REG 2 - Property Taxation

What is the basis and holding period of purchased property?

• Basis = Purchase price

• Holding period begins on purchase date

What is the basis and holding period of gifted property?

• Gain → Donor's basis

• Loss → Lower of donor's basis or FMV at gift

• Holding period carries over from donor

What is the basis and holding period of inherited property?

• Basis = FMV at date of death

  • If alternate valuation is elected: FMV at 6 months after death OR earlier sale/distribution

• Holding period = always long-term

⚰ Inherited = FMV + automatic long-term.

What basis is used when personal property is converted to business use?

Depreciation basis = Lower of adjusted basis or FMV at conversion

When is a cost capitalized rather than expensed?

Capitalize if it:

• Improves property

• Extends useful life

• Restores value

• Adapts property to new use

Otherwise, repair/maintenance is expensed.

When can low-cost property be expensed immediately?

• $5,000/item with AFS (available for sale)

• $2,500/item without AFS

How are start-up and organization costs treated?

• Expense first $5,000

• Amortize remaining costs over 180 months

What is the formula for realized gain or loss?

Amount realized − Adjusted basis = Gain (Loss)

What is included in amount realized?

• Cash received

• FMV of property/services received

• Debt assumed by buyer

• Less selling expenses

What is a capital asset?

Investment and personal-use property.

What are noncapital assets?

• Inventory

• Accounts receivable

• Business property

When is a capital gain short-term vs. long-term?

• ≤1 year = Short-term

• 1 year = Long-term

How are short-term and long-term capital gains taxed?

• STCG → Ordinary rates

• LTCG → Preferential rates (0%, 15%, or 20%)

How much net capital loss may an individual deduct annually?

$3,000

Excess carries forward indefinitely.

How are capital losses treated for C corporations?

• Offset only capital gains

• Carry back 3 years

• Carry forward 5 years

When can you exclude gain from selling your primary home?

You generally must OWN and USE the home as your principal residence for >2 of the 5 years before the sale.

Maximum gain excluded from taxable income:

• $250,000 → Single

• $500,000 → MFJ (if requirements are met)

Generally, you can use the exclusion once every 2 years.

Example:
Basis = $300K → sell for $500K → $200K gain
Single taxpayer qualifies → entire $200K gain excluded → $0 taxable gain.

🏡 Why? Congress gives a tax break for appreciation on your primary residence—not investment properties.

Remember: 2 out of 5 → $250K / $500K.

Which losses are nondeductible? (WRaP)

• Wash sales

• Related-party losses

• Personal-use property losses

When is a wash sale loss disallowed?

If substantially identical securities are purchased within 30 days before or after the sale.

What depreciation system is generally used for business property?

MACRS

• Asset Classes: Properties are sorted into recovery periods ranging from 3 to 39 years (e.g., 5-year for computers and vehicles, 7-year for office furniture, 39-year for nonresidential real property).

• Calculation Methods: Uses accelerated methods like 200% or 150% declining balance that switch to straight-line, or standard straight-line for real estate.

• Conventions: Applies rules like half-year, mid-quarter, or mid-month to determine when depreciation starts in the first year.

• Tax Savings: Front-loads larger deductions into the early years of an asset's life to reduce taxable income and boost immediate cash flow.

What recovery periods apply to real property?

• Residential rental = 27.5 years

• Nonresidential = 39 years

Straight-line using mid-month convention.

Which convention generally applies to MACRS personal property?

Half-year convention

Mid-quarter if >40% placed in service during last quarter.

What is Section 179?

Immediate expensing of qualifying business property, limited by taxable income.

When is bonus depreciation taken?

After Section 179 but before regular MACRS.

How are most purchased intangibles amortized?

Straight-line over 180 months.

How are patents and copyrights amortized?

Over their useful lives.

What are debt issuance costs, and how are they deducted?

Debt issuance costs are costs a business pays to obtain a loan, such as legal/accounting fees related to arranging the debt.

They are not deducted all at once. Instead, they are amortized over the life of the loan.

Example:
$10,000 of loan issuance costs for a 5-year loan → deduct the costs gradually over the 5 years.

💳 Why? The cost helped obtain financing that benefits the business for multiple years → spread the deduction over those years.

How are research and experimental (R&E) costs treated?

• Domestic R&E → Expense immediately (or elect amortization)

• Foreign R&E → Capitalize and amortize over 180 months

Match the asset with its basis.

