Tax Planning: Tax Consequences on Sale of Assets (Module 7)

Charlie purchased residential rental property for $400k on August 1, 1985. ACRS deductions for 1985 through the date of the sale were $110k. The property is sold for $470k on January 1 of the current year. Depreciation would have been $80k of the straight-line method had been used. What is the amount of the Section 1231 gain?

$150k The realized gain is $180k (470-290) and $30k of excess depreciation is recaptured as Section 1250 ordinary income. The rest of the gain, $150k is section 1231 gain. Of this amount, $80k will be unrecaptured 1250 gain - taxed at the special reate of 25%, and $70k (470-400) will be taxed at 15%

Dan sells a classic automobile to his brother-in-law under the following terms: - The selling price is $25,000. - Dan's purchase price was $15,000. - Dan's brother-in-law will pay five annual installments of $5,000 plus accrued interest. Ignoring interest income, what amount of gain will Dan recognize for the current year?

$2,000 Dan's gross profit percentage is 40% (profit $10,000 / contract price $25,000) $5,000 x 40% = $2,000 There is no recapture because he never depreciated the car.

Bob sells land with an FMV of $500,000 to a local charity for $300,000. His basis in the land is $100,000. What is his taxable gain?

$240k [$300,000 (realized) / $500,000 (FMV)] x $100,000 (basis) = $60,000 $300,000 (sale) - $60,000 (adjusted basis) = $240,000 Bob's basis is adjusted because he claimed a $200,000 charitable tax deduction. If the basis wasn't adjusted he would benefit disproportionally.

What are the 1244 loss limits and what happens if you go over?

$50k for individual and $100k for couple filing jointly. If you go over the limit in a given year the excess will be considered a capital loss and NOT an ordinary loss. Capital loss can only be deducted $3k a year. Ordinary loss could be deducted in full that year

Linda has four transactions involving the sale of capital assets during the year. As a result of the transactions, she has a STCG of $5,000, a STCL of $7,000, a LTCG of $10,000 and a LTCL of $2,000. What is the NCG?

$6,000.00 After the initial netting of short-term and long-term gains and losses, Linda has a NSTCL of $2,000 ($7,000 - $5,000) and a NLTCG of $8,000 ($10,000 - $2,000). Because the NLTCG exceeds the NSTCL by $6,000 ($8,000 - $2,000), her NCG is $6,000.

Taxpayers separate their long-term capital gains (LTCGs) and long-term capital losses (LTCLs) into three tax rate groups, what are they?

- 28% group - 25% group - 15% group

What are the two main differences between non-corporate taxpayers and corporate taxpayers in regards to capital gain/loss taxes?

- Corporations have higher tax rates - Corporations can only deduct capital losses against their capital gains. While non-corporate can use their net capital loss to deduct up to $3k a year against their income

Section 1231 property includes what types of property?

- Real property or depreciable property used in a trade or business or held for the production of income that is held for more than one year - Timber, coal or domestic iron ore - Livestock - Unharvested crops

Net Capital Gain (NCG)

- exists when NLTCG exceeds net short-term capital loss (NSTCL). - The excess of the net long-term capital gain for the tax year over the net short-term capital loss. The net capital gain of an individual taxpayer is eligible for the alternative tax. § 1222(11).

Section 1244 Stock

- stock from small businesses are eligible to receive ordinary loss treatment limited to 50,000/100,000 per year. losses in excess of this receive capital loss treatment. the company's profits must not exceed $1 million in order to qualify as a small business. - Loses 1244 status if stock is sold or donated

As a general rule, gains resulting from the sale of collectibles such as artwork, rugs, antiques, stamps and most coins are not taxed at the lower tax rates of __% and __% but may be taxed at a maximum rate of __%

0; 15; 28

Which of the following are considered selling expenses? 1. Legal Expenses 2. Repair Costs 3. Commissions 4. Deed Preparation Costs

1, 3, 4

What are the three ways Congress uses the tax law to encourage home ownership?

1. Real estate taxes and interest on a mortgage used to acquire a principal or second residence are deductible, 2. Part or all of the interest on home equity debt may be deductible, and 3. Taxpayers may elect to exclude up to $250,000 ($500,000 on a joint return) of gain from the sale of a principal residence.

15% capital gain/loss group

This 20%, 15% of 0% group, depending upon the taxpayer's taxable income, includes capital gains and losses when the holding period is more than one year and the capital asset is not a collectible or Section 1202 small business stock.

