R4.1 - Property Taxation

Gross profit percentage

(Sale - COGS)/Sale=GP% Earned revenue = GP% x cash collection

*Residential Rental Property:* MACRS real estate (substract land cost) depreciation rule

*27.5 year straight line*; include apartment and duplex rental homes

Adjusted basis

- Generally, purchase price reduced by depreciation and added capital improvements

MACRS depreciation rules

- for 3,5,7,10 year property other than real property, 200% declining balance - 20-year property, used 150% declining balance

1231 LTCG treatment

- net 1231 gains = LTCG - subjected to 1245 and 1250 recapture

examples

1. trading personal laptop computer for desks and furniture in business (not qualify) 2. trading building used as clothing store for apartment building (qualify because trading real property for real property used in trade or business)

10-year 200% class

ADR midpoint of 16 years and more, less than 10 years

realized gain/loss

Amount realized - Adjusted basis

Inheritance, property received as gift, bequest, devise:

Excluded from income

depreciation

MACRS used for tax

Personal property

Personal property is *movable property*. It's anything that can be subject to ownership, except land

1245 example Sections 1245 (personal property) and 1250 (real property). Note that even though 1245 is called "recapture" and 1250 is called "unrecapture" they work virtually the same way.

Purchase price: $100,000 Depreciation:$30,000 =$70,000 Basis ==== 1. Selling Price: $120,000 2. Selling Price: $90,000 1. Selling price 120,000 -$70,000 basis= 50,000 gain Of this 50,000 gain, 30,000 depreciation will be taxed as ordinary income (the higher, less favorable rates) ==> depreciation is the recapture amount and the balance of $20,000 component will be taxed at 1231 long-term capital gain rates (the lower, more favorable rates) 2. Selling price $90,000 - $70,000 basis = 20,000 gain $30,000 depreciation taken > 20,000 gain...so the recaptured amount is the lesser of realized gain (20,000) and accumulated dep (30,000)

mid-month convention

Real property *(buildings)* is subject to the mid-month convention under MACRS

Realized gain

Realized gain = FMV of old property - basis of old property Realized gain not recognized becomes deferred gain

Annual gift tax exlusion

The 2016 annual gift exclusion remains the $14,000.

LOSS nondeductible

WRaP *W*ash Sale Loss *R*elated Party Transaction *a* *P*ersonal Loss

when is loss not deductible?

Wash sale loss Related party loss and Personal loss

research expenses

amortize for tax purposes over 60-month period

capital loss treatment on RP transactions

disallowed

tax treatment of business org and start-up cost

each is permitted to take off $5000 to be expensed, and the remainder is amortized over 180 months ($5000 amount is reduced as total costs exceeds $50,000 for each item)

MACRS: salvage value

ignore

1250 recapture for individual

loss = ordinary ordinary income = lesser of recognized gain or AD (similar to 1250 for business)

1250 recapture for business For Sec. 1250, the recapture is the amount of depreciation claimed in excess of straight line (i.e. - Sec. 179 and bonus depreciations). For Sec. 291, the recapture is 20% of the total depreciation claimed and is only applicable to corporations.

real business property (warehouse) Sec. 291 recapture - ordinary income = 20% of the lesser of the recognized gain or accumulated depreciation, excess gain is cap gain under Sec. 1231

Related party transaction

related parties are - brothers and sisters - husband and wife - lineal descendants (father, son, grandfather) - entities more than 50% owned by individuals, corporations, trusts, partnerships. Note: in-laws are not related parties Capital gain treatment

installment sale revenue recognition

revenue is recognized over the period cash payments are received

Wash Sale Loss

when security is sold for a loss and repurchased within 30 days before or after the sale date

*Basis when gift tax paid* Julie received a parcel of land as a gift from her Aunt Agnes. At the time of the gift, the land had a fair market value of $83,000 and an adjusted basis of $23,000. This was the only gift that Juli received from Agnes during 2012. If Agnes paid a gift tax of $14,000 on the transfer of the gift to Julie, what tax basis will Julie have for the land? a. $23,000 b. $35,180 c. $36,000 d. $82,000

(b) The requirement is to determine Julie's basis for the land received as a gift. A donee's basis for gift property is generally the same as the donor's basis, increased by any gift tax paid that is attributable to the property's net appreciation in value. That is, the amount of gift tax that can be added is limited to the amount that bears the same ratio as the *property's net appreciation bears to the amount of taxable gift.* For this purpose, the amount of gift is reduced by any portion of the $14,000 annual exclusion that is allowable with respect to the gift. *Tax basis= Dononrs Adjusted Basis + {(gift tax paid} (FMV -AB)/FMV-Exclusion)}* Thus, Julie's basis is $23,000 + [$14,000 *($83,000 - 23,000) / ($83,000 - $14,000)] = =23,000 + {14,000 * 60000/69000} =23,000+ {14,000 *0.87) =35,180

1.Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer's depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain? a. $27,700 b. $0 *c. $7,000* d. $20,700

(c) Sale price: 37,000 ====Cost of asset: 30,000 ====*depreciation* : 20,700 Basis: (30,000 cost - 20,700 dep) 9,300 Sale price 37,000 - 9,300 basis= 27,700 gain Of the 27,700 gain, 20,700 dep taken recaptured and treated as 1245 ordinary income, while the balance (27,700 total gain - 20,700 dep) 7000 is 1231 long term capital gain which is given favorable treatment the tax code says that the $7,000 component will be taxed at long-term capital gain rates (the lower, more favorable rates) and the $20,700 will be taxed as ordinary income (the higher, less favorable rates).

