ACCY Chapter 7 -2
Heron & Associates owns Tan Corporation stock that cost $3,000. The stock has appreciated in value and is now worth $5,000. What is Heron's realized gain?
$0. There is no identifiable event.
Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and $3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property?
$300,000 + 5,000 - 15,000 - 3,000 = $287,000 realized.
Problem - Tobin inherited 100 acres of land on the death of his father in 2019. A Federal real estate tax return was filed and the land was valued at $300,000 (its FMV at the date of the death). The father had originally acquired the land in 1976 for $19,000 and prior to his death had made permanent improvements of $6,000. What is Tobin's basis in the land?
$300,000 - Long term
Assume Nicky deducts depreciation of $6,500 and then sells the car for $32,500. What is her recognized gain or loss?
$38,000 - 6,500 depreciation = 31,500 Selling price of car = $32,500 Gain basis 32,500 - 31,500 = 1,000 recognized gain Loss basis - FMV 33,000 -6,500 = 26,500
Non-taxable Exchange How is the deferral accomplished?
- A nontaxable exchange postpones (i.e., defers) recognition of gains or losses until the property received in the exchange is later sold in a taxable transaction. ^This deferral is accomplished by assigning a carryover basis to the replacement property. If the taxpayer receives cash or other non-qualifying property, part or all of the realized gain from the exchange is recognized since the taxpayer has the wherewithal to pay.
When does the holding period begin for property acquired by gift?
- If the donee's basis is the carryover basis - begins on the date the donor acquired the property. - If the donee's basis is the FMV - begins on the date of the gift.
7-1B -What is a recognized gain and loss? Understand the difference between realized gain or loss and recognized gain or loss
- Recognized gain is the amount of the realized gain that is included in the taxpayer's gross income. - Recognized loss is the amount of a realized loss that is deductible for tax purposes. ^Unless there is an exception in the tax laws, taxpayers must immediately recognize their realized gains and losses.
7-4 Like-Kind Exchanges (1031) What are the requirements to be satisfied for nontaxable exchange treatment under 1031?
- The property is like-kind property - The form of the transaction is an exchange - Both the property given up and the property received are either "used in a trade or business" or "held for investment" Qualifying like-kind exchanges include only exchanges involving real property used for business or investment purposes The like-kind exchange rules are applied independently to each taxpayer in the exchange
7-2D Disallowed Losses - What is the wash-sale rule? When does it apply? How does the realized loss that is not recognized affect the basis of the substantially identical stock acquired?
- The wash sale rules (§ 1091) are designed to eliminate a taxpayer strategy to sell stock at a loss and replace the stock sold by buying identical shares shortly before or after the sale. The wash sale rule applies if a taxpayer sells or exchanges stock or securities at a loss and within 30 days before or after the date of the sale or exchange acquires substantially identical stock or securities. - A realized loss that is not recognized is added to the basis of the substantially identical stock or securities whose acquisition resulted in the nonrecognition of loss. In other words, the basis of the replacement stock or securities is increased by the amount of the unrecognized loss. If the loss were not added to the basis of the newly acquired stock or securities, the taxpayer would never recover the entire basis of the old stock or securities. As a result, the wash sale rule operates to defer the recognition of the taxpayer's loss.
Haley bought her house in 2015 for $350,000. Since then, she has deducted $55,000 in depreciation associated with her home office and has spent $20,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2019. What is Hailey's adjusted basis at the date of the sale?
1. Subtract depreciation from cost basis of house 2. Add capital additions 350,000 - 55,000 + 20,000 = $315,000 adjusted basis
C - What is Lisa's recognized gain or loss from 9/1/20
120,000 - (75,000) = 45,000 recognized
Assume that Nicky deducts depreciation of $6,500 and then sells the car for $20,000. What is her recognized gain or loss?