25% capital gain/loss group

This group consists of unrecaptured Section 1250 gain and there are no losses for this group.

28% capital gain/loss group

This group includes capital gains and losses when the capital asset is a collectible held for more than one year and if applicable, either half or a quarter of the gain from the sale of qualified small business stock (Section 1202) held for more than 5 years.

The new exclusion provided by Section 121 applies to only one sale or exchange every _____ years.

2 years A portion of the gain may be excluded in certain circumstances even if the two-year requirement is not satisfied.

John Matthews, a married taxpayer filing a joint return, sells Section 1244 stock during the current year. Which of the following correctly identify the tax treatment of the sale? 1. Up to $50,000 of loss is treated as an ordinary loss. 2. Up to $100,000 of loss is treated as an ordinary loss. 3. Any loss in excess of the maximum annual ordinary loss is treated as a capital loss. 4. A gain on the sale is considered ordinary income.

2, 3 Statements II and III are accurate. A gain on sale is a capital gain. The $50,000 ordinary loss would apply to taxpayers other than married filing jointly.

What is the new maximum rate on net capital gains (NCG)

28% The maximum rate on NCG was reduced to 28% in 1990. However, this tax reduction only benefited taxpayers whose tax rate exceeded 28%

For a taxpayer to get the gain exclusion on property sale proceeds, they must have lived in the house for 2 years within the past _____ years

5

Section 1202 provides that non-corporate taxpayers may exclude __% of the gain resulting from the sale or exchange of qualified small business stock issued after August 10, 1993, if the stock is held for more than five years.

50%

Edie bought a home for $150,000 one year ago. Due to a job change, she had to move several thousand miles away. She was lucky enough to find a buyer quickly and sell the home for $160,000, but she incurred a 6% brokerage commission and $3,000 of selling expenses. What is the tax result of the sale of the home? a. She will not have to report a gain. b. She will have to report a $10,000 gain. c. She will not have to report the $400 gain due to her change of place of employment. d. She will not have to report the $10,000 gain due to her change of place of employment.

A Edie will not realize a gain but a loss of $2,600 $160,000 - ($9,600 + 3,000) = 147,400 basis $150,000 - 147,400= $2,600 loss There is no deduction for loss on a home sale. Selling expenses (like commissions, title search and doc stamps) are generally deductible.

Patsy is going to sell some of the shares of his/her mutual fund. Which statement is incorrect? a. To maximize taxable gain, the client should always use the first in, first out method. b. To minimize taxable gain, the client would normally use the specific identification method. c. The taxable gain may be based on an average cost per share. d. The client may choose which shares to sell, thereby controlling the taxable gain under specific identification.

A The clearly incorrect answer is to set basis using FIFO. If the first shares acquired were priced near current FMV the gain may be small.

Section 1245

A gain from the disposition of Section 1245 property is treated as ordinary income to the extent of the total amount of depreciation (or cost-recovery) deductions allowed since January 1, 1962. The gain recaptured as ordinary income cannot exceed the amount of the realized gain.

How is coal or domestic iron ore treated tax wise?

An owner who disposes of coal (including lignite) or domestic iron ore while retaining an economic interest in it must treat the disposal as a sale. The coal or iron ore is considered Section 1231 property. The owner must own and retain an economic interest in the coal or iron ore. An economic interest is owned when one acquires by investment any interest in mineral in place and seeks a return of capital from income derived from the extraction of the mineral.

In the current year, Tim sells several securities that leave him with the following gains and losses: - Long-term capital gain $10,000 - Long-term capital loss $3,000 - Short-term capital gain $7,000 - Short-term capital loss $6,000 What is the net capital gain or loss on Tim's security sales? a. Net long-term gain of $8,000. b. Net long-term gain of $7,000 and net short-term gain of $1,000. c. Net long-term gain of $6,000. d. Net long-term gain of $7,000 and net short-term loss of $1,000.

B LTCG $10,000 STCG $7,000 LTCL $3,000 STCL $6,000 LTCG $7,000 STCG $1,000

Tim, a single taxpayer who purchased his home on January 1, 2019, for $500,000, recently became ill and sold his home in order to move closer to a relative who could care for him. Tim sold his principal residence on June 14, 2019, for $620,000, realizing a gain of $120,000. How much can he exclude if any?

