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70 Cards in this Set
- Front
- Back
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What are examples of noncapital assets?
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ACID 1)jAccounts or notes receivables; 2)copyrights and creative works held by the creator; 3) Inventory and 4) Depreciable personal and real property used by a business
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What is the basis of loss property received as a gift and subsequently sold?
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Gift of loss property (fmv<Donor basis) If donee sales property a higherj price that donor's adjusted tax basis, donnee determines gain according to donor's asis. HP carries over to donee and gift tax is not allocated to the donees basis. If the donnee sells at lower than donors FMV, hp does NOT carry over to donee and no gift tax is allocated. If dpmmee se;;s between donors FMV and basis, no gian orloss is recognized.
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Example of gifting property
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Gift of land with FMV of $700K and donor basis of $800 purchased 5 years ago. Sold 1 week after gift
If donee sells property sells property at $740K 0 gain loss and holding period is irrelevant. If donee sold land for $850, $50 LTG with donor's holding period If donee sells it for $600K, STCL of $100, as holding period began anew at the time of the gift. |
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What are the four most popular recovery periods under MACRS, Modified Accelerated Cost Recovery System
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Autos 5 years
Office furniture and fix 7 years Residential rental pro(sec1250) 27 1/2 years Commercial rental prop(sec1250) 39 years |
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What are the two types of depletion methods?
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Cost depletion --asset basis/recoverable units
and percentage depletion using statutory percentage applied to gross income |
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What is section 1231 property
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Any depreciable real property or personal property used in a trade or business or for the production of income. Any 1231 property sold at a gain is afforded CG treatment. Any 1231 sold at a loss is ordinary loss.
A TP who has a net 1231 gain for the current year must report the gain as ordinary income to the extent of any 1231 losses reported within the past five taxable years. |
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What is Section 1245 property
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Depreciable personal property (moveable) used in a trade or business. If sold below basis=Ordinary loss
Btwn basis and purchase price = ordinary income Above purchase price=capital gain |
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What is section 1250 property?
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Long term Depreciable real property Non moveable includes elevators) used in a trade or business.--Recaptures at OI rates the depreciation deducted by tp over what would have been deducted at straight line. Prevents TP from receiving benefits of both accelerated depreciation and LTCG
If sold lower than basis= ordinary loss If sold at gain accelerated depr amount=ordinary income SL depreciation taxed at 25% cg rate Amount tht exceeds purchase price= LTCG |
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Demonstrate an example of a section 1250 recapture:
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TP has owned a building for several years, cost =$3million, accelerated depreciation=$1.4 million, straight line depreciation would have been $1 million. TP sales building for $3.5 million. Profit=$1.9 million
OI $400K 25% depreciation recapture rate $1,000 LTCG $500K |
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Explain installment sale recapture
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Gain recaptured under section 1245 or section 1250 is not eligible for installment sale treatment. Consequently the ordinary income recognized in the year of sale is added to the property's basis and this adjusted basis is used in determining gross profit for the sale.
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How are organizational and startup costs treated for tax purposes?
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a corporation may elect to deduct up to $5K of any organizational expenses and up to $5K of any startup costs it incurs in the tax year in which it gegins business.This deduction must be reduced by the amount which the expenses exceed $50K. Any remaining balance must be amortized over a 180 month period
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What is the cost basis of inherited property?
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In all years, except 2010, the cost basis stepped up to the fair market value on the date of the decedent's death.
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What is Section 179 property
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DEPRECIABLE property that may be totally expenses. The maximum write off of section 179 is $500 but limited to taxable income..
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When is the SEc 179 deduction phaseout
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If total amount of property placed in service for a given year is above $2 million, the allowance is reduced dollar for dollar for any amount over $2 million. No carryover is allowed.
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What distinguishes a repair from a capital expenditure
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A repair does not materially add to the value of the property nor appreciably prolong the life of the property. A repair is an expense that maintains the property in its normal operating state.
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What is it prohibited to use accelerated methods of depreciation
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When business usage is less than 50%
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What intangible assets must be amortized over 15 years (180 months)
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goodwill, trademarks, convenants not to compete, copyrights and patents.
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How does a cash-basis tp treat Series EE bonds bonds
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A cash basis tp has the choice to either defer income recognition until maturity or redemption or to include in gross income the annual increment in redemption EE bonds must be purchased in name of parent in order to use tax free for education
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How does a cash-basis tp treat OID bonds (except for series E) bonds
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OID must be reported when earned regardless of the accounting method.
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What are exceptions for accrual basis TPs
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Prepaid income like rents and interest may not be deferred by accrual basis TP. Deferral of advance payments for services cannot be beyond current and following tax year.