1) A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245 (Gain from Dispositions of Certain Depreciable Property)? a. $13,000 b. $17,000 *c. $20,000* d. $30,000

(c) Section 1245 only requires that the *lesser* of the *depreciation taken* ($30,000) or the *gain recognized* ($200,000 - $180,000=$20,000) be *recaptured*

Sec 1231 gain treated as long term capital gain INSTEAD it MUST be treated as ORDINARY income to the extent of the taxpayer's nonrecaptured net sec. 1231 losses for the FIVE preceding taxable years Evon Corporation, which was formed in 2009, had $50,000 of net Sec. 1231 gain for its 2012 calendar year. Its net Sec. 1231 gains and losses for its three preceding tax years were as follows: *Year Sec. 1231 results* *2009* Gain of $10,000 *2010* Loss of $15,000 *2011* Loss of $20,000 As a result, Evon Corporation's 2012 net Sec. 1231 gain would be characterized as a. A net long-term capital gain of $50,000. b. A net long-term capital gain of $35,000 and ordinary income of $15,000. c. A net long-term capital gain of $25,000 and ordinary income of $25,000. *d. A net long-term capital gain of $15,000 and ordinary income of $35,000.*

(d) Nonrecaptured losses 2010 15,000 + 2011 20,000 = $35,000.....so only 50,000 net sect 1231 gain - 35,000 nonrecaptured losses = 15,000 gain treated as Long term capital gain while the $35,000 treated as ordinary income

Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on November 15, 2012, and an additional 100 shares for $13,000 on December 30, 2012. On January 3, 2013, Smith sold the shares purchased on November 15, 2012, for $13,000. What amount of loss from the sale of Core's stock is deductible on Smith's 2012 and 2013 income tax returns? *2012 2013* *a. $0 $0* b. $0 $2,000 c. $1,000 $1,000 d. $2,000 $0

*(a)* The requirement is to determine the amount of loss from the sale of Core stock that is deductible on Smith's 2012 and 2013 income tax returns. No loss can be deducted on the sale of stock if substantially identical stock is purchased within thirty days before or after the sale. Any loss that is not deductible because of this rule is added to the basis of the new stock. In this case, Smith purchased 100 shares of Core stock for $15,000 and sold the stock on January 3, 2013, for $13,000, resulting in a loss of $2,000. However, the loss cannot be deducted by Smith because on December 30, 2012 (within thirty days prior to the January 3, 2013 sale), Smith purchased an additional 100 shares of Core stock. Smith's disallowed loss of $2,000 is added to the $13,000 cost of the 100 Core shares acquired on December 30 resulting in a tax basis of $15,000 for those shares.

Conner purchased 300 shares of Zinco stock for $30,000 in 2008. On May 23, 2012, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during 2012. On July 26, 2012, Alice sold the 300 shares of Zinco for $25,000. 32. What amount of the loss from the sale of Zinco stock can Conner deduct in 2012? *a. $0* b. $ 3,000 c. $ 5,000 d. $10,000

*(a)* The requirement is to determine the amount of the $10,000 loss that Conner can deduct from the sale of stock to his daughter, Alice. *Losses are disallowed on sales or exchanges of property between related taxpayers*, including members of a family. For this purpose, the term family includes an individual's spouse, brothers, sisters, ancestors, and lineal descendants (e.g., children, grandchildren, etc.). Since Conner sold the stock to his daughter, no loss can be deducted.

What was Alice's recognized gain or loss on her sale? *a. $0.* b. $5,000 long-term gain. c. $5,000 short-term loss. d. $5,000 long-term loss.

*(a)* The requirement is to determine the recognized gain or loss on Alice's sale of the stock that she had purchased from her father. Losses are disallowed on sales or exchanges of property between related taxpayers, including family members. *Any gain later realized by the related transferee on the subsequent disposition of the property is not recognized to the extent of the transferor's disallowed loss.* *Here, her father's realized loss of $30,000 - $20,000 = $10,000 was disallowed because he sold the stock to his daughter*, Alice. *Her basis for the stock is her cost of $20,000*. On the *subsequent sale* of the stock, Alice *realizes a gain of $25,000 - $20,000 = $5,000.* Alice can reduce her gain by up to $10,000, but not below zero. Here the gain is $5,000, so it is reduced to zero. *Conner loss when sold to daugher alice= Basis 30,000 - Selling price $20,000=$10,000 disallowed loss So when Alice, Conner's daughter, sells stock to a unrelated 3rd party, she can exclude gain up to the $10,000 loss her father faced.* But CANOT create or increase a loss using father's loss...can't reduce gain below zero*

Aviation Corp. manufactures model airplanes for children. During 2012, Aviation purchased $570,000 of production machinery to be used in its business. For 2012, Aviation's taxable income before any Sec. 179 expense deduction was $405,000. What is the maximum amount of Sec. 179 expense election Aviation will be allowed to deduct for 2012 and the maximum amount of Sec. 179 expense election that can carryover to 2013? Expense Carryover a. $405,000 $0 b. $405,000 $95,000 c. $500,000 $0 d. $570,000 $0

*(b)* The requirement is to determine the maximum amount of Sec. 179 expense election that Aviation Corp. will be allowed to deduct for 2012, and the maximum amount of expense election that it can carry over to 2013. Sec. 179 permits a taxpayer to elect to treat up to $500,000 (for 2012 and 2013) of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. The $500,000 maximum is reduced dollar-for-dollar by the cost of qualifying property placed in service during the taxable year that exceeds $2 million. Here, since the production machinery cost $570,000, the maximum amount that can be expensed is $500,000. However, this amount is further *limited as a deduction for 2012 to Aviation's taxable income of $405,000* before the Sec. 179 expense deduction. The remainder ($500,000 - $405,000 = $95,000) that is not currently deductible because of the taxable income limitation can be carried over and will be deductible subject to the taxable income limitation in 2013.

