Download - Ch13 - 2015
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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.
Comprehensive Volume
1
Chapter 1!
"roperty #ransactions$
%eter&ination o' (ain or Loss,)asis Considerations, and
*onta+able +changes
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#he )ig "icture -slide 1 o' /
Alice ons a house that she inherited
'ro& her grand&other &onths ago.
#he 'air &ar3et value o' the house at the date o'her grand&other4s death as 5,000.
6er grand&other4s basis 'or the house as
25,000
#he house currently is orth 700,000.
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#he )ig "icture -slide 2 o' /
Alice is considering to options.
#he 'irst is to give the house to her son,
Michael. Michael, his i'e 8andra, and their
daughter "eggy ould live in the house.
#he second option is to sell the house.
"ro9ected selling e+penses ould be
about : o' the selling price.
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#he )ig "icture -slide ! o' /
Alice ould also li3e to 3no the ta+ conse;uenceso' selling her boat. 8he paid 22,000 'or the boat &onths ago and has used it
e+clusively 'or personal use.
)ased on listings in the area, she anticipates that she cansell it 'or 20,000 to 2!,000.
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#he )ig "icture -slide o' /
Alice also has oned a building -ad9usted basis50,000/ used in her business that as recentlydestroyed by a 'ire.
#he insurance co&pany paid Alice 100,000 to co&pensateher 'or the loss. *o she is loo3ing to ac;uire suitable replace&ent property.
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%eter&ination o' (ain or Loss-slide 1 o' /
Reali=ed gain or loss
%i''erence beteen a&ount reali=ed 'ro& sale or
other disposition o' the asset and its ad9usted basis
8ale or other disposition
ins, casualties, conde&nations, the'ts,
bond retire&ents
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%eter&ination o' (ain or Loss-slide 2 o' /
A&ount reali=ed 'ro& disposition
#otal consideration received, including cash, ?M@
o' property received, &ortgagesloans trans'erred
to buyer ?air &ar3et value -?M@/$ @alue o' asset deter&ined by
ar&s>length transaction, i.e., a&ount set by transaction
beteen illing buyer and seller ith neither obligated
to enter into transaction
Reduced by any selling e+penses
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%eter&ination o' (ain or Loss-slide ! o' /
Ad9usted basis
Briginal cost -or other ad9usted basis/ plus capital
additions less capital recoveries
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%eter&ination o' (ain or Loss-slide o' /
Capital additions
Cost o' i&prove&ents and better&ents to the
property that are capital in nature and not currently
deductible
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%eter&ination o' (ain or Loss-slide 5 o' /
Capital recoveries
A&ount o' basis recovered through$
%epreciation or cost recovery alloances
Casualty and the't losses -and insurance proceeds/
Certain corporate distributions
A&orti=able bond pre&iu&
ase&ents
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%eter&ination o' (ain or Loss-slide 7 o' /
Recogni=ed gain or loss
A&ount o' reali=ed gain -loss/ that is included in
-deducted 'ro&/ gross inco&e
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%eter&ination o' (ain or Loss-slide o' /
Reali=ed gains and losses are not alays recogni=ed Reali=ed gains &ay be de'erred or e+cluded
Reali=ed losses &ay be de'erred or disalloed
Reali=ed losses 'ro& the sale, e+change, orconde&nation o' personal use assets -e.g., a personalresidence/ are not recogni=ed 'or ta+ purposes +ception > casualty or the't losses 'ro& personal use assets
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#he )ig "icture > +a&ple
(ain Bn 8ale o' "ersonal se Assets
Return to the 'acts o' #he )ig "icture on p. 1!>1.
Assu&e Alice sells the boat, hich she has
held e+clusively 'or personal use, 'or 2!,000.
Recall that her ad9usted basis o' the boat is
22,000.
Alice has a reali=ed and recogni=ed gain o'
1,000.
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#he )ig "icture > +a&ple D
Loss Bn 8ale o' "ersonal se Assets
Return to the 'acts o' #he )ig "icture on p. 1!>1.
Assu&e Alice sells the boat in +a&ple 'or
20,000.
8he has a reali=ed loss o' 2,000, but the loss is
not recogni=ed.