Because he owned and occupied the residence for 164 days and the sale was due to a change in his health, he may exclude $56,507 ($250,000 x 165/730).

Mr. Dell sells land that he purchased for $125,000. The sale price is $508,000. He receives $25,000 as a down payment this year. He will be paid $4,025 per month for 10 years. In addition to the down payment, he receives 10 monthly payments this year. What is his taxable gain for the current year? a. $55,260 b. $30,345 c. $49,192 d. $36,325

C $383,000 / $508,000 = 75.39% Gross Profit Percentage Payments ($25,000 + $40,250) x 75.39% = $49,192

Edie bought a home for $150,000. What will the tax result be when she sells the home for $200,000 after living in it for six months? Why? a. She would have received an exclusion of up to $250,000 in gains. b. She would have received an exclusion of up to $125,000 in gains. c. She would have received an exclusion of up to $62,500 in gains

C She is single. $250,000 x 0.25* = $62,500 *6 months divided by 24 months

Tim and Maggie Butler sell their residence in June. The realized gain over the eight years they owned it is $350,000. Instead of buying a new home, they decide to rent a condo. Which of the following is true? a. The gain must be reported on the year-end tax return. b. The amount of the gain is more than exclusion. No tax forms need to be filed. c. There is no taxable gain; therefore, no tax forms need to be filed. d. A Schedule D and form 2119 must be filed.

C The $350,000 realized gain is completely excluded by the $500,000 exclusion. No return needs to be filed. There is no recognized gain.

A corporation owns many acres of timber, which it acquired three years ago, and which has a $100k basis. The timber is cut during the current year for use in the corporation's business. The FMV of the timber on the first day of the current year is $300k. What is the tax result if the corporation makes the appropriate election? a. no recognition of gain or loss since the timber is to be used in the business b. Recognition of a gain if the timber is later sold with the gain equal to the sales price less $300k (FMV on the first day of the year of cutting) c. Recognition of Section 1231 gain of $200k d. Recognition of a gain at the time of sale if the timber is later sold with the gain equal to the sales price less the basis in timber

C The gain or loss is determined by comparing the timber's adjusted basis for depletion with its FMV on the first day of the tax year in which it is cut

Two years ago, Maxine purchased a computer for use in her business at a cost of $10,000. She took cost recovery deductions of $5,200. Due to her business expanding, she needs a faster more powerful computer. She sells the original computer for $4,000. What is her gain or loss on the sale of the computer? Why? a. 1231 gain of $1,200 b. Ordinary loss of $1,200 c. Ordinary loss of $ 800 d. 1245 gain of $ 800

C The sale creates an ordinary loss. Her basis is $4,800. The $4,000 in sales proceeds less $4,800 basis equals an $800 loss. NOTE: When the amount realized is less than the adjusted basis, the resulting loss is treated as an ordinary loss.

A corporation may have qualified small business stock (QSBS) only if the corporation is a _ corporation and at least __% of the value of its assets must be used in the active conduct of one or more qualified trades or businesses.

C ; 80%

Allyson, a dealer in securities, purchases Cook Corporation stock on April 8 and identifies the stock as being held for investment on that date. Four months later, Allyson sells the stock. Is it a capital gain/loss or ordinary income?

Capital gain/loss because the dealer marked that stock as an investment and not inventory for her clients

Under the related parties rules of Section 267, why has congress imposed the concept of constructive ownership?

Congress has imposed the concept of constructive ownership to prevent attempts to circumvent the related party rules by dispersing ownership of a corporation among family members or related entities while at the same time retaining economic control

Albert and Joycelyn, both 35 years old and married, sell their personal residence in 2019 for $500,000. They have lived in the house for seven years and their tax basis is $160,000. They must recognize what amount of gain from the sale? A. $0 B. $90,000 C. $340,000 D. $500,000

Correct Answer: A. $0 Explanation: They meet the requirements of Section 121 to exclude all of the gain.

During the current year, Max recognizes a $30,000 Section 1231 gain and a $20,000 Section 1231 loss. Prior to this, Max's only Section 1231 item was a $15,000 loss two years ago. What must Max Report? Why? A. $10,000 ordinary income B. $10,000 ordinary income and $5,000 net LTCG C. $10,000 LTCG D. $15,000 ordinary income

Correct Answer: A. $10,000 ordinary income Explanation: Due to the five-year lookback rule, $10,000 of the non-recaptured Section 1231 loss is recaptured as ordinary income.