David Dickens sold a piece of land on an installment sale basis to Chuck Quarters on October 1, Year 1. David's basis in the land was $150,000 and Chuck purchased it for $1,500,000; payable in three annual installments of $500,000 on Dec. 31, Year 1, Year 2 and Year 3. How much gain should David report in his Year 1 tax return? a.$1,350,000 *b.$450,000* c.$500,000 d.$1,500,000

*(b)* The realized and recognized profit should be calculated as follows: *Step 1: Gross profit* Sale on installment: $1,500,000 Cost of goods sold (basis): 150,000 = *Total gross profit: $1,350,000* *Step 2: Gross profit percentage* Gross profit / Sales on installment = 1,350,000 / 1,500,000 = 90% *Step 3: Earned Gross profit:* Current year payment: $500,000 x 90% = $450,000

Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker's tax basis in the acquired van? a. $20,000 *b. $17,000* c. $13,000 d. $ 7,000 *The basis of the old property is used to calculate the basis of the new property, less any boot received*

*(b)* The requirement is to determine the basis for Leker's new van. The exchange of Leker's old van with a basis of $20,000 that was used exclusively for business, for a new van worth $10,000 plus $3,000 cash qualified as a like-kind exchange. Since it is a like-kind exchange, Leker's realized loss of $20,000 - ($10,000 + $3,000) = $7,000 cannot be recognized, but instead is reflected in the basis of the new van. The new van's basis is the adjusted basis of Leker's old van of $20,000 reduced by the $3,000 of cash boot received, resulting in a basis of $17,000. Calculation: 1. F 10FMV of prop rec 2. P + 3plus boot rec 3. A = 13=amount rec 4. L - 20less adj basis of prop given up 5. G = (7)Gain realized 6. Take Lesser of 2 vs 5, so 3 vs. (7), Gain Recognized is Zero, as it cannot be negative Basis 7. F 10FMV of prop rec 8. (5-6) + 7 ( this was (7) -0 =(7), so you have a double negative, subtract (7) so add, tricky! 9. N = 17 Think of Basis as your cost! In a tax free transaction (like this one), you would transfer the van for van, tit for tat, and the new van's basis would be $20,000, with no gain recognized. However, since there is boot (loot, cash) involved, we have a slight problem. Whenever you receive boot (loot, cash), you must recognize that gain. So you will recognize the gain = cash = $3,000. This means that your adjusted basis in the van will go DOWN, because it is no longer a tax free transfer. Thus, the amount of boot (loot, cash, $3000,) reduces your basis. Thus, your adjusted basis is $17,000. The government is going to tax the $3,000 because you have the ability to pay it (since its cash), but will NOT tax the remaining $17,000 because you do not have the ability to pay it (it's a VAN! = not liquid) I hope this helps.

Marsha and Brad, married taxpayers filing jointly, had the following transactions during Year 9: Gain on sale of stock purchased in Year 1 and sold in June, Year 9 $ 3,000 Ordinary income from employers 80,000 Loss on sale of stock purchased in January, Year 9 and sold in March, Year 9 20,000 What is the amount of the capital loss carryover to Year 10? a.$20,000 b.$0 *c.$14,000* d.$17,000

*(c)* Capital Loss *$20,000* *Less* Captial gain *$3,000* =Net capital loss *$17,000* An individual's net capital loss can be offset against ordinary income up to a maximum of so *less $3,000* =amount of loss carryover which can carry forward indefinitely $14,000

In December 20X1, Davis, a single taxpayer, purchased a new residence for $200,000. Davis lived in the new residence continuously from 20X1 until selling the new residence in July 20X7 for $455,000. What amount of gain is recognized from the sale of the residence on Davis' 20X7 tax return? a. $455,000 b. $255,000 *c. $5,000* d. $0

*(c)* Provided Davis has lived in his home for a total of 2 years out of the 5 years preceding his sale of his residence, as a single taxpayer he may exclude up to $250,000 o gain on its sale. The basis on the residence sold in Year 20X7 is equal to it's cost $200,000. Selling price: $455,000 Less: Basis (200,000) *______* Realized gain:$255,000 Less:Excluded Amount (250,000) *______* *Recognized gain: $5,000*

Data Corp., a calendar-year corporation, purchased and placed into service used office equipment during October 2012. No other equipment was placed into service during 2012. Under the general MACRS depreciation system, what convention must Data use? a. Full-year. b. Half-year. c. Mid-quarter. d. Mid-month.

*(c)* The requirement is to determine the depreciation convention that must be used when a calendar-year taxpayer's only acquisition of equipment during the year occurs during October. Generally, a *half-year* convention applies to *depreciable personal property*, and a *mid-month* convention applies to *depreciable real property.* Under the half-year convention, a halfyear of depreciation is allowed for the year in which property is placed in service, regardless of when the property is placed in service during the year, and a half-year of depreciation is allowed for the year in which the property is disposed of. However, a taxpayer must instead use a *mid-quarter* convention if more than *40%* of all depreciable personal property acquired during the year is *placed in service during the last quarter* of the taxable year. Under this convention, property is treated as placed in service (or disposed of) in the middle of the quarter in which placed in service (or disposed of). Since Data Corp. is a calendar-year taxpayer and its only acquisition of depreciable personal property was placed in service during October (i.e., the last quarter of its taxable year), it must use the mid-quarter convention, and will only be allowed a half-quarter of depreciation of its office equipment for 2012.