26,500 - 20,000 = 6,500 Recognized loss
The wash sale rule applies if a taxpayer sells or exchanges stock or securities at a loss and within 30 days XXXXXXXX the date of the sale or exchange acquires substantially identical stock or securites
30 days before or after
Barry owns property on which there is a mortgage of $20,000. He sells the property to Cole for $50,000 cash and Cole's agreement to assume the mortgage. What is Barry's amount realized?
50,000 + 20,000 = $70,000
Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements?
550,000 + 10,000 + 28,000 + 25,000 + 800,000 = $1,413,000
Example - Noelle received dining room furniture as a gift from her friend, Jane. Jane's adjusted basis was $9,200 and the FMV on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold it to a neighbor 6 months later for $6,500. What is her recognized gain or loss?
6,500 - 7,000 = ($500) Realized but not recognized. This is a personal use asset. Recognized loss is 0 In any case, the operation of this dual basis rule can produce a curious anomaly: if the sales proceeds fall between the donor's adjusted basis and the property's fair market value at the date of gift, no gain or loss is recognized.
Realized gain or loss Jamie sells land that has a $60,000 mortgage. In return for the land, Jamie receives cash of $40,000 and stock with a fair market value of $30,000. The buyer also assumes the mortgage. Jamie's adjusted basis in the land is $80,000.a.What is Jamie's amount realized?b.What is Jamie's realized gain or loss?
A - Amount realized = 40,000 + 30,000 + 80,000 = $130,000 B = Realized gain = Amount realized - adjusted basis 130,000 - 80,000 = $50,000
Problem 28 - Maple Company owns land (adjusted basis of $90,000; FMV of $125,000) that it uses in its business. Maple exchanges it for another parcel of land (worth $100,000) and stock (boot) worth $25,000. Determine Maple's A Realized and Recognized gain or loss on the exchange B Basis in the new land C Basis in the stock Maple received
A = Amount realilzed 100,000 + 25000 Adjusted basis (90,000) Realized gain 35,000 25,000 recognized gain 10,000 deferred gain B = 100,000 - 10,000 = 90,000 c = 25,000
What is a boot? How does the receipt of boot affect the recognition of gain on like-kind exchanges? Realized loss?
A boot is when a party provides some other property (e.g, cash) to even out the exchange. - The receipt of boot will trigger recognition of gain if there is a realized gain. ^ Recognized gain: the lesser of the boot received or the realized gain There is no recognition of boot if there is realized loss
Janice bought her house in 2010 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing., She sells the house on July 1, 2019. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Don buys the house for $500,000 in cash and assumes her mortgage of $194,000. What is Janice's adjusted basis at the date of the sale and the amount realized?
Adjusted basis = 395,000 - 70,000 + 45,000 = $370 Amount realized = $500,000 + 194,000 - 34,700 - 300 = 659,000 Realized Gain is 659,000 - 370,000 = $289,000
Problem 26 - Tanya Fletcher owns undeveloped land (adjusted basis of $80,000 and FMV of $92,000) on the East Coast. On 1/4/2019, she exchanges it with Lisa Martin (an unrelated party) for undeveloped land on the West Coast and $3,000 cash. Lisa has an adjusted basis of $72,000 for her land, and its FMV is $89,000. Because the real estate market on the East Coast is thriving, on 9/1/020, Lisa sells the land she acquired for $120,000. A -What are Tanyas's recognized gain or loss and adjusted basis for the West Coast land on 1/4/2019?
Amount realized = $89,000 + 3,000 Adjusted basis = (80,000) Realized gain = $12,000 Recognized gain: $3,000 Deferred gain: 9,000 Basis for West Coast land = 89,00 - 9,000 = 80,000
Paul exchanges undeveloped land (adjusted basis of $60,000 and FMV of $70,000) on the East Coast with Lisa for undeveloped land on the West Coast and $5,000 cash. Lisa has an adjusted basis of $55,000 for her land and its FMV is $65,000. What is Lisa's basis for the East Coast land (the property received in the exchange??
