question

dispositions

answer

assets can be disposed of in many ways: TP can sell an asset, donate it to charity, trade it for a similar asset, take it to the landfill, or have it destroyed in a natural disaster, when an asset is disposed of it triggers a realization event for tax purposes (to determine gain/loss, TP must know amount realized and the adjusted basis of the asset being disposed of at time of disposition)

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amount realized

answer

= ((any cash received for asset + FMV of any other property received for asset+ buyers assumption of sellers liabilities (debt relief)) - selling expenses) this occurs from sale or other form of disposition of an asset, it is everything of value received from the buyer (including assumption of debt/debt relief) less any selling costs

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adjusted basis

answer

= initial/starting basis - accumulated cost recovery deductions allowed or allowable

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initial basis for assets converted from personal to business use

answer

lesser of: (1) FMV on date of conversion->if asset has depreciated or (2) basis on date of conversion->if asset has appreciated, this is to prevent TP from converting a personal loss into a business loss

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declining assets converted to business use

answer

if sales price falls between the adjusted basis for loss and adjusted basis for gain, then adjusted basis for realization is assumed to be sales price

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adjusted basis for loss on declining value asset converted

answer

FMV at date of conversion - accumulated depreciation

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adjusted basis for gain on declining value asset converted

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adjusted basis at date of conversion - accumulated depreciation

question

initial basis when asset is received as gift

answer

carryover basis: donors adjusted basis, dual rules apply when assets FMV is less than donors basis at gift date

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initial basis of gifted asset which has declined in value

answer

dual basis means that the gift property has one initial basis to the donee for determining gains and a different basis for determining losses when the donee disposes of the property, if asset is later sold for a gain->carryover basis, if asset is later sold for a loss->FMV on date of gift, if the asset sells at a price between the donor's basis and the FMV at the date of the gift then donees basis is assumed to be the selling price (prevents the transfer of unrealized losses from one TP to another by gift)

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initial basis of inherited prperty

answer

usually this is the step up basis: FMV

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realized gain or loss

answer

the amount of gain/loss taxpayers realize on a sale or other disposition of assets is simply the amount they realize minus their adjusted basis in the disposed asset

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realized gain

answer

amount realized > adjusted basis in disposed asset

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realized loss

answer

adjusted basis in disposed asset > amount realized

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recognizing realized gains/loss on disposition

answer

TP realizing gains/losses during the year must recognize the gains/losses (this will affect their gross income) in certain circumstances: TP may be allowed to defer recognition of gains to subsequent periods or permanently exclude gains, TP may be required to defer losses to later periods or losses might be permanently disallowed

question

character of gain/loss

answer

every gain or loss is ultimately characterized as a short or long term and capital or ordinary based on the type of asset, there are some special rules but eventually every gain/loss received this treatment, this is important because it determines the tax treatment

question

character of asset

answer

assets are characterized upon disposition based on certain features such as length of use since purchase (holding period) or how the asset was used in business, all assets may be characterized as: trade or business, held for investment/personal use, and inventory/accounts receivable

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holding period

answer

the length of time the business owned the asset, if greater than 1 year: long term, if less than 1 year: short term

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short term trade or business, inventory, accounts receivable, and long term inventory and accounts receivable

answer

the sale of these assets always results in ordinary gain or loss

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long term trade or business

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the sale of these assets will result in a S. 1231 gain or loss with special rules applying

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investment/personal use asset

answer

characterized as short or long term capital asset (however personal use assets are taxable capital gains but losses on the sale of personal use assets aren't deductible) and short term capital gains are always taxed at ordinary rates

question

ordinary assets

answer

generally these are assets created or used in the TP trade or business, assets are characterized as this if used in a business for one year or less (ordinary gains are taxed normally and ordinary losses are fully deductible against income)