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When can completed contract method be used
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Only for home construction contracts and small contractors.
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What is excluded from sec 1231 property
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CAP C SHITCapital assets; casualty losses that exceed casualty gains; Short term property, InTangibles
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What are the CG rates for collectibles
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Lessor of 28% or tax bracket
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What are the CG rates for section 1250 gain (depreciable real property)
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25%
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How are qualifying dividend income taxed
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at individuals capital gains rate
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How did the American Taxpayer Relief Act of 2012 modify capital gains tax rates
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Beginning in 2013, the top rate for capital gains and dividends will be 20% for TPs with incomes exceeding $400K. For TPx whose ordinary income is taxed at a rate below 25%, capital gains and dividends will be 0%. The rate will be 18.8% for those subject to the 3.8 Medicare surtax (MAGI is $$250K or over)
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What happens if a capital loss remains after netting
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$3K of net capital loss may be used to offset ordinary income in any tax year. Individuals may generally carryover the loss indefinitely. But they do not carryover to the estate or to a beneficiary. In some cases (using related party rules) loss may be disallowed entirely
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What is the basis of appreciated property given as a gift when gift taxes have been paid
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Donor's basis + unrealized appreciation/FMV less exclusion amount used multiplied by gift tax paid
in other words it is the basis plus the portion of gift tax attributable to unrealized appreciation |
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What are the double basis rules for gifts of loss property and there is a gain on the donee's disposition
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If donee subsequently disposes of the property at a higher rice than the donor;s basis, donee determines the gain using donors carryover BASIS and holding period carries over. The gift tax is not allocated to the donee's basis when the property is subsequently disposed of.
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What are the double basis rules for gifts of loss prooerty and there is a loss on the donee's disposition
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If donee disposes the property at a lower price than the FMV of the property at time of gift, donee determines the loss on the basis of the FMV at the time of the gift.The donors holding period does NOT carryover. The gift tax is not allocated to the donee's basis
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What are the double basis rules for gifts of loss property and the donnee sells the gifted property at a price betwn the donors basis and the FMV
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NO gain or loss is recognized
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What happens to the basis if a donee dies and bequeaths property back to donor
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No step up in basis
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What are the holding period exceptions applied to futures contracts including foreign currency contracts, non-equity options (index) and dealer equity options
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Mark to market rules--contract is treated as if it were sold on the last day of the taxable year. CG or loss is treated as 40% st and 60% LT
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How are losses from sales to related parties treated
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Disallowed. However if the subsequent sale results in a gain, this gain can be reduced by the previous disallowed loss.
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What is the basis for the sale of personal property converted to business property
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Double basis rule applies. Basis for loss is FMV at date of conversion. Basis for gain=adjusted basis
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Is it an installment sale even if only one payment is made after the close of the year of sale
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Yes
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When CANT installment treatment be used
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Ordinary income property and securities. Recaptured depreciation is not eligible for installment sale.
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How is gain reported for installment sales
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Gain is based on amount of cash received and the GP percentage
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When must worthless securities be recognized
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last day of tax year
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What is a Section 1031 exchange and what is not considered like kind
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nontaxable exchange for like kind Business property. Items not considered like kind are person assets, ordinary assets (inventory), securities, livestock of different sexes, foreign for domestic real estate
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What is realized gain on a sec 1031 like kind exchange
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FMV Received
- Basis of property GIEN - Boot PAID + Boot RECEIVED = Realized Gain |
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What is the gain RECOGNIZED in a sec 1031 like kind xchange
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LESSER of realized gain or boot RECEIVED
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What happens if like kind property is exchanged with a relate party
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The TP must not dispose of the like kind property received in the xchabge for 2 years (ecept death andinvoluntary conversions) If sold within 2 years, related parties must recognize gain
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What are some other requirements of sec 1031 like kind xchange
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property to be received must be identified in writing with 45 days after xferred property is surrendered. Property in xchange must be received on or before 180 days or due date of tax return for the year the property is given up
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What is a sec 1033 involuntary conversion
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allows TP who incurs an involuntary conversion to postpone recognition of gain realized. Typically amount realized is the amount received as compensation for roperty--not severance damages.
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What two tests must the replacement property pass
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Functional use must be the SAME. Taxpayer's use must be in SIMILAR endeavor.
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What is the time limitation on replacement for a section 1033 involuntary conversion
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2 years
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What is section 121 sale of personal residence
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universal of exclusion of $250K of gain on sale of residence, $500 MFJ. Exclusion can be used once every two years. IT IS NOT REQUIRED to reinvest in a new residence to take adv of gain exclusion.