Amount realized by Lisa = 70,000 Lisa gave up 55,000 adj + 5,000 boot = $60,000 70,000 - (55,000+5000) = 10,000 Since Lisa was giving up boot and its solely cash, she does not have to recognize income and so this is all deferred. Lisa's basis is $60,000
B - What are Lisa's recognized gain or loss and adjusted basis for the East Coast land on 1/4/19?he East Coast land on 1/4/19?
Amount realized: 92,000 Adjusted basis: (72,000 + 3,000) Realized gain = 17,000 Recognized gain: $0 Deferred gain: 17,000 Basis for the East Coast land = 92,000 - 17,000 = 75,000
7-1a Sale or Disposition - What is the key factor in determining whether a disposition has taken place?
An identifiable event has to occur before there is a realized gain or loss
Pheasant, Inc., made the following exchanges during the taxable year: a. Inventory for a machine used in business b. Land held for investment for a building used in business c. Stock held for investment for equipment used in business d. A light-duty business truck for a light duty business truck e . Land for investment in New York for land held for investment in London Which of the above qualifies as an exchange of like-kind property?
Answer is B - Land held for investment for a building used in business a - Inventory for a machine used in business - NO - because this is personal property - not real property. c - Stock held for investment for equipment used in business - NO - because stock and equipment are not real property d - A light-duty business truck for a light-duty business truck - NO - because not real property e - Land for investment in New York for land held for investment in London - NO - both are real property but foreign property is not like-kind It has to be in the US
What are the requirements for replacement property (For owner -user vs. owner-investor
Basic requirement: The replacement property be similar or related in service or use to the involuntarily converted property o Owner-user: Functional use test - Under this test, a taxpayerǯs use of the replacement property and of the involuntarily converted property must be the same. o Owner-investor: Taxpayer use test - Under this test, the properties must be used by the taxpayer in similar endeavors.
Example - Problem 1 (7-32) Luciana, a nonshareholder purchases a condominium from her employer for $85,000. The FMV of the condo is $120,000. What is Luciana's basis in the condo and the amount of any income as a result of this purchase?
Basis = $120,000 Income = $120,000 - 85,000 = $35,000
What are the capital recoveries that decrease the adjusted basis of property?
Capital Recoveries are: - Depreciation and cost recovery (subtracted from the original basis) --The original basis of depreciable property is reduced by the annual cost recovery allowances while the property is held by the taxpayer - Certain corporate distributions --A corporate distribution to a shareholder that is not taxable is treated as a return of capital, and it reduces the basis of the shareholder's stock in the corporation -Casualties and thefts --The adjusted basis is reduced by the amount of the deductible loss and insurance proceeds received
Example 14 (7-9) Pelican, Inc. purchases 100 shares of Olive Corporation stock two years ago for $5,000 ($50 a share) and another 100 shares of Olive stock one year ago for $6,000 ($60 a share). Pelican sells 50 shares of the stock on January 2 of the current year. What is the cost of the stock sold assuming that Pelican cannot adequately identify the shares?
Cost of the stock sold = $50 a share for $2,500 total. (Use FIFO. The original price of shares was $50. This is the price used to calculate the amount)
When a taxpayer cannot identify the specific shares being sold, how is the basis of the stock sold determined?
FIFO - First-In, First-Out. This happens when a taxpayer has purchases shares of a company's stock over time at different prices.
Qualifying like-kind exchanges include exchanges involving real property and personal property used for business or investment purposes.
False - because it does not include personal property. It only includes real property.
Problem - Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 2, 2019. During 2019, she sells 25 shares of the 100 shares purchased on January 2, 2019 for $2,500. Twenty-five days earlier, she had purchased 30 shares of Gold Corporation stock for $3,000. What is Karen's recognized gain or loss on the sale of the stock, and what is her basis in the 30 shares purchased 25 days earlier?