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capital assets

answer

this is any asset other than: property used in trade or business or receivables acquired ina business from the sale of services/property, inventory or stock in trade held for sale in the ordinary course of business to customers, real and depreciable property used in trade or business, copy rights and artistic literary compositions created by the TP or acquired by gift or non taxable exchange from the creator, and US government publications, for assets to receive this character depends on the use of the asset by the TP: generally this is an asset held for investment (stocks and bonds) for the production of income (a for profit activity that doesn't rise to the level of trade or business) or held for personal use (can only deduct 3K of net capital losses)

question

section 1231 asset

answer

depreciable assets and land used in trade or business (including rental property) held by TP for more than one year (gain or loss is characterized as this and then ultimately as ordinary or capital), all assets sold during the year that qualify as this are netted together and net gain is capital but net loss is ordinary, land is always this if it qualifies

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exceptions for 1231

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there are three main exceptions that may change the character of a net 1231 gain, includes: depreciation recapture, related parties transactions, and the look back rule

question

depreciation recapture

answer

(when depreciation deductions reduce the adjusted basis by more than the actual economic decline in value) this will only change the character of the gain (not the amount) all 1231 assets (except land) are subject to cost recovery, so sometimes a 1231 asset can sell for a gain when there was no appreciation and sometimes a decline in value, this concept potentially applies to gains (never losses) on the sale of depreciable or amortizable business property and can change the character (or portion thereof) of the gain from 1231 to ordinary, method for computing this depends on the type of 1231 asset the TP is selling

question

types of 1231 assets

answer

long term assets used in trade or business are broadly characterized as 1231 assets but there are three parts to this: pure 1231 asset (land), 1245 assets, and 1250 assets, these asset classes exist for the purposes of re-characterizing the gains relating to the sale of these assets as ordinary

question

S. 1245 asset

answer

consists of tangible personal property (machines, equipment, and automobiles) and amortizable intangible personal property (patents, copyrights, and purchased goodwill), gain from the sale of this asset is characterized as ordinary to the extent the gain was created by cost recovery deductions

question

1245 gain

answer

amount of gain characterized as ordinary income will be the lesser of: (1) recognized gain on the sale or (2) total accumulated cost recovery deductions on the asset, if the gain>accumulated depreciation->excess will be 1231 gain,

question

S. 1250 asset

answer

this includes depreciable real property (office building or warehouse)

question

1250 gain

answer

(only applies to property held less than one year) when 1250 property is sold at a gain, the amount of gain recaptured as ordinary income is limited to additional depreciation (the excess of accelerated depreciation deductions on the property over the amount that would have been deducted if the TP has used the straight line method) taken using MACRS (however all property now is forced to use straight line)

question

S. 291 recapture rules

answer

(for gains on disposition of real property) applies to corporations, portion of gain characterized as ordinary: 20% of the lesser of the recognized gain or accumulated depreciation and the remainder of the recognized gain is 1231 gain

question

unrecaptured 1250 gains

answer

the portion of a gain, from the sale of 1250 assets, caused by depreciation deductions reducing the basis is taxed at a maximum rate of 25% (taxed at the ordinary rate if the ordinary rate is lower than 25%) the rest of the portion of the gain receives preferential treatment, this max of 25% only applies after the netting process and the amount taxed at 25 cannot exceed the amount of the TP net 1231 gain

question

related party transactions

answer

when a TP sells property to a related person and the property is depreciable property to the buyer, the entire gain on the sale is characterized as ordinary income to the seller, ordinary income is the amount of depreciation deductions the buyer will receive in the future (when both this and recapture apply, use recapture first)

question

calculating net 1231 gain/loss

answer

after recharacterizing 1231 gain as ordinary income under 1245 and 291 recapture and performing the related party recharacterization, the remaining 1231 gains and losses are netted together and then 1231 look back rule is applied (so that TP can't plan all their gains and losses for one particular year)

question

S. 1231 look-back rule

answer

this is a nondepreciation recapture rule that applies to the character but not the amount of gain, this requires TP to recharacterize net 1231 gains as ordinary gains to the extent of the prior 5 years net nonrecaptured 1231 losses,

question

nonrecaptured 1231 losses

answer

losses that were deducted as ordinary losses that have not caused subsequent net 1231 gains to be recharacterized as ordinary income in a subsequent year

question

nonrecognition transaction

answer

generally gains and losses are recognized immediately, sometimes for gains the transaction resulting in the gain doesn't provide the TP with wherewithal to pay the taxes, these include: like kind exchanges, involuntary conversions, installment sales, etc...

