Property Transactions

Gain or Loss and Basis

Gains/Losses from Property

Proceeds adjusted basis = gain/loss Adjusted Basis:
Generally Cost (unless gift, exchange, inheritance) + capital additions depreciation, 179, casualty/theft loss taken to date

Includes exchange of common solely for preferred stock in same corporation valued at FMV Real property traded for personal property: FMV Exchanges of stock in different corporations: FMV Exchange of partnership Interests: FMV

Capital Gains/Losses
Capital asset: defined by what it is NOT:
Inventory, A/R Property depreciated in trade or business Copyrights U.S. Govt publications

Think of this as investments and personal use property

Exceptions: Securities dealers treat gain/loss on investments as ordinary unless they pre-identify investment securities Similar exception for sub-dividers of real

Q. Which of the following assets is not generally considered a capital asset? a. A personal residence b. A computer used in a trade or business c. Chrysler Corporation stock held for investment d. U.S. Government securities held for investment

Capital Gain Treatment

A capital asset does not necessarily get capital gain/loss treatment (e.g. personal use losses not deductible) A non-capital asset may get capital gain treatment (e.g. Sec. 1231: depreciable assets used in a trade or business sold at a gain)

Capital Losses
Deductible up to $3,000 in excess of capital gains. Excess losses carried forward to future years until used.

9. During the current year, F, an individual, had long-term capital losses of $2,000 and short-term capital losses of $1,500. If this is the first year F has experienced capital gains or losses, what amount of these losses may F deduct this year? a. $1,750 b. $2,500 c. $3,000 d. $3,500

Long- v. Short-term Capital

Short is held for one year or less Long-term has preferable rates for individuals:
(0% 2008 or 5% before, 15%), 25% for long-term real estate gains from trade or business 28% for collectibles

1. 2. 3. 4.

Figure gain/loss per transaction Net by long-term tax bracket separately Condense longs and shorts separately Net longs against shorts for one final #

1. N sold a summer cabin to Y for $30,000 in cash and a recreational vehicle. Y had an adjusted basis in the RV of $15,000 at the time of the sale, although its fair market value was $22,000. N had an adjusted basis in the cabin of $44,000. Assume there were no selling costs. What was N's amount realized in the sale? a. $55,000 b. $45,000 c. $52,000 d. $44,000

2. T purchased the following lots of ZYX Corporation stock: 25 Shares Purchased 4/30/1998 Cost $1,800 40 Shares Purchased 5/20/1998 Cost $3,000 25 Shares Purchased 9/21/1998 Cost $2,000 T sold 70 shares in December, 1998, for $6,300, but was unable to identify specific shares to be sold by certificate number and date of purchase. What was T's adjusted basis in the shares sold? a. $5,200 b. $5,250 c. $5,360 d. $6,300

When Basis Is Not Cost

If gift that has appreciated: use donors basis + gift tax paid on (appreciation/total taxable gift); holding period is donors date of purchase If gift that has depreciated: use lower of donors basis or FMV at time of gift; holding period begins with gift If inheritance: use step-up basis; holding period always long-term If nontaxable exchange: substitute basis If bargain purchase, use FMV

Q. The adjusted basis to the recipient of property bequeathed by a decedent generally is which of the following? a. Fair market value on the valuation date of the decedent's estate. b. Adjusted basis to the decedent on the valuation date of his or her estate. c. Fair market value on the valuation date of the decedent's estate, less estate taxes paid on the transfer. d. Adjusted basis to the decedent on the valuation date of his or her estate, plus estate taxes paid on the transfer.