First step is to calculate the price per share. 11,500/100 = $115 per share 25 shares were sold for $2,500 115 * 25 = 2,875 2,500 - 2,875 = -375 Realized loss - not recognized. Karen's recognized gain or loss on the sale is $0 loss. The basis is $3,375. (3,000 + 375 = 3,375)
For each of the following involuntary conversions, indicate whether the property acquired qualifies as replacement property, the recognized gain, and the basis for the property acquired. Frank owns a warehouse that is destroyed by a tornado. The space in the warehouse was rented to various tenants. The adjusted basis was $470,000. Frank uses all of the insurance proceeds of $700,000 to build a shopping mall in a neighboring community where no property has been damaged by tornadoes. The shopping mall is rented to various tenants.
Frank - owner - investor Qualifies as replacement property 700,000 - (470,000) = 230,000 Realized gain All $230,000 deferred ($0 gain recognized) Basis = 700,000 - 230,000 = 470,000
Determination of gain or loss
Gain and losses result from realization events such as sales, exchanges or other dispositions of property. Many, but not all, are realized and recognized.
How do you determine the basis of like-kind property received when taxpayers receive like-kind property and boot in a like-kind exchange? What is the basis of boot received in the exchange? What is the holding period of the like-kind property and the boot received?
If an exchange qualifies as nontaxable under § 1031, the basis of like-kind property received in the exchange equals the property's fair market value less any postponed gain or plus any postponed loss. The basis of any boot received is the boot's fair market value because this portion of the transaction is taxable. Section 1031(d) of the Code provides an alternative approach for determining the basis of like-kind property received: Adjusted basis of like-kind property surrendered + Adjusted basis of boot given + Gain recognized − Fair market value of boot received − Loss recognized = Basis of like-kind property received This approach is logical in terms of the recovery of capital doctrine. That is, the unrecovered cost or other basis is increased by additional cost (boot given) or decreased by cost recovered (boot received). Any gain recognized is included in the basis of the new property. The taxpayer has been taxed on this amount and now is entitled to recover it tax-free. Any loss recognized is deducted from the basis of the new property because the taxpayer has already received a tax benefit on that amount.
Ivan owns a warehouse that is destroyed by fire. The adjusted basis is $300,000. Because of economic conditions in the area, Ivan decides not to rebuild the warehouse. Instead, he uses all of the insurance proceeds of $400,000 to build a warehouse for use in his business in another state.
Ivan - Owner - user - Functional use test Qualifies as replacement property 400,000 - 300,000 = 100,000 realized gain All 100,000 deferred ($0 recognized gain) Basis = 400,000 - 100,000 = 300,000
Example 39, 40 and 41 Jason operates a charter fishing business in Panama City, Florida, taking customers out in the Gulf of Mexico on daylong fishing trips. Unfortunately, Hurricane Michael completely destroyed his boat, which had a basis of $78,000 ($120,000 cost − $42,000 of accumulated depreciation). Fortunately, Jason had insurance that paid him the full replacement cost of his boat. He filed an insurance claim the week after he lost his boat and received $175,000 in insurance proceeds three weeks later. Assume that Jason buys a new boat for $180,000 and he uses the entire insurance settlement as part of the purchase. How much of realized gain can Jason defer? What is the basis of the new boat? Example 40Involuntary Conversions: General Rules Refer to the facts of Example 39, and assume that Jason buys a new boat for $180,000. He uses the entire insurance settlement as part of the purchase. In this case, Jason's $97,000 realized gain is deferred, and the basis of his new boat must reflect that deferral. As a result, his new boat's basis is $83,000 ($180,000 cost − $97,000 deferred gain). Example 41Involuntary Conversions: General Rules Continuing with the facts of Example 39, assume that Jason negotiates an excellent price for his new boat. In fact, he is able to replace his old boat for only $168,000 and uses the $7,000 remaining from the insurance settlement to pay for other business expenses.