On August 1, 2012, Graham purchased and placed into service an *office building* costing $264,000 including $30,000 for the land. What was Graham's MACRS deduction for the office building in 2012? a. $9,600 b. $6,000 c. $3,600 *d. $2,250*

*(d)* Only the building is depreciable, so the depreciable portion is $264,000 less $30,000 land, for a net of $234,000. The MACRS rules provide a 39-year life, straight line depreciation, nd a "mid-month" acquisition convention that treat the property as acquired in the middle of the month, regardless of the actual date of acquisition. Therefore, the august 1, year 1, service date provides half-months depreciation for August *(0.5 mos)*, plus a full month for September through December (4 mos), for a totla of 4.5 months for year 1. *(234,000/39 years) x (4.5/12)= $2,250*

In a "like-kind" exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of a. Convertible debentures. b. Convertible preferred stock. c. Partnership interests. d. Rental real estate located in different states.

*(d)* The requirement is to determine which exchange qualifies for nonrecognition of gain or loss as a like-kind exchange. The exchange of business or investment property solely for like-kind business or investment property is treated as a nontaxable exchange. Like-kind means "the same class of property." Real property must be exchanged for real property, and personal property must be exchanged for personal property. Here, the exchange of rental real estate is an exchange of like-kind property, even though the real estate is located in different states. The likekind exchange provisions do not apply to exchanges of inventory, investment securities, stocks, bonds, notes, convertible securities, the exchange of partnership interests, property held for personal use and real property in different countries

*MACRS nonresidential real property* (The recovery period for nonresidential real property is 39 years and the mid-month (see below) convention is used

*39 year straight line* office building, warehouse, Stores or Offices

MACRS

*5 & 7 year depr class* = Machinery & Equipment 2 conventions: 1. Half yr - Yr of disposal, take half of the % amount in tables 2. Mid quarter - if more than 40% of depr personal prop is placed in service during the last quarter, mid quarter must be used (do NOT include real estate in 40%) 5 year - cars, trucks, computers 7 year- furniture, fixtures, equipment *27.5 and 39 yr depr class* = Buildings 1 convention: Mid Month (One half month is taken for month of purchase and sale) 27.5 years- residential rental property (apartments, rental homes) 39 years - NONresidential real prop (office buildings warehouses)

*2 Mortgages-Liability assumed (boot paid) and Liability relieved (boot received)*---Only difference is the gain recognized--- Recognized gain on a like kind exchange with 2 morgages = Lesser of gain realized (#5) or the total boot received (#2...-morgage relieved of and + mortgage assumed) A taxpayer exchanged Parcel A, a piece of land used solely for business purposes, for Parcel B and $30,000 cash Parcel A: (relinquished property) FMV $229,000 Basis: 149,000 Mortgage: 49,000 Parcel B: (property received) FMV: 240,000 Basis: 170,000 Mortgage: 20,000 Cash Received: 30,000 The taxpayer will assume the $20,000 mortgage on Parcel B and the other party to the transaction will assume $49,000 mortgage on Parcel A.

*So For A:* 1. *F*MV of Prop rec'd $240,000 2.* P*lus boot received cash $30,000 +Add boot rec Morgage relieved of 49,000 -Less boot paid Mortgage assumed 20,000 3. = Amt Realized $299,000 4. Less Adjusted Basis (old) (149,000) 5. = Gain Realized $150,000 6. Normally take the lesser of item 2 vs 5 except in circumstances of 2 mortgages. With two mortgages, lesser of gain realized (#5) or the total boot received (#2...-morgage relieved of and + mortgage assumed+ cash rec) (30,000 cash +49,000 mort relieved -20,000 mort assumed=59,000) #5 150,000 > #2 59000....so gain recog 59,000 7. Fmv of Prop received $240,000 8. Less item 5-6 (note if negative then add) ($91000) calculation was $150,000 - 59,000 = 91,000 9. (New) Basis of property received in like kind exchange= $149,000

GIFTED PROPERTY (USE BASIS, NOT FMV) 1. Start by looking at Donor basis and SP... 2. If *SP > Donors basis* means we sold at a gain...so we use donor's basis 3. If *SP < Donors* basis means we sold at a loss....so we use lesser of donor's basis or FMV at time of distribution 4. If FMV>SP>Donors basis or Donors Basis>SP>FMV..mean sold in-between donor's basis and FMV......SP is the basis...NO gain or loss 5. If FMV is higher at the date of Gift, Use "Rollover Basis/NBV".

*Sold at a gain* : Use donor's basis *Sold at a loss:* Use lesser of donor's basis or FMV at time of distribution *Sold in-between donor's basis and FMV:* No Gain or Loss *Want to maximize gain so use donors basis...and want to minimize losses...so when loss use lesser of DB or FMV at time of distribution*

*individual* capital gain/loss rule An individual's net capital loss can be offset against ordinary income up to a maximum of $3,000 ($1,500 if married filing separately).

- *3000 maximum deductible every year* - LT taxed at capital rate (depending on brackets), ST at ordinary rate - Collectibles and small business stocks and antiques taxed at 28% - Excess net capital loss *carry forward forever, can't carryback* - Bad debt loss = ST loss, worthless stock loss = capital loss (The cost of worthless stock or securities is treated as a capital loss as if they were sodl on the last day of the taxable year in which they became worthless)

Netting procedure (individual)

- ST loss offsets ST gains (taxed at ordinary rate) - Remaining ST loss offset LT gain from 28% group, then 25% group, then lower - LT loss offset net gain (remaining) from higher group to lower group

*Corporation* capital gain and loss rule

- all gain = ordinary rate - only Sec. 1231 = capital gain treatment - net capital loss *carryback 3 years and carry forward 5 years* - net capital loss deducted from capital or Sec. 1231 gain (1231 gain = capital, 1231 loss = ordinary)

1231 ordinary loss

- applies for loss excess of gain, SEc. 1231 net loss is deductible in full without consideration of capital gain

Section 1231 assets 1231 property is real or depreciable business property held for over a year. Section 1231 property includes buildings, machinery, land, timber and other natural resources, unharvested crops, cattle, livestock and leaseholds that are at least a year old, but does not include poultry, trademarks, or inventory.

