Tax Consequences of Property Transactions

Comprehensive vocabulary flashcards covering the tax consequences of property transactions, including basis, characterization, recapture, and nonrecognition rules.

Amount Realized

Computing the sum of cash received, the fair market value (FMV) of property received, and liability relief, minus any selling expenses.

Adjusted Basis

The original basis of property plus any capital additions, minus depreciation or other recoveries such as amortization.

Realized Gain/Loss

The mathematical difference between the amount realized from a transaction and the adjusted basis of the property ($\text{Amount Realized} - \text{Adjusted Basis}$).

Recognized Gain/Loss

The amount of realized gain or loss that is actually reported on the tax return after applying recognition, nonrecognition, deferral, or loss-disallowance rules.

Carryover Basis

The basis used for gifted property and some nonrecognition exchanges where the transferee's basis is derived from the transferor's basis.

Substituted Basis

The tax basis assigned to replacement property involved in an exchange of property.

FMV Basis

The basis assigned to many inherited assets, typically equal to the fair market value at the date of death or an alternate valuation date.

Capital Asset

A broad category of property that excludes inventory, receivables, depreciable business property, and business real property.

§1231 Property

Depreciable business property and business real property held by the taxpayer for more than one year.

Net §1231 Gain

The status of §1231 gains after netting with §1231 losses; if the result is a gain, it generally receives long-term capital gain treatment.

Net §1231 Loss

The status of §1231 gains after netting with §1231 losses; if the result is a loss, it generally receives ordinary loss treatment.

§1231 Lookback Rule

A rule that recharacterizes current net §1231 gains as ordinary income to the extent of nonrecaptured net §1231 losses from the previous five years.

Depreciation Recapture

A tax provision that restores symmetry by characterizing gain as ordinary income to the extent of prior depreciation deductions that previously offset ordinary income.

§1245 Property

Depreciable personal property such as machinery, equipment, furniture, fixtures, computers, vehicles, and certain amortizable intangibles.

§1245 Ordinary Income Recapture

The amount of gain on §1245 property treated as ordinary income, calculated as the lesser of the total realized gain or the depreciation/amortization allowed or allowable.

§1250 Property

Depreciable real property, including buildings and their structural components, but excluding land.

Ordinary §1250 Recapture

The amount of gain on real property treated as ordinary income, usually limited to depreciation taken in excess of straight-line depreciation.

Unrecaptured §1250 Gain

A special category of long-term capital gain for individuals related to straight-line depreciation on real property, taxed at a maximum federal rate of $25\%$. house

Installment Method

A tax method that defers gain recognition by spreading it over the years in which principal payments are received; it applies when at least one payment is received after the year of sale.

Gross Profit Percentage

The ratio used in installment sales to determine recognized gain, calculated as gross profit divided by the contract price ($\text{Gross Profit} \div \text{Contract Price}$).

§1031 Exchange

A nonrecognition provision allowing gain deferral on the exchange of like-kind real property held for productive use in a trade or business or for investment.

Boot

Cash or non-like-kind property received in a §1031 exchange that can trigger current gain recognition.

§1033 Involuntary Conversion

A rule allowing gain deferral when property is destroyed, stolen, or condemned, provided the proceeds are reinvested in qualifying replacement property within a specific period.

COD Income

Cancellation of Debt income; occurs if recourse debt forgiven exceeds the property's fair market value (FMV).

Nonrecourse Debt

Debt for which the borrower is not personally liable; in a foreclosure, the amount realized generally includes the full debt satisfied regardless of the property's FMV.

Recourse Debt

Debt for which the borrower is personally liable; in a foreclosure, the amount realized equals the FMV, and any debt forgiven in excess of FMV is treated as separate COD income.

§351 Transaction

The corporate formation rule where property is transferred to a corporation solely for stock, and the transferors maintain control immediately after the exchange.

§721 Transaction

The partnership formation rule that generally allows for no gain or loss recognition on the contribution of property in exchange for a partnership interest.