Jason has a realized gain of $97,000, computed as follows: Realized gain - 175,000-78,000 = 97,000 Jason can defer the entire realized gain, provided that he uses all of the insurance proceeds to purchase a new boat. In this case, Jason's $97,000 realized gain is deferred, and the basis of his new boat must reflect that deferral. As a result, his new boat's basis is $83,000 ($180,000 cost − $97,000 deferred gain). Jason recognizes a $7,000 gain, which equals the difference between the $175,000 insurance settlement and the amount he paid for the new boat (the amount of the insurance proceeds he reinvested in replacement property). The balance of the realized gain is deferred, and the basis of his new boat must reflect that deferral. As a result, his new boat's basis is $78,000 ($168,000 cost − $90,000 deferred gain). If a loss occurs on an involuntary conversion, § 1033 does not apply and the general rules for loss recognition are effective. See Chapter 6 for the discussion of the deduction of losses.
How would your answer change if the basis of the truck was $6,000, its FMV was $9,000, and Falcon received a $9,000 insurance settlement. See detail below. An insured truck owned by Falcon Corporation is destroyed in an accident. At the time of the accident, the adjusted basis was $8,000 and the FMV was $6,500. Falcon receives insurance proceeds of $6,500. What is the truck's adjusted basis after the accident?
Loss amount is still the basis. (6000) + 9000 = 3,000 gain. This will be added to the adjusted basis. The adjusted basis starts at 6,000 and then add the 3,000 gain and then reduced by insurance settlement of 9,000. 6,000+ 3,000 - 9,000 = 0
Example - Shontelle received a gift of inocme-producing property with an adjusted basis of $49,000 to the donor and FMV of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?
Loss basis is used. 31,000 - 35,000 = (4,000) 35,000 is the loss basis 31,000 is loss amount 4,000
Example 31, 33 (p7-22) Blue, Inc., and White Corporation exchange land in a like-kind exchange. Because Blue's land (with an adjusted basis of $20,000) is worth $24,000 and White's land has a FMV of 19,000, White also gives Blue cash of $5,000. How much gain does Blue recognize? Part B - Assume the same facts, except that the adjusted basis of Blue's land is $30,000. What is Blue's realized loss? Does Blue recognizes any of this loss?
Part A - Amount Realized = 19,000 + 5,000 Adjusted basis - (20,000) Realized gain = 4,000. Recognized gain is $4,000 Part B - None of the loss is recognized Amount realized - 24,000 Adjusted basis (30,000) Realized loss - (6,000)
Example 34 & 35 Flicker, Inc., and Gadwall Corporation exchange land in a like-kind exchange. Flicker receives land with a FMV of $75,000 and transfers land worth $63,000 (adjusted basis of $45,000) and cash of $12,000. What is Flicker's realized gain? How much of this gain is recognized? part b - Assume the same facts, except that Flicker transfers land worth $30,000 (adjusted basis of $36,000) and boot worth $45,000 (adjusted basis of $27,000) Does Flicker recognize any gain or loss? If so, what amount?
Part A - Amount realized = $75,000 Adjusted basis ($45,000 + 12,000) Realized gain = $18,000 = $0 recognized Part B - Amount realized 75,000 Adjusted basis (436,000 + 27,000) Net realized gain = $12,0000 Built-in loss in land: 30,000-36,000 = (6,000) Build-in gain in boot: 45,000-27,000 = 18,000 $6,000 loss deferred $18,000 gain recognized Assume the same facts as in the preceding example, except that Flicker transfers land worth $30,000 (adjusted basis of $36,000) and boot worth $45,000 (adjusted basis of $27,000). Flicker's net gain on this exchange is $12,000 [$75,000 amount realized − adjusted basis of $63,000 ($36,000 + $27,000)]. But Flicker is transferring two pieces of property: land (like-kind property) with a built-in realized loss of $6,000 ($30,000 fair market value − $36,000 adjusted basis) and non-like-kind property (boot) with a built-in realized gain of $18,000 ($45,000 fair market value − $27,000 adjusted basis). In this case, the $6,000 realized loss on the like-kind property is deferred (not recognized) and the $18,000 realized gain on the non-like-kind property is recognized. In other words, the realized loss on the like-kind property cannot be used to offset the realized gain on the boot given up as part of the transaction.