Basket Purchase Allocation

Similar to GAAP treatment
http://www.youtube.com/watch?v=3Bc QpOGpxcI

Relative FMV for discounts on bundled assets. Goodwill figured last for overpayments

Gain/Loss Recognition
Sometimes, gain deferred (casualty gain reinvested) Or not recognized (gain on sale of personal residence up to $250k single, $500k MFJ) Sometimes loss not deductible (personal use assets) or limited/carried over (related party transactions, wash sales +/-30 day rule)

 Defer gains or losses U.S. real property for U.S. real property (often using a 3rd party) Personal property much closely match function of property given up Property held for productive use or investment (excludes: inventory, investments, trusts; livestock of different sexes does not qualify) If related party, 2-yr holding period Need not be simultaneous exchange, but must be near-simultaneous identification of property to be exchanged Mandatory treatment

Like-kind Exchanges

TV Tax Green Acres

Oliver Douglas and his wife trade a Manhattan penthouse for a farm in upstate New York. Does did qualifies as a like-kind exchange? Would trading a Mercedes and tractor swap qualify?

Effect of Boot on Like-kind Exchanges

Boot is non-like-kind property, usually cash or assumed liability If net boot received, gain recognized is lesser of realized gain or boot received. Basis of boot received is FMV Basis of like-kind property is substitute basis +/- net boot given +/- gain or loss recognized, or Amount after tax that youre out-of-pocket Holding period for boot begins with exchange, like-kind property has carry-over holding period

Q. Which of the following exchanges of property (used for business or investment purposes) are not like-kind exchanges? a. Warehouse for condominium b. Beach house for yacht c. Cadillac business car for an Escort business car d. Apartment building for vacant lot

Netting Capital Gains and Losses, Individuals

Calculate capital gain or loss per property Sort each gain/loss into 1 of 4 buckets:
Short-term Long-term, by tax rate:
28% (Collectibles) 25% (Gains on real estate used in business) 15%/5% (all other/most gains/losses)

Sub-total each of the 4 categories

Netting Capital Gains and Losses, Individuals (cont.)

Net Long-term capital gains and losses:
Take (offset) the long-term capital losses (if any) against the gains in the highest tax rate category first, working your way down to the 15% bracket.
28% (Collectibles) 25% (Gains on real estate used in business) 15%/5% (all other/most gains/losses)

Then, net the long-term gain/loss against short-term gains/losses, if theyre different signs.

Example
S/t Gains Losses Net 1,000 (8,000) ? 15% 4,000 (5,000) ? 25% 2,000 X ? 28% 6,000 (2,000) ?

Example
S/t Gains Losses Net 2nd Stage Net 1,000 (8,000) (7,000) ? 15% 4,000 (5,000) (1,000) ? 25% 2,000 X 2,000 ? 28% 6,000 (2,000) 4,000 ?

Example
S/t Gains Losses Net 2nd Stage Net 1,000 (8,000) (7,000) (7,000) 15% 4,000 (5,000) (1,000) 0 25% 2,000 X 2,000 2,000 28% 6,000 (2,000) 4,000 4,000 (1,000) 3,000

S/t

Example
15%

25%

28%

Gains Losses Net 2nd Stage Net

3rd Stage

1,000 (8,000) (7,000) (7,000)

4,000 (5,000) (1,000) 0

2,000 X 2,000 2,000

(2,000)

2,000 (2,000) 0

6,000 (2,000) 4,000 4,000 (1,000) 3,000 3,000 (3,000)* 0 (offset 1st)

Q. For the current year, a taxpayer had a short-term capital gain (STCG) of $5,000 and a short-term capital loss (STCL) of $1,000. The taxpayer also had a long-term capital gain (LTCG) of $3,000 and a long-term capital loss (LTCL) of $6,000. Based upon that information, which of the following is not true? a. The taxpayer has a NSTCG of $4,000. b. The taxpayer has a NLTCL of $3,000. c. The taxpayer treats the net gain of $1,000 just like ordinary income. d. The taxpayer cannot combine the NSTCG and NLTCL; therefore, the NSTCG is treated like ordinary income and the NLTCL is deductible as a net capital loss (NCL).