- comprises of Sec. 1250 (REAL) and Sec. 1245 (PERSONAL) assets - depreciable personal and real property used in taxed/business held for over 12 months, involuntary converted assets also -Sec. 1231 property generally includes both depreciable and nondepreciable property used in a trade or business or held for the production of income if held for more than twelve months. The land held 18 months for business use would be Sec. 1231 property

Sales between the following parties do not receive capital gain treatment

- husband and wife (basis merely transfer) - an individual and a 50-percent-plus controlled corporation or partnership (where the gain is taxed at ordinary income)

Sec. 179 expense Any property not considered PERSONAL PROPERTY may not qualify for sec 179. 50 percent bonus for new property after 500,000 cap reached Real property does not qualify Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income.

- may deduct an expense before depreciation a fixed amount of depreciable property For New/Used equipment placed into service between January 1, 2016 and December 31, 2016 ===>Max Deduction: $500,000 ===>Max Total Equipment Purchases for 2016: $2,000,000 ===>$500,000 deduction is phased-out dollar for dollar for the amount of equipment purchases that exceed $2,000,000 ===> If a company buys $2,015,000 in equipment, then the $500,000 deduction is reduced by $15,000 ($2,015,000 - $2,000,000) ===> Max 179 Deduction: $485,000 *To qualify for IRC section 179, the property must be tangible personal property acquired by purchase from an unrelated party for use in the active conduct of a trade or business-Land is not a depreciable asset therefore it can not be expensed under sec. 179*

recognized gain in like-kind exchange

- no recognized gain if no boot is received - recognize gain as the lesser of realized gain or boot received

recognized gain with liabilities assumed (boot paid)

- no recognized gain, realized gain become deferred gain

involuntary conversions

- nonrecognition treatment of gain on involuntary conversion (theft, destruction, etc) if taxpayer's reinvestment of proceeds doesn't exceed prior property; taxpayer's excess proceed is taxable - personal property (two years from year-end), principal residence 4 years reinvestment, business property 3 years - gain recognized = boot, loss recognized immediately and basis of new property is the replacement cost

basis/gain/loss rule

- same as gift tax rule

Real Estate/Building (MACRS)

-> Salvage Value is "Ignored" in MACRS -> Don't Depreciate "Land". *Note:* 3, 5, 7 & 10 Year Property uses 200% Declining Balance 15 & 20 Year Property uses 150% Declining Balance 27.5 & 39 Year Property Uses Straight Line Depreciation

1245:(Mostly personal property) 1245 property, includes depreciable assets held by a business for intergral use. If the property has been depreciated, the recapture of depreciation is ordinary income, with any gain in excess of depreciation recapture considered a capital gain. 1245 recapture for business Recaptured amount under Section 1245 will be the lesser of the depreciation taken or the gain recognized. Whatever is lesser, will be recaptured first.

-personal business property (machinery and equipment, autos - used in trade over 12 months) - recapture: the lesser of gain recognized or accumulated depreciation = ordinary income, the remainder is Sec. 1231 gain

Qualify for the whole exclusion for homeowner *Note* that the purchase of the new home is of no consequence to the recognizable gain on the sale of the old home

1) Must own and use the house for 2 out of 5 years ending on sale date 2. Either spouse must meet ownership requirement, both must meet the use requirement for $500,000 exclusion. Gain eligible might be reduced by non-qualified use. (any use of a home other than the residence) (see example) 3. No age requirement, no rollover to another house, renewable exclusion

Gifted property basis for realized gain/loss purposes (generally donor's basis is the donee's basis) Example: Lets say your Grandmother give you a car that she bought it for *$10,000* (Grandmother Basis), but at the date of gift, *FMV of Car is lower* than your *Grandmother Basis* which is in the amount of *$6,000.* You can only know what your basis are when you sell that car.

1. Lets say you *sold* the car for *$12,000* SP=12,000 - 10,000 Donor basis= 2000 gain...sold @ gain...so use Donor's basis of 10,000 then your basis will be Grandmother Rollover Basis/NBV (Ignore FMV) because the selling price is higher than original Basis. *(Recognize Gain)* 2. Lets say you *sold* it for *$4,000* Donors Basis= 10,000 - 4000 SP=6,000 loss...loss so use lesser of donor's basis or FMV at time of distribution.......DB=10,000 > FMV 6,000...so use $6000 FMV as basis since lesser then your basis will be FMV at the date of Gift which is $6,000 because selling price is Lower than Original Grandmother basis. *(Recognize Loss)* 3. Now, Lets say if you *sold* it for *$7,000* DB=10,000 *SP=7,000* FMV=6, 000 (if the selling price is in between the Original Basis and FMV when you received it as a Gift) then *(NO Gain/Loss Recognized)* *SP is in between DB and FMV...no GL...basis is SP of $7000* ====== *Note:* If FMV is higher at the date of Gift, Use "Rollover Basis/NBV".

Like kind exchange Formula: "FPALG 2 vs 5 F (5-6) N" Written out in steps 1 thru 9.