Sebastian received a gift of income producing property with and adjusted basis of 30,000 to the donor and FMV of $25,000 on the date of gift. No gift tax was paid by the donor. Sebastian subsequently sold the property for $33,000. What is the recognized gain or loss?
Refer to dual basis rules Since the FMV is less than the donor's basis, the dual basis rules must be applied. (Basis for gain (donor adj) and basis for loss (FMV). In this problem the sales proceeds are greater than the donor's adj so you use the gain basis. 33,000 - 30,000 = 3,000 recognized gain.
Nicky receives a car from Sam as a gift. Sam paid $48,000 for the car. He had used it for business purposes and had deducted $10,000 for depreciation up to the time he gave the car to Nicky. The FMV of the car is $33,000. Assuming that Nicky uses the car for business purposes, what is her basis for depreciation?
Sam is the donor Nicky is the donee 48,0000 - $10,000 depreciation = $38,000 - donor's basis (carryover basis) $33,000 is FMV The basis for Nicky is $38,000 because doneee (carryover) basis is always the basis for depreciation in determining gain
Silver, Inc., and Gold Corporation exchange land in a like-kind exchange. Because Silver's land (with an adjusted basis of $15,000) is worth 19,000 and Gold's land has a FMV of $17,000, Gold also gives Silver cash of $2,000. How much gain does Silver recognize?
Silver amount realized is $17,000 + $2,000 = $19,000 Adjusted basis = 15,000 Realized gain = 4,000 (19,000 - 15,000) Because Silver received boot, Silver has to recognize some gain which is going to be the lesser of boot received or the realized gain. The lesser amount is the boot, so the recognized amount is $2,000. Boot of $2,000 < Recognized gain of $4,000
7-5 Involuntary Conversions - What does Section 1033 provide to a taxpayer who suffers an involuntary conversion of property?
Taxpayer can postpone recognition of any gain realized from the conversion provided the Section 1033 rules are met
What is the basis of the replacement property?
Taxpayers postpone realized gain only to the extent that they reinvest the amount realized in replacement property - The deferral of gain on involuntary conversions is elective - Basis of the replacement property = FMV (cost) of the new property - Deferred gain If a loss occurs on an involuntary conversion Section 1033 does not apply and the general rules for loss recognition are effective
What is the loss amount in the complete destruction of business property?
The adjusted basis
What is the adjusted basis of property? What are capital additions that increase the adjusted basis of property? What are the capital recoveries that decrease the adjusted basis of property?
The adjusted basis of property is the property's original basis adjusted to the date of disposition. Original basis is the cost or other basis of the property on the date the taxpayer acquires it. Also includes any liability related to the property. Capital additions increase and capital recoveries decrease the original basis. As a result, adjusted basis equals: Cost (or other basis) on date of acquisition + Capital additions & improvements − Capital recoveries/depreciation = Adjusted basis on date of disposition A buyer's original basis in the property also includes any liability related to the property, including debt assumption.
What is the amount realized from a sale or other disposition of property? What does it include?
The amount realized from a sale or other disposition of property is the sum of any money received (which includes any debt relief) plus the fair market value of other property received. Debt relief includes any liability (e.g., a mortgage on a building) that the buyer assumes as part of the sale. Debt relief also occurs if property is sold subject to the mortgage. This debt relief is equivalent to the buyer paying the seller additional cash and the selling paying off the debt. Thus, the amount realized includes the debt relief. Money received + Fair market value + debt relief - selling expenses = Amount realized
What is the basis and holding period of the new property when like-kind property is exchanged solely for like-kind property?
The basis and holding period of the old property carries over to the new property.
Example 27 (p7-19) Starling Management Company completes a nontaxable exchange of property with an adjusted basis of $10,000 and a FMV of $12,000 for property with a FMV of $12,000. How much gain does Starling recognize? What is the basis in the newly acquired property?
