002nd Stage

Net

(7,000) 0 2,000 4,000

(1,000)

3,000

3rd Stage (2,000) 0 2,000

(2,000)

0

3,000

(3,000)*

0

(offset 1st)


25/37

Q. For the current year, a taxpayer had ashort-term capital gain (STCG) of $5,000 and ashort-term capital loss (STCL) of $1,000. The

taxpayer also had a long-term capital gain(LTCG) of $3,000 and a long-term capital loss(LTCL) of $6,000. Based upon that information,which of the following is not true?

a. The taxpayer has a NSTCG of $4,000.b. The taxpayer has a NLTCL of $3,000.c. The taxpayer treats the net gain of $1,000

just like ordinary income.

d. The taxpayer cannot combine the NSTCGand NLTCL; therefore, the NSTCG is treated likeordinary income and the NLTCL is deductible asa net capital loss (NCL).


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Capital Gains/Losses forCorporation

Taxed at ordinary rates

Capital Losses can only offset capital gains

(no $3,000 x/s deductible) Unused capital losses can be carried back 3

years, carried forward 5 years

Carryover amount always treated as short-term


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Section 1231 Assets &Recapture

Section 1231 Assets are fixed assets usedin a trade or business for more than 1 year If used less than one year, no capital gain

treatment would apply Gains on disposal of these assets receive

capital gain treatment subject to recapture

Losses receive ordinary treatment File Form 4797 for disposition of these

assets.


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Netting Process

1. Net Sec. 1231 gains & losses fromcasualty/theft

1. If net gain, add to other 1231 gains

2. If net loss, then treat each item separately:gains are ordinary and losses also ordinary

2. Net other Sec. 1231 gains & losses

1. If loss, all ordinary

2. If gain, capital gain treatment subject todepreciation recapture & lookback period


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Lookback

To avoid taxpayers taking gains in one year,losses in another to maximize their taxpositions (rather than offsetting taxliabilities),

*if* a Section 1231 netting results in a gain, thatgain is offset against the non-recaptured

Section 1231 losses from the previous 5 years. That is, gains will be treated as ordinary (not

capital) to the extent that there were ordinarylosses on Sec. 1231 assets in the previous 5yrs.


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Depreciation Recapture

Applies to personal, depreciable (Sec. 1245)property.

Includes property that was Sec. 179d.

Once the gain on the property is figured, thegain is treated as ordinary to the extent thatit was deducted as (ordinary)

depreciation/179.

Put another way, with recapture, there areonly capital gains treatment where you sell

the asset for more than you bought it for.


31/37

Q. G sold a file cabinet used in her business for$250. She had purchased it for $400 anddeducted depreciation of $220. What is the

amount and character of G's gain or lossrecognized on this sale?

a. $70 ordinary income

b. $70 1231 gain

c. $150 1231 loss

d. $220 ordinary income and $150 1231 loss


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Example

An asset was purchased for $12,000, and$8,000 of depreciation was taken. Theasset was sold for $5,000. What was the

gain? $5,000 - ($12,000 8,000) = $1,000

How much of this gain gets capital

treatment? None (you did not sell it for more than you

bought it for; all of the $1,000 (the lower of$1,000 gain or $8,000 depreciation) isrecaptured as ordinary income


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Example

An asset was purchased for $12,000, and $8,000of depreciation was taken. The asset was sold for$15,000. What was the gain?

$15,000 - ($12,000 8,000) = $11,000 How much of this gain gets capital treatment?

$3,000(which is how much more you sold it for

than you bought it for; all of the $8,000 (the lowerof $11,000 gain or $8,000 depreciation) isrecaptured as ordinary income.


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Section 1250 Depreciable RealEstate

Land not included, because its not depreciable.

Pre-1987 purchases have separate rules that maytrigger recapture

Most recapture is timed out

Rather than recapture (at ordinary rates) thedepreciation taken (up to the amount of gain), we

tax it at a 25% rate. Thats a tax break, but not as big as the 15% rate would

have generated.


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Special 1245 & 1250 Exceptions

Gifts: recapture carries over to donee

Death: recapture potential extinguished

Nontaxable exchange: recapture generally carries

over to new property Installment sales: recaptured gain must be

recognized in year of sale(!)

Related party sales: gains treated as ordinary if

purchaser will depreciate property Special Sec. 291 recapture on Sec. 1250 real

estate applies to regular corporations


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Related Party Transactions

Losses disallowed, higher basis given todonee.

Related parties: members of family,majority owner in corp., 2 corps. In samecontrolled group, grantor & fiduciary, etc.


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Other (Be Familiar w/ List, NotDetails for Tax I)

Exchange of insurance policies Transfer of pension Exchange of property to form a Corporation or Partnership Exchange of stock in qualified reorganization Conversion of preferred to common stock Sales of stock to employee stock ownership plans Reacquisition of real property in foreclosure Transfer of property between spouses (or incident to divorce) Rollover of publicly traded securities into specialized small business

investment co.

Rollover of qualified small business stock

2012.10 property transactions

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