1. *F*...FMV of Property Received 2. *P*...Plus Boot Received..unlike property rec is boot rec also...other party assuming mortgage is boot received also ====> Less Boot paid...unlike property given is boot paid also....assuming mortgage is boot paid also 3. *A*...=Amount Received 4. *L*...ess Adjusted Property of Property Given Up 5. *G*...=Gain Realized**/ (Loss realized) *=======* 6. Take the lower number *2 vs.5* and this is *Gain Recognized* (if a negative number, then zero) boot received vs gain realized =:2 vs 5 *======* *Basis* 7. FMV of Property Received -8. (5 - 6) this is item 5 minus item 6, so if negative then ADD it because it's a double negative 9. New Basis The above formula, requires a slight modification when you give up a mortgage and get a mortgage (2 mortgages)

*1 Mortgage- Like Kind property with Liabilities relieved (boot received)* A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $17,500. The other party also agrees to assume liability from the taxpayer secured by the old auto of $2,500. What is the gain or loss *realized* by the taxpayer on this transaction? $3,000 gain What is the gain or loss *recognized* by the taxpayer on this transaction? $0 What is the taxpayer's *basis* in the new automobile? $19,000

1. *F*...FMV of Property Received *$17,500* 2. *P*...Plus Boot Received..unlike property rec is boot rec also...other party assuming mortgage is boot received also *2500* ====> Less Boot paid...unlike property given is boot paid also....assuming mortgage is boot paid also *0* 3. *A*...=Amount Received *20,000* 4. *L*...ess Adjusted Property of Property Given Up *17,000* 5. *G*...=Gain Realized**/ (Loss realized) *3000* *=======* 6. Take the lower number *2 vs.5* and this is *Gain Recognized* (if a negative number, then zero) *2500 vs 3000* *lower is 2500* *======* *Basis* 7. FMV of Property Received *17,500* -8. (5 - 6) this is item 5 minus item 6, so if negative then ADD it because it's a double negative *3000 - 2500= 500* 9. New Basis: *22,000 - 3000= 17,000*

*No boot* A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss *realized* by the taxpayer on this transaction? $3000 gain What is the gain or loss *recognized by the taxpayer on this transaction? $0 What is the taxpayer's *basis* in the new automobile received? $17,000

1. *F*...FMV of Property Received *$20,000* 2. *P*...Plus Boot Received..unlike property rec is boot rec also...other party assuming mortgage is boot received also *0* ====> Less Boot paid...unlike property given is boot paid also....assuming mortgage is boot paid also *0* 3. *A*...=Amount Received *20,000* 4. *L*...ess Adjusted Property of Property Given Up *17,000* 5. *G*...=Gain Realized**/ (Loss realized) *3000* *=======* 6. Take the lower number *2 vs.5* and this is *Gain Recognized* (if a negative number, then zero) *0 vs 3000* *lower is 0* *======* *Basis* 7. FMV of Property Received *20,000* -8. (5 - 6) this is item 5 minus item 6, so if negative then ADD it because it's a double negative *3000 - 0= 3000* 9. New Basis: *20,000 - 3000= 17,000*

*Boot paid in cash or Non-Like kind property* A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $22,000, so the taxpayer has agreed to pay $2,000 cash in addition to the trade in. What is the gain or loss *realized* by the taxpayer on this transaction? $3,000 gain What is the gain or loss *recognized* by the taxpayer on this transaction? $0 What is the taxpayer's *basis* in the new automobile? $19,000

1. *F*...FMV of Property Received *$22,000* 2. *P*...Plus Boot Received..unlike property rec is boot rec also...other party assuming mortgage is boot received also *0* ====> Less Boot paid...unlike property given is boot paid also....assuming mortgage is boot paid also *2,000* 3. *A*...=Amount Received *20,000* 4. *L*...ess Adjusted Property of Property Given Up *17,000* 5. *G*...=Gain Realized**/ (Loss realized) *3000* *=======* 6. Take the lower number *2 vs.5* and this is *Gain Recognized* (if a negative number, then zero) *0 vs 3000* *lower is 0* *======* *Basis* 7. FMV of Property Received *22,000* -8. (5 - 6) this is item 5 minus item 6, so if negative then ADD it because it's a double negative *3000 - 0= 3000* 9. New Basis: *22,000 - 3000= 19,000*

3 typers of assets that may be held by business= Ordinary income assets, section 1231 assets, capital assets

1. *Ordinary income assets* current assets of business- assets acquired or produced with the intention of being sold in the ordinary course of business e.g. inventory 2. *Capital assets* Investments & non business assets- all assets that do not qualify as ordinary income or section 1231 assets e.g. consumer goods

installment sale taxable income

= annual cash collection x gross profit percentage

To calculate depreciable basis in tax

= same as GAAP rules for capitalizing an asset. Basis = cost to purchase and to get ready for use; further improvements also capitalized

3-year 200% class

ADR (asset depreciation range) midpoints of 4 years and less; excludes automobiles and light trucks, includes racehorses more than 2 years old and other horses more than 12 years old, and special tools

15 year 150% class

ADR midpoint 20 years or more, less than 25 years including sewage treatment plants, telephone distribution plants, comparable equipment used for two-way exchange of voice and data communication

7-year 200% class

ADR midpoint of 10 years and more, less than 16 years. Office furniture, equipment, property with no ADR midpoint not classified elsewhere, railroad track

20-year 150% class

ADR midpoint of 25 years and more, other then real property with ADR midpoint of 27.5 years and more, including sewer pipes

5-year 200% class

ADR midpoint of more than 4 years and less than 10 years; includes automobiles, light trucks, computers, typewriters, copiers, duplicating equipments

Adjusted basis of compensation stock

Adjusted basis of compensation stock is the FMV of stock at the time of transfer (compensation in the form of property).

