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49 Cards in this Set
- Front
- Back
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Amount Realized
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- Amount realized from the sale or other disposition of an asset= everything of value received from the buyer less any selling costs
- Amt realized=Cash received + FMV of other property + Buyer's assumption of liabilities- Seller's expenses |
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Adjusted Basis
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- Adj Basis is the original basis reduced by depreciation or other types of cost recovery deductions taken against the property
- Adjusted Basis = Cost basis - Cost Recovery deductions |
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Realized Gain or Loss on Disposition
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- the amount of gain or loss realized on the sale or other disposition is the amount they realize minus their adjusted basis in the disposed assets
- Realized G/L= Amount realized - Adjusted Basis |
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Recognized Gain or Loss on Disposition
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General rule: taxpayers realizing gains and losses must recognize the gains and losses
- recognized gains- increase gross income - recognized losses- decrease gross income - exceptions: deferrals and exclusions |
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Character of G/L- Ordinary Assets
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Ordinary assetse are created or used in a taxpayer's trade or business (inventory, a/r, machine and equip held for less than 1 yr)
- Sell at a gain- taxed at ordinary rates - Sell at a loss- loss is deducted against ordinary income |
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Character of G/L- Capital Assets
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Capital assets are held for investment, for the production of income or for personal use. (depends on the purpose of the asset)
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Character of G/L- Capital Assets for Individuals ... prefer what kind of gains/losses? (capital or ordinary and why?)
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-Prefer capital gains to ordinary income because they are taxed at lower rates and offset capital losses which cannot be deducted against ordinary income
- prefer ordinary losses to capital losses because ordinary losses are deductible w/o limit, can only deduct $3000 of capital losses against ordinary income and the rest carries forward |
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Character of G/L- Capital Assets for Corporations
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- prefer capital gains to ordinary income if have capital losses
- b/c can deduct capital losses only by offsetting them against capital gains - net capital losses are not deductible (carry back 3 yrs, and carry forward 5 yrs to offset capital gains) - capital gains are taxed at ordinary rates |
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§1231 Assets definition
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-deprecicable assets and land used in a trade or business and held more than 1 year
- when you sell a §1231 Asset recognize a §1231 Gain or Loss - ultimately these are netted, with a §1231 Gain as capital or §1231 Loss as ordinary |
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Net §1231 Gain
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Long-Term Capital Gain
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Net §1231 Loss
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Ordinary Loss
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Deprecation Recapture
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- applies to gains (not losses) on the sale of depreciable business property
- *it does not change the amount of gain, only the character - recharacterizes the gain on the sale of a §1231 asset from a §1231 gain into ordinary income |
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Types of §1231 Assets applicable for Depreciation Recapture
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- Pure §1231 Assets, land
-§1245 Assets- depreciable personal property ex. machines §1250 Assets- depreciable real property ex. buildings |
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§1245 Property Depr Recapture
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*Gain is treated as ordinary income to the extent gain was created by depreciation
* Ordinary income is the less or (1) gain recognized or (2) accumulated deprecation. Any remaining gain is §1231 gain *losses are not subject to deprecation recapture, they are §1231 losses |
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§1250 Property Depr Recapture
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all real property is deprecated using SL method so §1250 rules no longer apply
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§1250 Deprecation Recapture... §291 **only for CORPS
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§291 applies to gains on sales of depreciable realty by corporations
- must recapture as ordinary income 20% of the lesser of (1) recognized gain or (2) accum depr |
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§1250 Unrecaptured Gain **only for individuals
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- unrecaptured §1250 gain = the portion of the gain caused by deprecation deductions reducing basis
- when an individual sells §1250 property at a gain, the amount taxed at the max 25% is the lesser of (1) recognized gain or (2) accum depr *remainder of the gain is taxed at 15% |
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§1239 Gains on the Sale of Depreciable Property to Related parties
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1. Related Party
2. Property is depreciable to buyer *the entire gain is characterized as ordinary income to seller |
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§1231 Lookback
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- converts LTCG into ordinary income
- applies to current year net §1231 Gain - look back 5 preceding years and recapture the CY net §1231 gain as orindary income to the extent of unrecaptured net §1231 losses in the 5 year period * any remaining net §1231 gain for the current year is treated as LTCG |
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What are nonrecognition transactions? examples?
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Taxpayers may defer recognizing gains in certain types of exchanges because the exchange itself does not give taxpayers the "wherewithal" cash to pay the taxes on the realized gain
Ex. Like-kind exchanges, involuntary conversions, installment sales |
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Like-kind Exchanges §1031
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- taxpayers exchanging property that meets like-kind exchange requirements do not recognize a gain or loss
- they receive an exchanged basis in the new property (basis of the property given up is transferred to the basis of property received) |
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§1031 Requirements (3)
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1. the property exchanged solely for like-kind property
2. both the property given up and the property recieved are used in a trade or business or are held for investment by the taxpayer 3. the exchange must beet certain time restrictions |
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Definition of Like-Kind Property (for real and personal property, what is ineligible?)