Capital Gains/Losses for Corporation

Taxed at ordinary rates Capital Losses can only offset capital gains (no $3,000 x/s deductible) Unused capital losses can be carried back 3 years, carried forward 5 years Carryover amount always treated as shortterm

Section 1231 Assets & Recapture

Section 1231 Assets are fixed assets used in a trade or business for more than 1 year
If used less than one year, no capital gain treatment would apply

Gains on disposal of these assets receive capital gain treatment subject to recapture Losses receive ordinary treatment File Form 4797 for disposition of these assets.

Netting Process
1. Net Sec. 1231 gains & losses from casualty/theft
1. If net gain, add to other 1231 gains 2. If net loss, then treat each item separately: gains are ordinary and losses also ordinary

2. Net other Sec. 1231 gains & losses

1. If loss, all ordinary 2. If gain, capital gain treatment subject to depreciation recapture & lookback period

Lookback
To avoid taxpayers taking gains in one year, losses in another to maximize their tax positions (rather than offsetting tax liabilities),
*if* a Section 1231 netting results in a gain, that gain is offset against the non-recaptured Section 1231 losses from the previous 5 years. That is, gains will be treated as ordinary (not capital) to the extent that there were ordinary losses on Sec. 1231 assets in the previous 5 yrs.

Depreciation Recapture
Applies to personal, depreciable (Sec. 1245) property.
Includes property that was Sec. 179d.

Once the gain on the property is figured, the gain is treated as ordinary to the extent that it was deducted as (ordinary) depreciation/179. Put another way, with recapture, there are only capital gains treatment where you sell the asset for more than you bought it for.

Q. G sold a file cabinet used in her business for $250. She had purchased it for $400 and deducted depreciation of $220. What is the amount and character of G's gain or loss recognized on this sale? a. $70 ordinary income b. $70 1231 gain c. $150 1231 loss d. $220 ordinary income and $150 1231 loss

Example
An asset was purchased for $12,000, and $8,000 of depreciation was taken. The asset was sold for $5,000. What was the gain? $5,000 - ($12,000 8,000) = $1,000 How much of this gain gets capital treatment? None (you did not sell it for more than you bought it for; all of the $1,000 (the lower of $1,000 gain or $8,000 depreciation) is recaptured as ordinary income

Example
An asset was purchased for $12,000, and $8,000 of depreciation was taken. The asset was sold for $15,000. What was the gain? $15,000 - ($12,000 8,000) = $11,000 How much of this gain gets capital treatment? $3,000(which is how much more you sold it for than you bought it for; all of the $8,000 (the lower of $11,000 gain or $8,000 depreciation) is recaptured as ordinary income.

Section 1250 Depreciable Real Estate

Land not included, because its not depreciable. Pre-1987 purchases have separate rules that may trigger recapture Most recapture is timed out Rather than recapture (at ordinary rates) the depreciation taken (up to the amount of gain), we tax it at a 25% rate.
Thats a tax break, but not as big as the 15% rate would have generated.

Special 1245 & 1250 Exceptions

Gifts: recapture carries over to donee Death: recapture potential extinguished Nontaxable exchange: recapture generally carries over to new property Installment sales: recaptured gain must be recognized in year of sale(!) Related party sales: gains treated as ordinary if purchaser will depreciate property Special Sec. 291 recapture on Sec. 1250 real estate applies to regular corporations

Related Party Transactions

Losses disallowed, higher basis given to donee. Related parties: members of family, majority owner in corp., 2 corps. In same controlled group, grantor & fiduciary, etc.

Other (Be Familiar w/ List, Not Details for Tax I)

Exchange of insurance policies Transfer of pension Exchange of property to form a Corporation or Partnership Exchange of stock in qualified reorganization Conversion of preferred to common stock Sales of stock to employee stock ownership plans Reacquisition of real property in foreclosure Transfer of property between spouses (or incident to divorce) Rollover of publicly traded securities into specialized small business investment co. Rollover of qualified small business stock