An individual had the following capital gains and losses for the year: Short-term capital loss of $70,000 Long-term gain (un-recaptured Section 1250 at 25%) 56,000 Collectibles gain (28% rate) 10,000 Long-term gain (15% rate) 20,000 What will be the net gain(loss) reported by the individual and at what applicable tax rate(s)? A. Long-term gain of $16,000 at the 15% rate. B. Short-term loss of $3,000 at the ordinary rate and long-term capital gain of $86,000 at the 15% rate. C. Long-term capital gain of $3,000 at the 15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate. D. Short-term loss of $3,000 at the ordinary rate, long-term capital gain of $10,000 at the 15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate.

Answer (a) The short-term capital loss will be used first to offset net gain for the highest long-term rate basket, then to offset the next highest rate basket and so on. The $70,000 loss will entirely offset the $10,000 collectibles gain and the $56,000 unrecaptured Section 1250 gain. The remaining $4,000 will partially offset the $20,000 15% long-term gain leaving $16,000 of long-term gain at a 15% rate.

Calculate basis for like-kind exchanges

Basis in the new property = Adjusted Basis of old property (given up) - boot received (+ gain recognized) = FMV of property received - deferred gain + deferred loss

Calculate basis for like-kind exchanges...*2*

Basis=Adjusted Basis of auto given up + Gain Recognized-Boot Received. In the event that you pay boot, just net them together. Those basic principles should help you with any like-kind. The gain you recognize is the lessor of you gain realized, or boot received.

Amount realized

Cash received + Fair market value of other property + Buyer assumption of seller's liabilities - Seller's expense

Inherited property basis and gain Property inherited is LTCG property regardless of how long you hold it after receipt

Date of death FMV becomes basis; gain is long-term

Let's look at a typical example. John and Jane Smith have owned and used their home as their principal residence for nine months. But John's employer is transferring him to another branch halfway across the country. So the Smiths put their home on the market and quickly sell it at a $200,000 gain.

Even though the couple hasn't stayed in the home for the minimum two years, they still qualify for a partial exclusion. Under these facts, they can exclude from tax a maximum of $187,500 from the home sale [ (9 months divided by 24 months) x $500,000 (for MFJ, 250,000 for S)]. The remaining $12,500 of the gain ($200,000 - $187,500) is taxable under the capital gain rules.

Alternate valuation date (for FMV)

FMV on the alternate valuation date (earlier of six months later or the date of distribution/sale). The alternate valuation date is only available if its use lowers the entire gross estate and estate tax earlier of: - sale date, or - alternate valuation date (earlier of 6 months after date or date of sale)

when is gain excluded or deferred?

HIDE IT Home owner exclusion Involuntary conversion Divorce property settlement Exchange of like-kind (business) Installment sale Treasury capital & stock

*Inheritance:* *Alternate Valuation Date*

It is the responsibility of the executor of an estate to take care of the financial matters of the deceased including the filing of the final income tax return and the estate tax return. *For valuing the assets that make up the decedent's estate*, the executor has the option of *using the date of death value* or the *"alternate valuation date,"* which is six months after the date of death.

like-kind exchanges Six types of property are not eligible for a like-kind exchange: (1) stock in trade or other property held primarily for sale; (2) stock, bonds, or notes; (3) other securities or evidences of indebtedness or interest; (4) interests in a partnership; (5) certificates of trust or beneficial interests; and (6) choses in action

Like kind exchanges include exchanges of business property for business property, where like kind is interpreted very broadly and refers to the nature or character of the property and not to its grade or quality The exchange of business or investment property for like-kind business or investment property is treated as a nontaxable exchange. Like-kind means "the same class of property;" the exchange of an apartment building for unimproved land would qualify as a like-kind exchange.

Homeowner's Exclusion general rule

Sale of taxpayer's personal residence a. $500,000 for married couples filing joint and surviving spouse b. $250,000 for single, married filing separately, head of household

Section property definitions *Personal property* is movable property. It's anything that can be subject to ownership, except land. *Real property* is immovable property - it's land and anything attached to the land.

Section 1245 property. This type of property includes *tangible personal property*, such as furniture and equipment, that is *subject to depreciation*, or *intangible personal property*, such as a patent or license, that is *subject to amortization.* Section 1250 property - depreciable real property, including leaseholds if they are subject to depreciation. The most common examples of §1250 property are buildings and ..... deck, shingles, vapor barrier, skylights, trusses, girders, and gutters. ... of the cost of construction of the building and depreciated over the life of the building. Section 1252 property, which is farmland held less than 10 years, on which soil, water, or land-clearing expenses were deducted Section 1254 property, including intangible drilling and development costs, exploration costs, and costs for developing mining operations, Section 1255 property, which is cost-sharing payment property described in section 126 of the Internal Revenue Code

1245 (PERSONAL) DEPRECIATION RECAPTURE

You sell a piece of depreciated machinery at a gain ===>Some of gain is treated as ordinary income -Amount of depreciation -Remainder of the gain is a 1231 LTCG

1. Inherited Property Basis

a) General Rule - @ Date of Death, FMV become Basis (If Alternate Valuation Date is *NOT* used) b) Alternate Valuation Date - For FMV, which is the Earlier of: Distribution Date of Asset *OR* 6 Months After Date of Death (MAX 6 Months)

half-year convention

applies to personal property, placed in service or disposed of during a taxable year