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Recovery o' Capital %octrine
#a+payer is entitled to recover cost or other
original basis o' property ac;uired and is not
ta+ed on that a&ount
#o e+tent receive only invest&ent bac3 upon
disposition o' an asset, ta+payer has no gain
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)asis Considerations-slide 1 o' 7/
Briginal basis o' an asset is generally its cost
Bargain purchaseassets have a basis e;ual to
their ?M@
)argain a&ount &ay be inco&e to purchaser -e.g.,
e&ployee E co&pensationF shareholder E
dividend/
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)asis Considerations-slide 2 o' 7/
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)asis Considerations-slide ! o' 7/
Allocation proble&s$ lu&p>su& purchase
Must allocate basis to each asset obtained
Allocation usually based on relative ?M@ o' assets
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)asis Considerations-slide o' 7/
Allocation proble&s$ (oing concern
purchase
Assign purchase price to assets -e+cluding goodill/
to e+tent o' their total ?M@#hen allocate a&ong assets based on ?M@
Residual a&ount is goodill
(oodill is an a&orti=able G 1H asset
Allocation applies to both purchaser and seller
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)asis Considerations-slide 5 o' 7/
Allocation proble&s$ *onta+able stoc3
dividends
)asis o' original shares is allocated over the
original and ne shares
)ased on nu&ber o' shares -co&&on on co&&on/, or
)ased on relative ?M@ -pre'erred on co&&on/
6olding period includes the holding period o' theoriginal shares
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)asis Considerations-slide 7 o' 7/
Allocation proble&s$ *onta+able stoc3 rights)asis in rights is =ero unless ta+payer is re;uired
or elects to allocate basis 'ro& stoc3
Re;uired to allocate i' ?M@ o' rights is at least 15: o'the ?M@ o' the stoc3
Allocation is based on relative ?M@ o' rights and stoc3
6olding period includes holding period o' the
stoc3 on hich the rights ere distributed 6oever, i' the rights are e+ercised, holding period o'
nely ac;uired stoc3 begins ith date the rights aree+ercised
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(i't )asis-slide 1 o' 10/
(i't property &ay have a dual basis, i.e., basis
'or gain and loss &ay di''er
)asis is dependent on relationship beteen
?M@ at date o' gi't and donor4s ad9usted basis
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(i't )asis-slide 2 o' 10/
(i't basis 'or cost recovery
#he doneeIs basis 'or cost recovery is the donor4s
basis -doneeIs gain basis/
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(i't )asis-slide ! o' 10/
(i't basis 'or subse;uent gain
Jhen a gi'ted asset is disposed o' by the donee,
the basis 'or calculating any gain is the donor4s
ad9usted basis -carryover basis/
#his basis is called the Kgain basis
(ain basis &ay be increased i' donor incurred gi't ta+
on gi't
6olding period 'or donee includes that o' donor
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(i't )asis-slide o' 10/
(i't basis 'or subse;uent loss
Jhen a gi'ted asset is disposed o' by a donee, the
basis 'or calculating any loss is the lesser o' ?M@
at the date o' gi't or the donor4s ad9usted basis
#his basis is called the Kloss basis
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(i't )asis-slide 5 o' 10/
(i't basis 'or subse;uent loss
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(i't )asis-slide 7 o' 10/
(i't basis hen no gain or loss
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(i't )asis-slide o' 10/
+a&ple o' gi't basis deter&ination
Ale+ received a gi't 'ro& )eth on Nune 15 this year
?M@ o' asset on Nune 15 as D,000
)eth bought the asset on May 5, 1HD5 'or 10,000
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(i't )asis-slide D o' 10/
+a&ple o' gi't basis deter&ination -cont4d/
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(i't )asis-slide H o' 10/
Ad9ust&ent 'or gi't ta+es
#he proportion o' gi't ta+ paid -on gi'ts a'ter 1H7/
by the donor on appreciation o' asset can be added
to basis o' donee#he doneeIs basis is e;ual to$ %onor4s basis O
P-unreali=ed appreciationta+able gi't/ Q gi't ta+
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(i't )asis-slide 10 o' 10/
+a&ple o' gi't ta+$
Cathy received a gi't 'ro& %arren on Nune 15 o'
this year
?M@ on Nune 15 as !,000
%arren had a basis in the asset o' 2H,000