John buys a property on December 31, 2018 and sells it on December 31, 2019. Is the property long term or short term? A. Short-Term B. Long-Term

Correct Answer: A. Short-Term Explanation: To determine the holding period, the day of acquisition is excluded and the disposal date is included. John is holding the property for exactly one year, not more than one year, therefore it will be classified under short-term.

Net long-term capital gains receive preferential tax treatment if they exceed net short-term capital losses. A. True B. False

Correct Answer: A. True Explanation: Net capital gain (NCG), which may receive favorable tax treatment, is defined as the excess of net long-term capital gain over net short-term capital loss.

If the gain is less than the depreciation (or cost recovery) taken, the entire gain from the disposition of Section 1245 property is recaptured as ordinary income. A. True B. False

Correct Answer: A. True Explanation: The entire gain from the disposition of Section 1245 property is recaptured as ordinary income because the total amount of depreciation (or cost recovery) is greater than the gain realized.

Bill sells his personal residence, which has a $100,000 basis, to Elizabeth. In the deal, Bill pays a $5,000 sales commission and incurs $7,000 as legal costs. Elizabeth pays $25,000 cash and assumes Bill's $90,000 mortgage. What is Bill's realized gain? A. $ 2,000 B. $ 3,000 C. $ 5,000 D. $ 12,000

Correct Answer: B. $ 3,000 Explanation: Realized Gain = Selling Price - Selling Expenses - Adjusted Basis. Solving this equation, the amount realized is $103,000 ($25,000 + $90,000) - ($5,000 + $7,000). The realized gain is $3,000 ($103,000 - $100,000)

Lynn has two transactions involving the sale of capital assets during the year resulting in a short-term capital loss of $1,500 and a long-term capital loss of $5,000. What can Lynn offset? A. $1,500 of ordinary income and have a LTCL carryforward of $5,000 B. $3,000 of ordinary income and have a $3,500 LTCL carryforward C. $3,000 of ordinary income and have a STCL carryforward of $3,500 D. $6,500 of ordinary income

Correct Answer: B. $3,000 of ordinary income and have a $3,500 LTCL carryforward Explanation: Short-term losses are deducted first. The NSTCL may be deducted in full (i.e., on a dollar-for dollar basis) against any non-corporate taxpayer's ordinary income for amounts up to $3,000 in any one year.

Which of the following is not considered a capital asset? Why? A. Corporate stock held for investment B. Automobile used in a trade or business C. A Rembrandt painting held in a private collection D. Personal residence

Correct Answer: B. Automobile used in a trade or business Explanation: Property used in a trade or business and subject to allowances for depreciation under Section 167 or real property used in a trade or business is not a capital asset. (i.e., automobile used in a trade or business)

Robert bought 100 shares of stock X on each of three occasions during 1999. He paid $158 a share for the first block of 100 shares, $100 for the second block and $95 a share for the third block. On December 20, 2011, Robert sold 300 shares of X stock for $125 a share. On January 5, 2012, he bought 250 shares of identical X stock. He can deduct the loss realized on the first block of stock. Why? A. True B. False

Correct Answer: B. False Explanation: Robert cannot deduct the loss of $33 a share on the first block because within 30 days after the date of sale he bought 250 identical shares of X stock. In addition, Robert cannot reduce the gain realized on the sale of the second and third block of stock by this loss.

Suzy owns some Acme Corp. stock with a FMV of $20,000 and a basis of $24,000. In order to be able to recognize this loss, to which of the following individuals must she sell the stock?Why? A. Brother B. Father-in-law C. Husband D. Grandfather

Correct Answer: B. Father-in-law Explanation: Suzy may sell the stock to her father-in law because he is not considered a related party according to Section 267. If you sell stock at a loss to a related person, you can't deduct the loss. What's worse, unlike a wash sale, a sale to a related person prevents you or the related person from claiming a loss deduction on a later sale.

On March 31 you sell 100 shares of XYZ at a loss. On April 10 you buy a call option on XYZ stock. (A call option gives you the right to buy 100 shares.) Which of the following would your sale be considered? Why? A. Transaction B. Wash sale C. Bargain sale D. Simple sale

Correct Answer: B. Wash sale Explanation: If you sell stock at a loss, you'll have a wash sale (and won't be able to deduct the loss) if you buy substantially identical stock within the 61-day wash sale period consisting of the day of the sale, the 30 days before the sale and the 30 days after the sale. You'll also have a wash sale if, within the wash sale period, you enter into a contract or option to buy substantially identical stock. Section 1091 disallows losses incurred on wash sales of stock or securities in the year of sale.