question

like kind exchange

answer

when a TP trades assets for similar assets (real property is always this when used in business or investment) in trade or business or investment, realized gains/losses from these transactions may be deferred under certain circumstances

question

like kind property

answer

must meet certain definitions: the property is exchanged "solely for like kind" property, both the property given up and the property received in the exchange by the TP are either "used in trade or business" or are "held for investment" by the TP, and the "exchange" must meet certain time restrictions

question

like kind personal property

answer

must be in the same asset class to qualify as this, the asset must be used in a similar fashion

question

ineligible like kind property

answer

this includes: inventory held for resale (including land), most financial instruments (such as stocks, bonds, or notes), domestic property exchanged for foreign property, and partnership interests

question

personal use of like kind property

answer

TP can ony exchange property in a qualifying like kind exchange if the TP used the transferred property in a trade or business or for investment and the TP will use the property received in the exchange in the same fashion, so one party to the exchange can qualify for like kind treatment but the other party may not

question

timing requirements for a like kind exchange

answer

a delay in the transaction can occur when a third party intermediary is used, to receive like kind treatment the TP must: (1) identify the like kind replacement property (can identify 3 options in case some fall through) within 45 days after transferring the property given up in the exchange and (2) receive the replacement like kind property within 180 days (or the due date of the tax return including extensions) after the TP initially transfers property in the exchange

question

like kind property exchanged solely for like kind property

answer

if the property qualifies as like kind, then the full gain/loss may be deferred and basis of the property received will equal the adjusted basis of the property transferred (exchanged basis), gain/loss is recognized when property is sold in taxable transaction

question

like kind property and boot

answer

(only affects gains, losses are always deferred) when like kind property is traded for a greater value like kind property, then boot (additional non-like kind property or cash) may be received to compensate, this boot must be recognized as a gain to the extent there was a gain and not more than the value of the boot (gain may be subject to recapture rules)

question

basis of like kind property received

answer

=adjusted basis of like kind property transferred + adjusted basis of boot given + gain recognized - FMV of boot received - loss recognized OR FMV of like kind property received - deferred gain/+deferred loss

question

basis of boot received

answer

FMV of boot, when boot is transferred and received, TP recognizes any realized gain to the extent of the boot received (but when transferring liabilities as boots, this may be netted)

question

involuntary conversions

answer

a property disposition may be outside of the TP control (property being wholly or partially destroyed by a natural disaster or accident, stolen, condemned, or seized via eminent domain) a gain may occur because of replacement property or insurance proceeds in excess of their basis in the converted property, gain is deferred when appreciated property is converted, basis is exchanged from old property to new property (when directly converted), TP recognize realized gain to the extent that they do not reinvest the reimbursement proceeds in qualified property, TP recognized gain on involuntary conversion of indirect property= the lesser of: (1) the gain realized on the conversion or (2) the amount of reimbursement the TP does not reinvest in qualified property, recapture can apply to the gain, and character of gain depends on nature of property, losses are deductible as casualty losses

question

qualified replacement property

answer

for both personal and real property, this is more narrowly defined than like kind property, property must be similar and related in service or use to qualify

question

basis of replacement property

answer

=FMV of new property - deferred gain on the conversion

question

installment sales

answer

sales of property where the seller receives the sales proceesd in more than one period, must recognize a portion of gain on each installment payment received (payment x gross profit percentage), and the character of the gain/loss is determined by the asset sold, this treatment doesn't apply to marketable securities or inventory, depreciation recapture must occur in year of sale not over a period of time, recapture related gains are added to the adjusted basis of the property sold to determine the gross profit percentage

question

gross profit percentage

answer

gain realized/amount realized

question

related party loss disallowance rules

answer

losses on sales to related parties aren't deductible, but the buyer (related party) may deduct these disallowed losses later when they sell the asset to an unrelated third party, if sold at a gain greater than the disallowed loss->the entire disallowed loss is deductible by related party buyer, if disallowed loss>gain, loss is only deductible to the extent of gain, if the related party buyer sells asset for a loss (former disallowed loss is lost)

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