%arren paid gi't ta+ o' D00
Cathy4s basis in the gi'ted property is 2H,200P2H,000 O -5,000-!,000 1,000/ Q D00/
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"roperty Ac;uired
'ro& a %ecedent -slide 1 o' /
(enerally, bene'iciary4s basis in inherited
assets ill be the ?M@ o' the asset at
decedent4s date o' death
+ception$
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"roperty Ac;uired
'ro& a %ecedent -slide 2 o' /
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"roperty Ac;uired
'ro& a %ecedent -slide ! o' /
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"roperty Ac;uired
'ro& a %ecedent -slide o' /
+a&ple o' inherited property valuation$
At Re+4s date o' death, April !0 o' this year, his
assets had an ad9usted basis o' 200,000, and a
?M@ o' 00,000 "@% selected and assets distributed Nune !0F
bene'iciary4s basis is 00,000
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"roperty Ac;uired
'ro& a %ecedent -slide 5 o' /
+a&ple o' inherited property valuation
-cont4d/
Bctober !0 this year -si+ &onths a'ter date o'
Re+4s death/, the assets had a ?M@ o' 750,000 A@% selected and assets distributed *ove&ber 10F
bene'iciary4s basis is 750,000
A@% selected and assets distributed Nune !0 hen ?M@
o' assets is 70,000F bene'iciary4s basis is 70,000
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"roperty Ac;uired
'ro& a %ecedent -slide 7 o' /
%eathbed gi'ts
"roperty inherited by ta+payer -or spouse/ hich
as both appreciated and gi'ted by sa&e ta+payer
to decedent ithin 1 year o' decedentIs death)ene'iciary4s basis in property is carryover o'
decedent4s basis -not date o' death ?M@/ (enerally the sa&e basis ta+payer had on date o' gi't
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"roperty Ac;uired
'ro& a %ecedent -slide o' /
8urvivor4s share o' co&&unity property
)oth decedent4s share and surviving spouse4s share o'
co&&unity property receives basis o' ?M@ on date o'
death
8urviving spouse4s share dee&ed to be ac;uired 'ro& decedent
8urvivor4s share in co&&on la state
Bnly 12 o' 9ointly held property o' spouses is included in
the estate
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#he )ig "icture > +a&ple 22
"roperty Ac;uired ?ro& A %ecedent
Return to the 'acts o' #he )ig "icture on p. 1!>1.
Alice inherited her grand&other4s house.
At the date o' death, the ad9usted basis 'or the
house as 25,000.
#he house4s 'air &ar3et value at the date o' death
as 5,000.
#he alternate valuation date as not elected.Alice4s basis 'or inco&e ta+ purposes is 5,000.
#his is co&&only re'erred to as astepped-up basis.
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#he )ig "icture > +a&ple 2!
"roperty Ac;uired ?ro& A %ecedent
Return to the 'acts o' #he )ig "icture on p. 1!>1.
Assu&e the sa&e 'acts as in +a&ple 22,
e+cept the house4s 'air &ar3et value at the date
o' death as 270,000.
Alice4s basis 'or inco&e ta+ purposes is
270,000.
#his is co&&only re'erred to as astepped-down
basis.
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%isalloed Losses-slide 1 o' 5/
Related parties -G 27/
Losses on sale o' assets beteen related parties are
disalloed
?or inco&e>producing or business property, anyloss disalloed can be used to reduce gain
recognition on subse;uent disposition o' asset to
unrelated party
Bnly available to original trans'eree
*ot available 'or sales o' personal use assets
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%isalloed Losses-slide 2 o' 5/
Related parties include$
?a&ily &e&bers,
Corporation and a shareholder ho ons greater
than 50: -directly or indirectly/ o' thecorporation, and
"artnership and a partner ho ons greater than
50: -directly or indirectly/ o' the partnership
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%isalloed Losses-slide ! o' 5/
Jash sales
Losses 'ro& ash sales are disalloed
Jash sale occurs hen ta+payer disposes o' stoc3
or securities at loss and ac;uires substantiallyidentical stoc3 or securities ithin !0 days be'ore
or a'ter the date o' the loss sale
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%isalloed Losses-slide o' 5/
Jash sales
%isalloed loss is added to the basis o' the
substantially identical stoc3 or securities that
caused the disalloance%oes not apply to gains reali=ed on disposition o'
securities
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#he )ig "icture > +a&ple !1
Jash 8ale
Return to the 'acts o' #he )ig "icture on p. 1!>1.