How can Section 1250 recapture be avoided? A. Using an accelerated depreciation method. B. Electing not to apply Section 1250. C. Holding the Section 1250 property for its entire useful life or recovery period. D. Electing to override Section 1250 with Section 1245.

Correct Answer: C. Holding the Section 1250 property for its entire useful life or recovery period. Explanation: After the entire useful life of the property, accelerated depreciation will be equal to straight-line depreciation.

A full exclusion of gain under section 121 upon the sale of a personal residence applies only to one sale or exchange in what time period? A. Six months B. One year C. Two years D. Five years

Correct Answer: C. Two years Explanation: According to new provisions under IRS, the exclusion is determined on an individual basis. An individual may claim the exclusion even if the individual's spouse used the exclusion within the past two years.

In the case of Section 1245 recapture treatment, if gain realized is greater than depreciation, under what section would the gain be taxed?

Correct Answer: Under Section 1231 Explanation: Under Section 1245 recapture, gain is characterized\ as ordinary income to the extent of total depreciation deductions. Therefore, if the gain realized is greater than depreciation the tax treatment should be under Section 1231.

Tommy completes several security transactions this year: - Long-term capital gain $10,000 - Short-term capital gain $5,000 - Long-term capital loss $5,000 - Short-term capital loss $20,000 What is the net capital gain or loss on Tommy's security sales? a. Net STCL of $15,000 b. A loss of $3,000 can be taken against ordinary income c. Net loss of $10,000 d. Net STCL of $10,000

D The STCL is $15,000, but the LTCG must be netted against the loss. A loss of $3,000 can be taken against ordinary income, but it does not answer the question. LTCG $10,000 STCG $5,000 LTCL $5,000 STCL $20,000 LTCG $5,000 STCL $15,000

Mrs. Tuttle is about to retire. At retirement (NRA) she will get $1,500 per month from Social Security and $1,000 per month from her employer's retirement plan. She feels she needs to reposition her assets to produce more income. She is currently in a 25% tax bracket, but when she retires she will drop into a 10-15% bracket. What should she sell and when? a. She has a $20,000 gain in a Growth and Income fund worth $40,000. She should sell next year. b. She has a $10,000 loss in Global Tele with a current FMV $50,000. She should sell and take the loss this year. c. She has no gain in A REIT worth $40,000 with a current yield of 5.5%. She should sell this year and buy AAA bonds. d. She has a $10,000 gain in municipal bond fund with a current yield of 3.5%. Comparable AAA bonds are paying 6%. She should sell next year.

D The lower the marginal income tax bracket, the less advantageous the tax exempt income becomes. If she sells the municipal bond next year, her capital gains tax will be zero. The TEY of the AAA inher future tax bracket will be superior to the muni TEY. Answer A is wrong because she can only take a loss of $3,000 this year. Selling the other funds is not particularly tax effective.

To determine the holding period, the day of acquisition is ____________ and the disposal date is ___________.

Excluded ; included

If a taxpayer lives in his home for two years, it is considered a principal residence for Section 121. True or False? Why?

False Whether property is used as the taxpayer's residence is determined on a case-by-case basis for Section 121

Hal has two transactions involving the sale of capital assets during the year. As a result of those transactions, he has a STCG of $4,000 and a STCL of $3,000. What is the NSTCG?

Hal's NSTCG is $1,000 ($4,000 - $3,000), and his AGI increases by $1,000.

Gordon has a NLTCL of $9,000 and a NSTCG of $2,000. What can be deducted?

He must use $2,000 of the NLTCL to offset the $2,000 NSTCG, and then use $3,000 of the $7,000 ($9,000 - $2,000) NLTCL to offset $3,000 of ordinary income. Gordon's carryforward of NLTCL is $4,000 [$9,000 - ($2,000 + $3,000)]. This amount is treated as a LTCL in subsequent years.

Frances sells an office building during the current year for $800,000. The office building was purchased in 1980 for $700,000 and depreciation of $500,000 has been allowed using an accelerated method of depreciation. If the straight-line method was used, depreciation would be $420,000. The office building is Section 1250 property. What are the tax consequences?