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1. Real Property- all real property is considered like-kind if used in a trade or business or held for investment
2. Personal property- TTP is considered like kind if in the same general asset class 3. Ineligible: inventory, most financial instruments like stocks, bonds, and partnership interests |
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Property Use Requirement
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taxpayers can only exchange property if both the seller and buyer use the property in a TRADE OR BUSINESS OR HELD FOR INVESTMENT
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Timing Requirements
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- many like-kind exchanges involve a simultaneous exchange of assets
- sometimes simultaneous exchange is not practical or possible - deferred exchange: use third party intermediaries to help with exchanges |
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Starker Exchange (deferred like kind exchange)
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2 timing rules:
1. must identify the replacement property within 45 days of transferring the property given up in the exchange 2. must receive the replacement property within 180 days after the taxpayer initially transfers the property in the exchange |
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§1031 Tax Consequences (when like-kind property is exchanged solely for like-kind property)
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- when like-kind property is exchanged solely for like-kind property, no gain or loss is recognized
- exchange basis applies (basis of property received=basis of property surrendered) |
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§1031 Tax Consequences (when transfers have like-kind property and boot)
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- boot is a non-like-kind property like cash or debt relief
- rule: the party receiving the boot must recognize gain equal to the FMV of the boot - recognized gain is lesser of (1) gain realized or (2) boot received |
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Basis in Like-Kind Property
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=FMV of like-kind property received - deferred gain + deferred loss
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§1033 Involuntary Conversions
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-property is partially or wholly destroyed by a natural disasters or accident, stolen, or seized by eminent domain
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§1033 Involuntary Conversions- Direct Conversion
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- receive direct property replacement
- no gain recognized - based in new property=basis in property given up |
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§1033 Involuntary Conversions- Indirect Conversion
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- receive money for involuntarily converted property
- may elect to recognize or defer gain - does not apply to losses - may defer gain if qualified replacement property is acquired within prescribed time limit |
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§1033 can elect to defer gain if..
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1- taxpayer reinvests the amount realized on the conversion in property similar or related in service or use AND
2 replacement of the converted property occurs within a time limit (usually 2 taxable eyras following the year in which the conversion/disaster took place) |
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§1033 Indirect Involuntary Conversions... what gain do you recognize?
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- recognize gain to the extent that they do not reinvested the reimbursement proceeds in qualified property
recognized gain is lesser of (1) realized gain or (2) amount of reimbursement not reinvested |
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§1033 Indirect Involuntary Conversions.. what gain is realized?
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Insurance proceeds exceed adjusted basis = realized gain
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§1033 Involuntary Conversions
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-property is partially or wholly destroyed by a natural disasters or accident, stolen, or seized by eminent domain
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Installment Sales
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- sales of property where the seller receives the sale proceeds in more than one period
- applies to gains only (not losses) - does not apply to inventory, marketable securities, depreciation recapture -recognize a portion of the realized gain as each payment is received |
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§1033 Involuntary Conversions- Direct Conversion
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- receive direct property replacement
- no gain recognized - based in new property=basis in property given up |
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Installment Sales- Gross Profit %
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= gain realized/amount realized
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§1033 Involuntary Conversions- Indirect Conversion
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- receive money for involuntarily converted property
- may elect to recognize or defer gain - does not apply to losses - may defer gain if qualified replacement property is acquired within prescribed time limit |
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Related Party Losses
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- Losses realized on sales of property between related parties are disallowed
- Seller never recognizes loss - Buyer takes a cost basis - Buyer may receive some or all the benefit from the loss, if sold at gain but if they don't use all of the loss, the rest goes away |
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§1033 can elect to defer gain if..
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1- taxpayer reinvests the amount realized on the conversion in property similar or related in service or use AND
2 replacement of the converted property occurs within a time limit (usually 2 taxable eyras following the year in which the conversion/disaster took place) |
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Who is considered a related party?
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1. members of the same family
2. an individual and a corporation if an individual owns more than 50% of the stock of the corp 3. a partner and the partnership |
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§1033 Indirect Involuntary Conversions... what gain do you recognize?
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- recognize gain to the extent that they do not reinvested the reimbursement proceeds in qualified property
recognized gain is lesser of (1) realized gain or (2) amount of reimbursement not reinvested |
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§1033 Indirect Involuntary Conversions.. what gain is realized?
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Insurance proceeds exceed adjusted basis = realized gain
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Installment Sales
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- sales of property where the seller receives the sale proceeds in more than one period
- applies to gains only (not losses) - does not apply to inventory, marketable securities, depreciation recapture -recognize a portion of the realized gain as each payment is received |
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Installment Sales- Gross Profit %
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= gain realized/amount realized
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Related Party Losses
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- Losses realized on sales of property between related parties are disallowed
- Seller never recognizes loss - Buyer takes a cost basis - Buyer may receive some or all the benefit from the loss, if sold at gain but if they don't use all of the loss, the rest goes away |
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Who is considered a related party?
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1. members of the same family
2. an individual and a corporation if an individual owns more than 50% of the stock of the corp 3. a partner and the partnership |