Alice oned 100 shares o' (reen Corporation stoc3 -ad9ustedbasis o' 20,000/.
8he sold 50 shares 'or D,000.
#en days later, she purchased 50 shares o' the sa&e stoc3 'or ,000. Alice4s reali=ed loss o' 2,000 -D,000 a&ount reali=ed >
10,000 ad9usted basis/ is not recogni=ed because it resulted'ro& a wash sale.
Alice4s basis in the nely ac;uired stoc3 is H,000 -,000purchase price O 2,000 unrecogni=ed loss 'ro& the ashsale/.
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%isalloed Losses-slide 5 o' 5/
"ersonal use assets
Loss on the disposition o' personal use assets is
disalloed
"ersonal use asset loss cannot be converted into abusiness -or production o' inco&e/ use deductible
loss
Briginal loss basis 'or an asset converted is the loer o'
personal use basis or ?M@ at date o' conversion
Cost recovery basis si&ilarly li&ited
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*onta+able #ransactions-slide 1 o' /
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*onta+able #ransactions-slide 2 o' /
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*onta+able #ransactions-slide ! o' /
6olding period 'or ne asset
#he holding period o' the asset surrendered in a
nonta+able transaction carries over to the ne
asset ac;uired
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*onta+able #ransactions-slide o' /
%epreciation recapture
"otential recapture 'ro& the asset surrendered
carries over to the ne asset ac;uired in the
transaction
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Li3e>Sind +changes-slide 1 o' 11/
G10!1 requiresnonta+able treat&ent 'or gains
and losses hen$
?or& o' transaction is an e+change
Assets involved are used in trade or business or
held 'or production o' inco&e
6oever, inventory, securities, and partnership
interests do not ;uali'y
Asset e+changed &ust be li3e>3ind in nature or
character as replace&ent property
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Li3e>Sind +changes-slide 2 o' 11/
Li3e>3ind property de'ined
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Li3e>Sind +changes-slide ! o' 11/
Jhen ta+payers involved in an e+change arerelated parties#o ;uali'y 'or nonta+able e+change treat&ent,
related parties &ust not dispose o' propertye+changed ithin the 2 year period 'olloinge+change
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Li3e>Sind +changes-slide o' 11/
+change re;uire&ent#he transaction &ust involve a direct e+change o'
property to ;uali'y as a li3e>3ind e+change
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Li3e>Sind +changes-slide 5 o' 11/
)oot
Any property involved in the e+change that is not
li3e>3ind property is Kboot
#he receipt o' boot causes gain recognition e;ualto the lesser o' boot received -?M@/ or gain
reali=ed
*o loss is recogni=ed even hen boot is received
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Li3e>Sind +changes-slide 7 o' 11/
)oot
#he trans'eror o' boot property &ay recogni=e gain
or loss on that property
(ain or loss is recogni=ed to the e+tent o' the di''erencebeteen the ad9usted basis and the 'air &ar3et value o'
the boot
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Li3e>Sind +changes-slide o' 11/
)asis in li3e>3ind asset received$ ?M@ o' ne asset
(ain not recogni=ed
O Loss not recogni=ed
E )asis in ne asset
)asis in boot received is ?M@ o' property
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Li3e>Sind +changes-slide D o' 11/
)asis in li3e>3ind property using Code
approach Ad9usted basis o' li3e>3ind asset given
O Ad9usted basis o' boot givenO (ain recogni=ed
?M@ o' boot received
Loss recogni=ed
E )asis in ne asset
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Li3e>Sind +changes-slide H o' 11/
+a&ple o' an e+change ith boot$
Ta3 and @ira e+change e;uip&ent o' sa&e general
business asset class
Ta3$ )asis E 25,000F ?M@ E 0,000
@ira$ )asis E 20,000F ?M@ E !0,000
@ira also gives securities$ )asis E ,000F
?M@ E 10,000
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Li3e>Sind +changes-slide 10 o' 11/