Her realized gain is $600,000 and $80,000 is Section 1250 ordinary income due to excess depreciation. Since this is non-residential real estate, placed in service prior to 1981, the remaining $520,000 gain is Section 1231 gain.

Danny, whose tax rate is 35%, purchased Bowling common stock and antique chairs for investment on March 10, 2017. He sells the assets in April of 2018 and has a gain of $8,000 on the sale of the stock and $10,000 on the sale of the antique chairs. What is the tax on capital gains? What is the ANCG?

His NLTCG is $18,000, and his NCG is $18,000. His ANCG is $8,000 since $10,000 of the NCG is a collectibles gain. His tax on the capital gains is $4,000 [(15% x $8,000) + (28% x $10,000)].

Section 1250 converts a portion of the Section 1231 gain into ________________ when real property is sold or exchanged

Ordinary income

Section 1231 Property

Real or depreciable property that is held for more than one year and is either used in a trade or business or is held for the production of income

Section 1250 Recapture

Recapture of excess accelerated depreciation over straight-line depreciation allowed for buildings placed in service before 1987.

For purposes of Section 121, the destruction, theft, seizure, requisition, or condemnation of property is treated as a ____________

Sale under Section 121 The destruction, theft, seizure, requisition, or condemnation of property is treated as a sale under section 121. Thus, taxpayers may exclude a gain of up to $250k or $500k due to the involuntary conversion of a principal residence if the use and ownership test is satisfied

Bargain Sales

Sales or exchanges where proceeds are less than fair market value. To the extent that a bargain sale is made up of two transactions, the transactions are split with the sale being treated as the proceeds less the basis for calculation of gain and no loss being recognized.

Savannah, whose tax rate is 35%, sells land at a gain of $10,000 and other land at a gain of $15,000. Both tracts of land qualify as Section 1231 property. She has no other transactions involving capital assets or 1231 property and no non-recaptured Section 1231 losses. What is the NLTCG, NCG & ANCG?

Savannah has net Section 1231 gain of $25,000 that is NLTCG and her NCG is $25,000. Her ANCG is $25,000 taxed at a rate of 15%.

Section 1250 Property

Section 1250 property is any depreciable real property other than Section 1245 property and includes the following: - All other depreciable real property except non-residential real estate that qualifies as recovery property (that is, placed in service after 1980 and before 1987) unless the straight-line method of cost recovery is elected. - Low-income housing. - Depreciable residential rental property.

Krista, who has owned and used a house as her principal residence for the last seven years, marries Eric in January of 2019. Eric sold his residence in October of 2018 and excluded a $145,000 gain. Krista sells her residence in December of 2019 and realizes a gain of $378,000. How much can she exclude? Why?

She may exclude $250,000 of the gain. For a married couple filing a joint return when each spouse maintains a separate principal residence, the $250,000 exclusion is available for the sale or exchange of each spouse's principal residence.

Non-business bad debt losses are deducted as a ______ ________ capital loss

Short term Bad debt losses from non-business debts are deductible only as short-term capital losses. It is only deductible in the year in which the debt becomes totally worthless

Arnie purchased a capital asset on April 20, 2018, if she sells the asset on April 20, 2019 is it a short term or long term?

Short term. Need to be one more day for it to be a long term

What is the four step procedure for analyzing section 1231 transactions?

Step 1 - Determine net gain from casualty or thefts of Section 1231 property and non-personal-use capital assets held more than 1 year Step 2 - Combine the following gains and losses: Net casualty and theft, sale or exchange of Section 1231 property, and condemnation of Section 1231 property and non-personal-use capital assets held more than 1 year Step 3 - If a net Section 1231 gain is the result of Step 2, determine if the taxpayer has any non-recaptured net Section 1231 losses Step 4 - Any net Section 1231 gain in excess of non-recaptured net Section 1231 loss is treated as a LTCG

Nora's principal residence, with an adjusted basis of $70,000, was destroyed by a flood in May 2018. The area was declared by the President to be a federal disaster area. All the contents of her home, including a Steinway grand piano with a basis of $25,000 and a fair market value (FMV) of $30,000, were destroyed. Nora received the following payments from the insurance company in July 2018: $200,000 for the house, $25,000 for personal property contents with an adjusted basis of $15,000, and $30,000 for the piano, which was separately scheduled property in the insurance policy. What are the tax consequences?

