Federal Taxes on Income Chapter 11

What is amount realized?

Value of everything received by the seller in a transaction minus any selling costs

What is the amount realized computation?

Cash received + Fair market value of other property + Buyer’s assumption of liabilities - Seller’s expenses

What does the initial basis of gift property to a recipient depend on?

Whether the value of the asset exceeds the donor’s basis on the date of the gift

If the fair market value of the asset on the date of the gift is greater than the donor’s basis, what will the asset’s initial basis be?

The donor’s basis

If the fair market value of the asset on the date of the gift is less than the donor’s basis, what will the asset’s initial basis be?

Depends on the special dual basis rules

What are the special dual basis rules?

If you sell an asset for a profit, you use the donor’s original price as your basis. If you sell an asset at a loss, you use the value of the item on the day you received it as your basis. If you sell at a price between what the donor paid and the FMV, you claim neither a gain nor loss as it is a tax wash.

If you use the giver’s price (gain) when does the holding period start?

When the donor bought it

If you use the FMV price (loss) when does the holding period start?

The day you received the gift

For inherited property, what is the heir’s basis in property?

The fair market value on the date of the decedent’s death

True or False: The holding period of inherited property is deemed to be long-term regardless of how long the heir owns the property

True

For property that gets converted from personal to business and has grown in value during ownership, what is the basis?

The original purchase price. This will be used to find both yearly depreciation and profit/less when it is eventually sold

For property that gets converted from personal to business and has gone down in value during ownership, what is the basis?

Dual Basis Rules. Depreciation and loss will use FMV while gain will use original cost

What is adjusted basis?

An asset’s carrying value for tax purposes at a given point in time

What is the formula for adjusted basis?

Initial Basis - Cost recovery allowes (or allowable)

Is the adjusted tax basis of a particular asset likely to be lower or higher than the adjusted book basis?

Lower

Why is the adjusted tax basis of a particular asset likely to be lower than the adjusted book basis?

Because businesses generally use more highly accelerated depreciation methods for tax purposes than they do for book purposes

What is the formula for realized gain/loss?

Amount realized - adjusted basis

What are recognized gains or losses?

The gain or loss included in gross income on a taxpayer’s tax return

The character of the gains or losses that taxpayers recognize when they sell assets depends on..

the character of the asset they are selling

The character of an asset depends on…

how the taxpayer used the asset and how long the taxpayer owned the asset before selling it

What are section 1231 assets?

Depreciable assets and land used in a trade or business held for more than one year

What are capital assets?

Assets held for investment purposes or personal-use purposes

What are ordinary assets?

Assets created or used in a taxpayer’s trade or business and held for one year or less

What is production of income?

A for-profit activity that doesn’t rise to the level of a trade or business

Why do individual taxpayers generally prefer capital gains to ordinary income?

Capital gains are taxed at lower rates and may offset capital losses that cannot be deducted against ordinary income

What is a benefit of ordinary losses in comparision to capital losses?

Ordinary losses are deductible without limit, whereas capital losses are limited to $3000 a year

How are section 1231 losses treated?

As ordinary losses

How are section 1231 gains treated?

As capital gains

When taxpayers sell or otherwise dispose of land that qualifies as 1231 property, the gain or loss from the sale is always characterized as a….

1231 gain or loss

Why when taxpayers sell or otherwise dispose of land that qualifies as 1231 property is the gain or loss from the sale always characterized as a 1231 gain or loss?

Because land is not depreciable

What is depreciation recapture?

Conversion of 1231 gain into ordinary income on a sale based on the amount of accumulated depreciation on the property at the time of sale or exchange

Does depreciation recapture affect losses recognized on the disposition of 1231 assets?

No

What is a pure 1231 asset?

Land

What is a 1245 asset?

Personal property and qualified production property

What is a 1250 asset?

Real property

When you sell personal property for a profit, how is your gain treated?

For the 1245 recapture, the amount of profit that is equal to the depreciation over the years is treated as ordinary income. Any profit above and beyond the original purchase price gets treated as long-term capital gain

If a gain on the sale of a 1245 property is created soley through depreciation deductions, how is it treated?

As ordinary income

What is 1250 property?

Depreciable real property

What is the 291 corporate recapture rule?

A C Corp must recapture 20% of what would have been recaptured under what would have been recaptured under 1245 equipment rules and report it as ordinary income

What is unrecaptured 1250 gain?

A type of 1231 gain derived from the sale of real estate held by a noncorporate taxpayer

What happens for an unrecaptured 1250 gain?

The gain of the building will be split into part that is equal to past depreciation and the leftover. The part that is equal to depreciation will be taxed at a maximum rate of 25% while the other part of the gain will be taxed at a lower rate.

Property that is sold to a related person (who will depreciate it) and results in a gain is treated…

as ordinary income