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What are requirements of Section 121 sale of personal residence
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Home must have been owned and used a principal residence for at least 2 of 5 years before sale (not necessarily consecutive). Both spouse must meet use requirement.. If tp fails to meet ownership and use tests because of change in employment or health, tp may be entitled to a partial exclusion based on the shorter of either use or ownership
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What losses are recognized when selling a personal residence
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None.
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What happens if nonqualified use exists in a sec 121 sale of personal residence
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Gain must be allocated to period of nonqualified use divided by period of ownership
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How is depreciation recaptured in section 1250 repature
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Accelerated depreciation=ordinary income, straight line=25% and the balance=capital gain
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What happens when owner of sec 1250 recapture dies-
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asset receives a step up in basis--no recapture for heirs
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What happens when owner of sec 1250 recapture gifts property
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recapture potential carries over to donee
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What happens when owner of sec 1250 recapture property donates it to a charity
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the depreciation that wold have been treated as ordinary income, reduces the amount of charitable contribution deduction of donor
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What is the 5-year look back for sec 1231 gain
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If tp has net gain, it must be reported as odinary income to the extent of section 1231 losses reported within the past 5 taxable years.
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when stocks are sold what is the basis
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FIFO or specific identification
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Molly, a dermatologist, earns $500,000 per year. She wants to make a donation to her favorite charity, the Human Fund. She is willing to donate the following assets:
Description FMV Basis Comments Cash $30,000 $30,000 Earns 3% Utility Company Stock $29,000/ $10,000 Pays 7% dividend; held long term Municipal Bond$31,000 $33,000 Pays 4% interest; held short term Growth Mutual Fund$30,000 $27,000 Pays 5% dividend; held for five months Which of the following assets would be the best from an income tax perspective for Molly to donate to charity? |
Utility company stock is the correct choice. Low basis--Donor can deduct FMV because it is long term property
Cash is not the best type of donation. Although cash can be donated to charity, highly appreciated assets are typically a preferable donation. If Molly were to donate the cash to charity and sell the stock, she would recognize a large capital gain. Municipal bond is incorrect, because the municipal bond is worth less than what Molly paid. Her deduction would be limited to the lower fair market value. She would probably be better off selling the property and recognizing the loss, rather than donating this asset to charity. Growth mutual fund is incorrect because the growth mutual fund was held short term, Molly would only get a deduction for the basis in the property. |
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How do you calculate the new basis for a property received in sec 1031 xchange
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Realized gain
LESS Recognized Gain = Realized but not recognized gain FMV of property received less Realized but not recognized gain = new basis. |
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When do you recognize gain in a sec 1033 involuntary conversion
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If you invest less than sales/reimbursement proceeds
Also if you reinvest mire than the proceeds, your basis will change by the amount in excess of the proceeds received (and vice versa) |
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What is the basis of appreciated property received as a gift and subsequently sold?
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The basis is the carryover basis. If sold at a gain, basis is adjusted by the portion of gift tax related to the appreciation
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How is sec 1231 gains and losses treated
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LTCG. Gains are netted. Losses are ordinary loss (see 5 year look back rule)
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What is sec 1245
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Requires any recognized gain to be treate as ordinary income to the extent of depreciation taken on property disposed of up to the gain recognized. Does not apply is rthe property is disposed of at a loss
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What is the purpose of sec 1250
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Prevents tp from receiving benefits of both accelerated depreciation and long term capital gain
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What are exceptions to 1245 and 1250
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Gifts--the recapture potential carries over to the donee,
death--because of step up, charitable xfers--that recaptured amount that would have been treated as ordinary income if sold at fmv reduces the amount of charitable contribution deduction Like kind xchange--carries over |
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What are the two types of statutory stock options
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ISO, incentive stock options and ESPPs employee stock purchase plans
The tax adv of statutory options is that income isn not reported until the stock is sold. Bargain element on ISO is atax preference item for AMT TP must hold stock 1E, 2G |
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Under what situations is an asset's basis determined by something other than cost
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1)property in exchange for services
Basis after a casualty loss-basis is increased by amount spent on repairs for restoration Basis after mortgage assumption Basis after involuntary conversion--basisj of replacement property is same as converted property Basis of property t/f from spouse-same as spouse |
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What is the basis of inherited property
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generally the FMV at DOD or alternative date (6 mos)
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What is the basis of property received as a gift
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Generally=basis of donor
If FMV is less than donor's basis, donee's basis for gain is the overpriced basis. However, donee's basis for loss is the lower FMV as of date of gift |
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If the tp cannot determine the basis of a stock, what basis will the IRS deem it to be
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zero
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