• Purchased

• Gift

• Inherited

• Personal → Business conversion

• Purchased → Cost

• Gift → Donor basis (gain); lower of donor basis/FMV (loss)

• Inherited → FMV at death

• Personal → Business conversion → Lower of basis or FMV for depreciation

What is the wash sale rule, and what happens to the disallowed loss?

If you sell stock at a loss and buy the same stock within 30 days before or after the sale:

• Loss on the replacement shares = not deductible yet

• Instead, add the disallowed loss to the basis of the new shares

• When you eventually sell the new shares, the higher basis can create a larger loss/smaller gain.

Example:
Buy $25 → sell $23 = $2 loss
Repurchase at $22 within 30 days → $2 loss disallowed
New basis = $22 + $2 = $24

🧠 Wash sale = postpone the loss, don't lose it.

Why does the wash sale rule exist?

To prevent taxpayers from creating a tax loss without really giving up their investment.

Without the rule, you could:

• Sell stock at a loss → deduct the loss

• Immediately buy it back → still own the same investment

So the IRS says if you rebuy within 30 days before/after the sale, the loss is postponed and added to the new stock's basis.

🧠 Wash sale = no fake/temporary losses.

What is the alternate valuation election, and when is property valued when the election is made?

The alternate valuation election lets an estate value inherited property after the date of death instead of on the date of death.

If elected, property is valued at the earlier of:

• 6 months after death, OR

• Date the property is sold/distributed

Example: Death → January; property sold → April
→ Value it in April, because that occurred before 6 months.

🧠 Normal = date of death. Alternate = 6 months later OR disposed earlier.

What is the depreciation basis when personal-use property is converted to business use?

Use the LOWER of:

• Adjusted basis (usually original cost), OR

• FMV on the date of conversion

Why? You can't deduct the loss in value that occurred while the property was for personal use.

Example:
Bought mower for $2,500 → now worth $1,500 → convert to business use
→ Depreciation basis = $1,500

Personal → Business = LOWER of basis or FMV.

How are gains and losses on the sale of personal-use property treated?

• Gain → TAXABLE capital gain

• Loss → NOT deductible

Example:
Car basis $20K → sell $15K = $5K loss → no deduction
Car basis $10K → sell $15K = $5K gain → $5K taxable

🚗 Personal property: IRS takes the gains but doesn't give you the losses.

Which nonresidential building improvements qualify for §179, and which are excluded? Why?

Qualify for §179:

• ✅ Roofs

• ✅ HVAC

• ✅ Fire/alarm systems

• ✅ Security systems

Specifically excluded:

• ❌ Elevators/escalators

• ❌ Building enlargements

• ❌ Structural framework

Why? §179 is a special tax break, not a rule for whether something is a legitimate business asset. Congress allows immediate expensing for certain improvements but specifically excluded these items.

An elevator is still a business asset — it just must generally be capitalized/depreciated instead of immediately expensed under §179.

🏗 Remember: Elevator, Expansion, Structure = NO §179.

What costs count as amortizable business start-up expenditures?

Costs incurred before the business begins operations to investigate/create the business or get it ready to operate.

Start-up costs examples ✅

• Advertising for opening

• Market/customer analysis

• Employee training before opening

NOT start-up costs ❌

• Interest on loans → has separate tax treatment

• Costs of issuing stock → capital-raising cost, not start-up

🚀 Don't ask “Was this necessary to start?” Ask “Is this a getting-the-business-ready cost, or does it have its own tax treatment?”

What are the MACRS asset classes and their corresponding recovery periods?

Property	Recovery period
Computers / equipment	5 years
Office furniture	7 years
Land improvements	15 years
Residential rental building	27.5 years
Nonresidential/commercial building	39 years
Land	Never depreciated

Conventions:

• Personal property → usually half-year

• Real estate → mid-month

When REG asks for the “maximum cost recovery” on business property, what is it asking?

How much of the asset's cost can I deduct this year?

Consider all available methods:

• §179

• Bonus depreciation

• Regular depreciation

Example: Buy $100K equipment + $20K land → land can't be deducted, but the $100K equipment may be fully expensed under §179 → $100K maximum cost recovery.

🔑 Translate “cost recovery” → “How much can I deduct for the asset this year?”

Does salvage value reduce depreciable basis under MACRS?

NO. MACRS ignores salvage value for assets placed into service after 1986.

Example: Equipment costs $100K and will be worth $10K at the end → depreciate the full $100K under MACRS.

🎯 MACRS = pretend salvage value is $0.