+a&ple -Cont4d/ Ta3 @ira
?M@ "roperty Rec4d!0,000 0,000
O8ecurities 10,000 >0>
#otal ?M@ Rec4d 0,000 0,000Less$ )asis "roperty (iven 25,000 !0,000 U
Reali=ed (ain 15,000 10,000
)oot Rec4d 10,000 >0>
(ain Recogni=ed 10,000 >0>
U20,000 ;uip. O 10,000 8ecurities E !0,000
8ecurities$ -10,000 ?M@ > ,000 basis/ E !,000 gain
recogni=ed by @ira
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Li3e>Sind +changes-slide 11 o' 11/
+a&ple -Cont4d/ Ta3 @ira
?M@ "roperty Rec4d !0,000 0,000
"ostponed (ain >5,000 >10,000
)asis "roperty Rec4d 25,000 !0,000
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3ind e+changes
l i
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user
< l C i
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year ta+payer
#a+payer4s replace&ent period is 'ro& *ove&ber, 2012 to %ece&ber !1, 2015
< l C i
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#he )ig "icture > +a&ple 5
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#he )ig "icture > +a&ple 5
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#he )ig "icture > +a&ple 5
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#he )ig "icture > +a&ple 55
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8ale o' Residence-slide 1 o' /
Loss on sale
As ith other personal use assets, a reali=ed loss
on the sale o' a personal residence is not
recogni=ed
8ale o' Residence
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8ale o' Residence-slide 2 o' /
(ain on sale
Reali=ed gain on sale o' principal residence is
sub9ect to ta+ation
Reali=ed gain &ay be partly or holly e+cludedunder G121
8ale o' Residence
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8ale o' Residence-slide ! o' /
G121 provides 'or e+clusion o' up to 250,000
o' gain on the sale o' a principal residence #a+payer &ust on and use as principal residence 'or at
least 2 years during the 5 year period ending on date o'sale
8ale o' Residence
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8ale o' Residence-slide o' /
A&ount o' +clusion
250,000 &a+i&u&
Reali=ed gain is calculated in nor&al &anner
A&ount reali=ed on sale is reduced by sellinge+penses such as advertising, bro3er4s
co&&issions, and legal 'ees
8ale o' Residence
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8ale o' Residence-slide 5 o' /
A&ount o' +clusion -cont4d/ ?or a &arried couple 'iling 9ointly, the 250,000 &a+ is
increased to 500,000 i' the 'olloing re;uire&ents are&et$
ither spouse &eets the 2 year onership re;4t, )oth spouses &eet the 2 year use re;4t,
*either spouse is ineligible due to the sale o' another principalresidence ithin the prior 2 years
8tarting in 200D, a surviving spouse can continue to use the
500,000 e+clusion a&ount on the sale o' a personalresidence 'or the ne+t to years 'olloing the year o' thedeceased spouse4s death
8ale o' Residence
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8ale o' Residence-slide 7 o' /
G121 cannot be used ithin 2 years o' its last usee+cept in special situations, such as$
Change in place o' e&ploy&ent,
6ealth,
Bther un'oreseen circu&stances nder these circu&stances, only a portion o' the
e+clusion is available, calculated as 'ollos$
Ma+ +clusion a&ount Q nu&ber o' ;uali'ying &onths
2 &onths
8ale o' Residence
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8ale o' Residence-slide o' /
#he 6ousing Assistance #a+ Act o' 200D
reduces the gain eligible 'or the G 121
e+clusion 'or a vacation ho&e converted to a
principal residenceG 121 e+clusion is reduced by the proportion o' the
periods o' non;uali'ied use co&pared to the period
the property as oned by the ta+payerApplies to sales and e+changes occurring a'ter
%ece&ber !1, 200D
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Bther *onrecognition "rovisions-slide 1 o' 7/
8everal additional nonrecognition provisions
are available$
nder G10!2, a corporation does not recogni=e
gain or loss on the receipt o' &oney or otherproperty in e+change 'or its stoc3 -including