The basis is $10,000 (carryover basis) Amount realized = $12,000 - Adjusted basis (10,000) Realized gain $2,000 - $0 Recognized gain (deferred)
What is the basis of inherited property in general?
The basis of inherited property is generally the property's FMV at the date of the death. The holding period of inherited property is deemed to be long-term regardless of when the property was acquired by decedent and whether the property is disposed of at a gain.
7-2A Determination of Cost Benefits What is the basis of property in general?What is the basis of property in case of a bargain purchase?
The basis of property is generally the property's cost which is the amount paid for the property in cash or other property. A bargain purchase of property is an exception to the general rule for determining basis. A bargain purchase results when an employer transfers property to an employee at less than the property's fair market value (as compensation) or when a corporation transfers property to a shareholder at less than the property's fair market value (a dividend). These transfers create taxable income for the purchaser equal to the difference between fair market value and purchase price at the time the property is purchased. The basis of property acquired in a bargain purchase is the property's fair market value. The difference between FMV and basis is taxable income. If the basis of the property were not increased by the bargain element, the taxpayer would be taxed on this amount again at disposition.
7-2B How do you determine the basis of property received as a gift? If the property's FMV on the date of the gift exceeds the donor's basis in the property?
The donor's basis carries over to the recipient (donee) (a carryover basis). If a property's fair market value on the date of the gift exceeds the donor's basis in the property (i.e., the property has appreciated in value), the donor's basis carries over to the recipient (donee). This basis is called a carryover basis and is used in determining the donee's future gain or loss.
7-2B How do you determine the basis of property received as a gift? If the property's FMV on the date of the gift is lower than the donor's basis in the property? What is the dual basis rule?
The dual basis rules apply. Here, the donee has one basis for measuring a gain and a different basis for measuring a loss. This special rule is in place to prevent the shifting of losses (typically among family members) to the individual who would receive the greatest benefit. Under this rule, the donee's gain basis is the donor's adjusted basis; the donee's loss basis is the (lower) fair market value of the property.For a loss you use the fair market to determine the realized loss. (Subtract selling price from FMV)
What is the dual basis rule?
The dual basis rules apply. Here, the donee has one basis for measuring a gain and a different basis for measuring a loss. This special rule is in place to prevent the shifting of losses (typically among family members) to the individual who would receive the greatest benefit. Under this rule, the donee's gain basis is the donor's adjusted basis; the donee's loss basis is the (lower) fair market value of the property.For a loss you use the fair market to determine the realized loss. (Subtract selling price from FMV)
How does the giving of boot affect the recognition of gain on like-kind exchanges?
The giving of boot does not trigger recognition if the boot consists solely of cash. However, if the boot given is appreciated or depreciated property, gain or loss is recognized to the extent of the difference between the adjusted basis and the FMV of the boot.
What is the holding period of the like-kind property and the boot received?
The holding period of the property surrendered in the exchange carries over and tacks on to the holding period of the like-kind property received. This rule stems from the basic concept that the new property is a continuation of the old investment. The boot received has a new holding period (from the date of exchange) rather than a carryover holding period.
Tom owns a warehouse that is destroyed by a hurricane. The space in the warehouse was rented to various tenants. Tom uses all of the insurance proceeds to build a shopping mall in a neighboring community. The shopping mall is rented to various tenants.
The shopping mall qualifies as replacement property. Because Tom is the owner-investor and the taxpayer use test applies (properties must be used by taxpayer in similar endeavors).
An insured truck owned by Falcon Corporation is destroyed in an accident. At the time of the accident, the adjusted basis was $8,000 and the FMV was $6,500. Falcon receives insurance proceeds of $6,500. What is the truck's adjusted basis after the accident?
Truck is completely destroyed. The loss amount is $8,000. (8,000) + 6,500 = (1,500) Deductible loss Adjusted basis = 8,000 - 1,500 - 6,500 = 0
