chapter 9 acquisitions of property ©2008 south-western kevin murphy mark higgins kevin murphy mark...
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Chapter 9Chapter 9
Acquisitions of PropertyAcquisitions of Property
©2008 South-Western©2008 South-Western©2008 South-Western©2008 South-Western
Kevin MurphyKevin MurphyMark HigginsMark Higgins
Kevin MurphyKevin MurphyMark HigginsMark Higgins
Transparency 9-2Transparency 9-2© 2008 South-Western© 2008 South-Western
Preview of Coming Attractions
Preview of Coming Attractions
Chapter 9 begins four chapters dealing with propertyAcquisition (Chapter 9)Depreciation (Chapter 10)Disposition (Chapter 11)Special Issues (Chapter 12)
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Tax Definition of PropertyTax Definition of Property
The term property refers to long-lived assets owned by a taxpayer.
The amount invested in an asset is the property’s basis.
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Under the capital recovery concept, a property’s basis may be recovered before any taxable income is realized from disposal of property.
Concept ReviewConcept Review
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Classes of PropertyClasses of Property
Property is classified by both its use and its type.
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Use of PropertyUse of Property
Property is used for Trade or business, Production of income (investment), or Personal purposes
The same property may be used differently by different taxpayers
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Types of PropertyTypes of Property
All property may be classified by type as either tangible or intangibleIntangible property lacks physical substance
and has only an economic existenceTangible property has physical substance
Tangible real property (realty) consists of land and structures permanently attached to land
Tangible personal property (personalty) is all other tangible property
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Property Investment CycleProperty Investment Cycle
PropertyAcquisition
PropertyDisposition
Period of Use
InitialBasis
AdjustedBasis
plusadditional
capital
minus capitalrecoveries
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Increases in BasisIncreases in Basis
There are two broad categories of increasesAdditional capital investments
Capital expenditures Costs of defending ownership Special assessments
Reinvestment of income from the property Taxable income from conduit entities
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Decreases in BasisDecreases in Basis
There are three broad categories of decreasesAnnual tax deductions for cost recovery
Depreciation, depletion or amortization Losses from conduit entities
Disposition of all or part of the propertyCapital recovery due to income exclusion
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Basis in Conduit EntitiesBasis in Conduit Entities
Basis in a conduit entity is adjusted yearly for items passed through to ownersIncreased for additional capital invested,
taxable and nontaxable income, and owner’s share of entity liabilities
Decreased for deductible or nondeductible expenses, cash or property distributed to the owner, and owner’s share of liability reductions
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Property DispositionsProperty Dispositions
Amount Realizedminus: Adjusted Basis
RealizedGain
RealizedLoss
RecognizedGain
RecognizedLoss
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Initial BasisInitial Basis
Amount invested = Cash paid,
+ FMV of property or services given
+ Increases in liabilities related to the purchase
+ Any cost incurred to get the asset ready for its intended use
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Basis in Bargain PurchaseBasis in Bargain Purchase
The all-inclusive income concept requires income recognition equal to the difference between an asset’s FMV and its sales price
The asset’s basis = amount paid plus the amount of income recognized
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Purchase of Multiple AssetsPurchase of Multiple Assets
Total basis is allocated between assets based on the relative FMV of each
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Purchase of Assets of a Business
Purchase of Assets of a Business
Purchase price is allocated to individual assets by their FMVs or through specific agreement
Excess of purchase price over FMV of assets is considered Goodwill
Purchase of corporate stock does not confer ownership of the business’ assets
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Purchase of Assets of a Business
Purchase of Assets of a Business
ABC Co. purchases all assets of Saw Shop. Details are:
Asset Basis FMV
Inventory $10,000 $27,000
Mach. & Equip 2,000 12,000
Land 8,000 15,000
Building 20,000 6,000
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Basis in Constructed AssetsBasis in Constructed Assets
Basis includes Direct construction costs
Actual costs of physical construction
Indirect construction costsGeneral costs of the business that support
the construction For example: interest, taxes, equipment
depreciation, general admin., etc.
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Basis of Property Acquired by Gift
Basis of Property Acquired by Gift
On the date of gift, compare FMV of property to the donor’s basis.