treasury stoc3/
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Bther *onrecognition "rovisions-slide 2 o' 7/
nder G10!5, no gain or loss is recogni=ed
'ro& the e+change o' certain insurance
contracts or policies
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Bther *onrecognition "rovisions-slide ! o' 7/
nder G10!7, a shareholder does not recogni=egain or loss on the e+change o' co&&on stoc3
'or co&&on stoc3 or pre'erred stoc3 'or
pre'erred stoc3 in sa&e corporation
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nder G10!D, no loss is recogni=ed 'ro& therepossession o' real property sold on an
install&ent basis
(ain is recogni=ed to a li&ited e+tent
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nder G101, trans'ers o' property beteenspouses or 'or&er spouses incident to divorce
are nonta+able
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Bther *onrecognition "rovisions-slide 7 o' 7/
nder G10, i' the a&ount reali=ed 'ro& thesale o' publicly traded securities is reinvestedin co&&on stoc3 or a partnership interest o' a
speciali=ed s&all business invest&entco&pany, reali=ed gain is not recogni=edA&ounts not reinvested ill trigger recognition o'
gain to e+tent o' de'iciency
8tatutory li&its are i&posed on the a&ount o' gain;uali'ied 'or this treat&ent
Bnly individuals and C corporations ;uali'y
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Re'ocus Bn #he )ig "icture -slide 1 o' 5/
Gift of Inherited House
Alice says that this is the only gi't that she ould&a3e to Michael this year. 8he has &ade no prior gi'ts to any individual that e+ceeded
the annual e+clusion a&ount -i.e., currently 1,000/.
Jith this in'or&ation, you in'or& Alice that no gi'tta+ ould be due on the gi't o' the house to Michael. 6oever, she ould use up 5D7,000 -700,000 > 1,000/
o' her li'eti&e gi't ta+ e+clusion.
Michael4s basis 'or the house ould be a carryover o'Alice4s basis o' 5,000.
#he 'air &ar3et value at the date o' the decedent4s death.
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Re'ocus Bn #he )ig "icture -slide 2 o' 5/
Sale of Inherited House
Alice4s ad9usted basis 'or the house is
5,000
#he 'air &ar3et value on the date o' her
grand&other4s death.
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Re'ocus Bn #he )ig "icture -slide ! o' 5/
8he ould have a recogni=ed gain o' D!,000 as calculatedbelo.
A&ount reali=ed -700,000 > 2,000/ 55D,000
Less$ Ad9usted basis -5,000/Reali=ed and recogni=ed gain D!,000
#he house is a capital asset, and Alice4s holding period is long
ter& since she inherited the house. #hus, the gain ould be classi'ied as a long>ter& capital gain -i.e.,eligible 'or a 15: or 20: ta+ rate/.
#he ?ederal inco&e ta+ due ould be 12,50 -D!,000 W 15:/.
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Re'ocus Bn #he )ig "icture -slide o' 5/
What If? Alice is leaning toard selling the house.
6oever, she 3nos that her grand&other ould not anther to have to pay inco&e ta+es on the sale.
Alice in;uires as to hether there is any ay that shecould reduce the ?ederal inco&e ta+ on the sale to 0.
Xou in'or& Alice o' the e+clusion provision under G121 o' the Code.
8he can ;uali'y 'or this e+clusion o' reali=ed gain provisioni' she satis'ies the at least to>out>o'>'ive>years onershipand use re;uire&ents.
#his ould necessitate her &oving into the house 'or 2years and occupying it as her principal residence.
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Re'ocus Bn #he )ig "icture -slide 5 o' 5/
What If?
?ro& a ta+ planning perspective, hat could Alice
have done so that none o' the 50,000 o' reali=ed
gain in +a&ple 5 'ro& the involuntary conversionas recogni=edY
#o postpone all o' the 50,000 reali=ed gain, Alice ould
have to reinvest all o' the 100,000 o' insurance proceeds
received in another building. nder this circu&stance, the basis o' the replace&ent
building ould be a carryover basis o' 50,000 -100,000
cost 50,000 de'erred gain/.
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