The $10,000 ($25,000 - $15,000) gain on the unscheduled personal property is excluded from gross income. The $135,000 gain attributable to the house and the piano is excluded under Section 121.

Kathryn owns land with a $20,000 basis and a $30,000 fair market value (FMV) as well as a capital asset with a $40,000 basis and a $26,000 FMV. Both assets are used in her trade or business and have been held for more than one year. As a result of the state exercising its powers of requisition or condemnation, Kathryn is required to transfer both properties to the state for cash equal to their FMVs. No other transfer of assets occurs during the current year. What are the tax consequences?

The $10,000 gain due to condemnation of the land is a Section 1231 gain and the $14,000 loss due to condemnation of the capital asset is a Section 1231 loss.

the Koch's principal residence, with an adjusted basis of $200,000, has been used and owned by them for nine years. The house is destroyed by a hurricane and the Koch's receive insurance proceeds of $820,000. Four months later, they purchase another residence for $900,000. How do the gains, exclusions and deference work? What's the basis of the new residence?

The Koch's have a realized gain of $620,000 and may exclude $500,000 under Section 121. The remaining $120,000 gain may be deferred and the basis of their replacement residence is $780,000 ($900,000 - $120,000).

Kirby sells his personal residence, which has a $100,000 basis, to Maxine. To make the sale, Kirby pays a $7,000 sales commission and incurs $800 of legal costs. Maxine pays $30,000 cash and assumes Kirby's $90,000 mortgage. What is the amount realized and the realized gain/loss?

The amount realized is $112,200 [($30,000 + $90,000) - ($7,000 + $800)]. The realized gain is $12,200 ($112,200 - $100,000).

Adobe Corporation sells equipment used in its trade or business for $95,000. The equipment was acquired several years ago for $110,000 and is Section 1245 property. The equipment's adjusted basis is $60,000 because $50,000 of depreciation was deducted. What is the tax consequences?

The entire $35,000 ($95,000 - $60,000) gain is treated as ordinary income because the total amount of depreciation taken ($50,000) is greater than the $35,000 realized gain.

With Section 1245 property, what happens if the gain is less than the depreciation?

The entire gain from the disposition of Section 1245 property is recaptured as ordinary income because the total amount of depreciation (or cost recovery) is greater than the gain realized.

the Prime Corporation owns land held as an investment and land used as an employee parking lot. How are these assets classified?

The land held as an investment is a capital asset. The land used as a parking lot is real property used in a trade or business and is not a capital asset. The land used as a parking lot is a Section 1231 asset if held for more than one year.

If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health or unforeseen circumstances. How is the portion of gain excluded determined?

The portion of the gain excluded is determined by multiplying the amount of the exclusion (that is, $250,000 or $500,000) by a fraction whose numerator is the number of days that the use and ownership tests were met and the denominator is 730 days.

Gains or losses resulting from an involuntary conversion arising from fire, storm, shipwreck, other casualty, or theft are not classified as Section 1231 gains or losses if the recognized losses from such conversions exceed the recognized gains. True or False?

True In such a case, the involuntary conversions are treated as ordinary gains and losses. However, if the gains from such involuntary conversions exceed the losses, both are classified as Section 1231 gains and losses.

If Section 1231 gains and losses are treated as ordinary income, they are fully deductible in the current year. True or False? Why?

True Section 1231 gain and losses treated as ordinary income are fully deductible in the current year. If the gains and losses were classified as long-term capital gains and losses, only $3k of the NLTCL would have been deductible against other income

Section 267

Under Section 267, related taxpayers may not take current deductions on two specific types of transactions between them. These transactions are: Losses on sales of property Accrued expenses that remain unpaid at the end of the tax year

Vermont Corporation owns timber with a $60,000 basis for depletion. The timber, acquired four years ago, is cut during the current year for use in the corporation's business. The FMV of the timber on the first day of the current year is $200,000. What is the realized gain/loss? If any?

Vermont Corporation may elect to treat the cutting of the timber as a sale or exchange and recognize a $140,000 ($200,000 - $60,000) gain.

Election Provision

When the requirements of Section 121 are satisfied, gain is excluded unless the taxpayer elects not to have Section 121 applied. It is unlikely that a taxpayer will ever have an incentive to elect not to have Section 121 applied.