If FMV > donor’s basisBasis in the property is the donor’s basis
plus any gift tax paid on net appreciation
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Basis of Property Acquired by Gift
Basis of Property Acquired by Gift
Ellen purchased 10 acres of land 10 years ago for $40,000. On January 20 of the current year, she gives the land to her son, David. Ellen pays $5,000 in gift tax on the transfer based on the land’s $50,000 FMV. What is David’s basis in the land?
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Basis of Property Acquired by Gift (continued)
Basis of Property Acquired by Gift (continued)
If Donor’s basis > FMV Basis is determined when property is
eventually soldIf sold for more than donor’s basis, use donor’s
basis (gain)If sold for less than FMV, use FMV as basis
(loss)If sold for an amount between the two, use
sales price as basis (no gain or loss)
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Holding Period for PropertyAcquired by Gift
Holding Period for PropertyAcquired by Gift
If donor’s basis is used, holding period carry’s over and begins on the donor’s acquisition date
If FMV is used, holding period begins on the date of gift
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Basis of Property Acquired by Inheritance
Basis of Property Acquired by Inheritance
Three dates are important Primary valuation date is the date of
deathAlternate valuation date is six months
after the date of deathDistribution date is the date a
beneficiary receives the property
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Basis of PropertyAcquired by Inheritance
(continued)
Basis of PropertyAcquired by Inheritance
(continued) Basis is generally the FMV of the
property on the primary valuation date If the estate is valued on the alternate
valuation dateBasis is the FMV of the property on the
earliest date received, either Date of distribution, or Alternate valuation date
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Holding Period of Property Acquired by Inheritance
Holding Period of Property Acquired by Inheritance
The holding period for property acquired by inheritance is automatically
long term.
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Basis of Property Acquired by Inheritance
Basis of Property Acquired by Inheritance
Taylor dies on Feb. 19th. On DOD owned 500 shrs of ABC Co. stock that he purchased on Aug. 13, 1997 for $14 per share.
Market values are as follows:February 19th $12April 1st $18August 19th $10November 21st $16
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Basis in Property Converted From Personal to Business
Use
Basis in Property Converted From Personal to Business
UseOn the date of conversion, compare the asset’s personal-use basis to its FMV.
If FMV > personal basisPersonal basis is used for depreciation and
gain or loss calculations
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Basis in Property Converted From Personal to Business Use
Basis in Property Converted From Personal to Business Use
Five years ago, Mary purchased her home for $100,000. ($90,000 building; $10,000 land). Converts home to office building by paying contractor $15,000 to make proper renovations. At date house is changed into office, building is appraised at $130,000 and land at $20,000. What is Mary’s basis in the building?
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Basis in Property Converted From Personal to Business
Use
Basis in Property Converted From Personal to Business
Use If Personal basis > FMV
Use FMV for depreciationBasis for sale is determined when the
property is sold If sold for > personal basis, use personal basis:
(gain) If sold for < FMV, use FMV: (loss) If sold for an amount between the two, no gain
or loss is recognized
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Basis in SecuritiesStock Dividends
Basis in SecuritiesStock Dividends
Stock dividends are generally non-taxable dividends.
Basis per share = Original cost Total shares held after dividend
Stock dividends become taxable when taxpayers may receive cash instead of
shares. Income = FMV of stock at distribution.
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Basis in SecuritiesStock Dividends
Basis in SecuritiesStock Dividends
Brooke owns 1,000 shares of stock with a basis of $15,000. The company issues Brooke a stock dividend of 500 shares. What is Brooke’s new basis in the shares?
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Basis in SecuritiesWash Sales
Basis in SecuritiesWash Sales
Loss is not deductible under the substance-over-form doctrine
Nondeductible loss amount is added to the basis of the replacement security
A wash sale occurs when a security sold at a loss is replaced with a substantially similar
security +/- 30 days from the sale.
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Basis in SecuritiesWash Sales
Basis in SecuritiesWash Sales
Dan purchased 100 shares of ABC stock in 2001. On December 1, 2007 sold 100 shrs of ABC stock for $15,000. On December 20, purchased 100 shrs of ABC stock for $16,000. On March 30, 2008 sold 100 shrs of ABC stock for $29,000.