3. Sec 1231 assets: assets used in a trade/business and held for over 1 year===> LT business property Net gain is LT capital gain Net loss is ordinary losss

e.g equiptment, machinery Capital gains have lower tax rates...rather have a gain be a capital gain b/c lower tax -limitation: can only deduct capital losses to the extent of capital gains, capital losses are offsetting lower rate gains Ordinary loss have higher rates....when have loss rather have a ordinary loss Sec 1231 assets loss treated as ordinary loss vs gain treated as capital...gettting best of both worlds with sec. 1231 assets -sect 1231 losses are first netted against section 1231 gains...any excess loss treated as ordinary loss (higher tax rate) 1231 *personal property (not permanently affixed-movable property) *1231/1245 e.g.* Personal property = Movable property not fixed to ground like building *1231 personal property = 1245* Buy @ 100 Depreciate $30 = Basis $70 Sell @ 100 -basis 70 =gain $50...gain includes $30 from depreciation which is recaptured as a sec. 1245 gain (ordinary gain) @ 35% rate- ordinary gain (higher rate)....and $20 sec 1231 capital gain (lower rate) @ 15% rate *1245 is ordinary* *Section 1245* assets comprise of *personal property* (e.g., machinery, equipment) used in trade or business and held for over 12 mos Ordinary gains (not loss)- recapture all accum depreciation (lesser of gain recognized or all accum dep) *Never a 1245 loss only gain* 1245 GAIN ONLY!!!!! if loss for 1245 property it would be a 1231 loss

1231/1250 e.g. REAL PROPERTY like building 1250: (Mostly real property) 1250 property includes real estate and real property subject to depreciation that is, and has not been, section 1245 property Section 1250 comprise of *real property* (e.g., buildings) used in trade or business and held for over 12 months Recaptured gain is only the portion of depreciation taken on real property in exess of SL Unrecatpured gain to the extent of the SL depreciation taxed at maximum 25% for individuals

eg.Real property 1231/120 Buy @ 1000 Depreciate @ 90 = basis $910 == Sold @ 1400 less 910 basis = gain 490 == Assuming SL dep of ($60) Gain of $490: divided into 3 baskets recaptured *1250 gain* to the extent of in excess of SL (Accelerated was 90 - 60 SL): $30 taxed at ordinary higher rate of 35% unrecaptured 1250 gain to extent of SL dep: $60 taxed at rate in btwn, max 25%, 1231 gain over and above purchases price (SP 1400 - Cost 1000): 400 taxed at capital lower rate of 15% *$30* in excess of SL recaptured + *60* unrecaptured to extent of SL + *400* SP - Cost (original)* = 490 gain* unrecaptured gain to the extent of SL depreciation is taxed at maximum rate of 25% for individual...its in between ordinary higher rate and capital lower rate- max is 25 but can be less *Never 1250 loss ONLY gain* if loss for 1250 property it would be a 1231 loss

mid-quarter convention jan feb march= *1st quarter* Apr may junh= *2nd quarter* july aug seph= *3rd quarter* oct nov dec= *4th quarter*

if more than 40% of depreciable personal property is placed in service in the last quarter of the year

Partial exclusion Taxpayer must have owned and used the home as a principal residence for at least two out of the previous five years. The tax law allows a home seller to claim a partial exclusion if the sale results from a change in employment, a need for medical care or other "unforeseen circumstances"

if the sale is due to a change in employment, health, unforeseen circumstances; must be claimed within 2 years Exclusion = months of qualifying ownership/24 x max exclusion amount (250,000)

tax treatment of intangibles

intangibles such as goodwill, licenses, franchises, trademarks might be amortized using straight-line basis over the period of 15 years, starting with the month of acquisition

noncapital assets

inventory, 1231, 1245, 1250 property, depreciable personal property and real estate used in a trade or business, treasury stock, AR/NR, copyrights/musical/compositions *held by original artists (their inventories)*

Real property

land and all items permanently fixed to the land (building, paving, etc.) Real property is *immovable property* - it's land and anything attached to the land.

percentage depletion (non GAAP)

limited to 50% of taxable income (excluding depletion) from the well or mine; allowable percentage ranges from 5% to 22% depending on the mineral or substance being extracted

timing requirement of like-kind exchange

must identify like-kind replacement property within 45 days of giving up their property; property must be received by the earlier of 1) 180 days after the taxpayer transfers property in a like-kind exchange or 2) the due date of the taxpayer's income tax return (including extension)

Realized loss treatment

never recognized --> becomes deferred loss

like-kind exchange

nonrecognition for exchange of property used in trade/business/investment except inventory, stock, securities, partnership interests, real property in different countries; personal property must be in the same asset class

property settlement

nontaxable, basis = carryover from exspouse

basis of repurchased security

purchase price of new security + disallowed loss on the wash sale *0r* basis of old security - proceeds from sale + purchase price of new security

capital assets Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and *stocks or bonds held as investments*. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss.

real and personal property held by taxpayers such as: - personal automobile - furniture and fixture - stock and securities - personal property/real property *NOT* used in trade or business -Real property not used in trade or business - interest in partnership - goodwill of corporation - copyrights, literary, musical, or artistic compositions that have been *purchased* - other assets held for investments

Mid Month Convention: If Building is placed or Disposed in service at ANY Day of the month, you can only take depreciation for half of that month + remaining months in the year. Use *Real Estate/Building... Always use "Mid Month Convention"* *Example:* If you placed a building on Jan 1, Year 1 in the Business, you can be able to depreciate for 11.5 months for that year.

straight-line depreciation was computed based on the number of months the property was in service, 1/2 month is taken in the month the property is placed in service; 1/2 month is taken for the month the property was disposed of