Net long-term capital gain (NLTCG)

When the total LTCGs for the tax year exceed the total LTCLs for that year, the excess is defined as net long-term capital gain (NLTCG)

Mark-To-Market

a method of accounting for certain investments that requires that they be adjusted to their fair value at the end of each period

Section 631

allows taxpayers to elect to treat the cutting of timber as a sale or exchange of such timber. To be eligible to make this election, the taxpayer must own the timber or hold the contract right on the first day of the year and for more than one year. Furthermore, the timber must be cut for sale or for use in the taxpayer's trade or business.

two years ago, Alice loaned $4,000 to a friend. During the current year, the friend declares bankruptcy and the debt is entirely worthless. Assuming that Alice has no other gains and losses from the sale or exchange of capital assets during the year, how much can she deduct in the current year?

she deducts $3,000 in determining adjusted gross income (AGI) and has a STCL carry forward of $1,000.

Depreciation Recapture

the cumulative amount of depreciation that has been taken since the property was placed into service. This amount is generally taxed at the depreciation recapture tax rate when/if the property is sold

During the current year, Coastal Corporation has capital losses of $50,000 and no capital gains for the current year or the preceding three years. The corporation owns equipment purchased several years ago for $90,000 and depreciation deductions of $48,000 have been allowed. If Coastal sells the equipment for $72,000, what are the tax consequences of this 1245? & the differences if it was 1231?

the entire $30,000 ($72,000 - $42,000) gain, which is due to the depreciation deductions, is Section 1245 ordinary income. Without Section 1245, the $30,000 gain is a Section 1231 gain that could be offset by $30,000 of the corporation's capital loss. Note that Section 1245 does not apply to losses. If Costal Corporation sells the equipment in the above example for $40,000, a $2,000 ($40,000 - $42,000 basis) Section 1231 loss is recognized.

If a shareholder receives nontaxable stock dividends or stock rights, what is the holding period? What if he exercises the stock rights?

the holding period of the stock received as a dividend or the stock rights received includes the holding period for the stock owned by the shareholder. However, if the stock rights are exercised, the holding period for the stock purchased begins with the date of exercise.

What is the main purpose of Section 1245?

the purpose of Section 1245 is to eliminate an advantage taxpayers would have if they were able to reduce ordinary income by deducting depreciation and subsequently receive Section 1231 capital gain treatment when an asset was sold

Net Short-term Capital Gain (NSTCG)

when total STCGs for the tax year exceed total STCLs for that year, the excess is defined as NSTCG.

Non-corporate vs Corporate: A statutory maximum tax rate applicable to net capital gain

Non-corporate: 0%, 15%, and 20% Corporate: flat 21%

Non-corporate vs Corporate: Carryforward of capital losses

Non-corporate: indefinitely Corporate: five years as STCLs

Non-corporate vs Corporate: Carryback of capital losses

Non-corporate: no Corporate: three years as STCLs

Non-corporate vs Corporate: Offset of net capital losses against ordinary income

Non-corporate: up to $3,000 Corporate: no

Identifying the Principle Residence

In view of the advantages of excluding gain on the sale of a principal residence, a taxpayer contemplating a sale should satisfy all the requirements of Section 121. A taxpayer who owns and occupies more than one residence may have difficulty in identifying the principal residence. The principal residence is the one that the taxpayer occupies most of the time.

What was determined in the landmark decision (Corn Products Refining Co.) rendered by the Supreme Court?

It was determined that the sale of futures contracts related to the purchase of raw materials resulted in ordinary rather than capital gains and losses

How is lifestock considered section 1231 property?

Livestock held by the taxpayer for draft, breeding, dairy or sporting purposes is considered Section 1231 property if held for 12 months or more from the date of acquisition. However, cattle and horses must be held for 24 months or more from the date of acquisition to qualify as Section 1231 property.

The most common example of Section 1245 property is depreciable personal property such as what?

equipment. Automobiles, livestock, railroad grading and single-purpose agricultural or horticultural structures as well as intangible assets that are subject to amortization under Section 197 are Section 1245 properties.

An unharvested crop growing on land used in a trade or business is considered Section 1231 property if what?

if the crop and the land are both sold at the same time to the same person and the land is held for more than one year. Section 1231 does not apply to the sale or exchange of an unharvested crop if the taxpayer retains any right or option to reacquire the land.

The amount realized on the sale of the property is equal to the selling price less selling expenses. Selling expenses include what?

include commissions, advertising, deed preparation costs, and legal expenses incurred in connection with the sale.