What is the basic calculation for basis in property?
Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis.
Note: Taxes and interest related to the time when a taxpayer did not own the property are not deductible; they are added to basis.
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What is the recipient or donee’s basis on gifted property?
Sold at a gain: use donor’s basis
Sold at a loss: use lesser of donor’s basis or FMV at time of distribution
Sold in between donor’s basis and FMV: No gain or loss
What is the basis and holding period of inherited property?
The basis and holding period of inherited property is FMV at the date of death or alternate valuation date (6 months later).
- If the alternate date is elected AND the property is sold before the 6-month window, use FMV at the date of death.
- Property inherited is LTCG property regardless of how long it is held by the recipient.
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock.
What property is eligible for like-kind exchange treatment?
Real for real business property only.
US property only.
Note: Under TCJA, personal property for personal property like-kind exchanges are not allowed.
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
In a like-kind exchange, how is it handled if a netting of mortgages results in net boot paid?
- Do not subtract the boot paid amount from the cash received.
- Ignore the boot paid amount from the mortgage completely.
What is an involuntary conversion? When does it not result in a gain?
It occurs when you receive money for a property involuntarily converted.
There is no gain if you reinvest the proceeds completely.
If proceeds not completely reinvested, the gain is lesser of realized gain or amount not reinvested.
What are the requirements for the exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years.
Loss on sale of a home is not deductible.
What is a wash sale?
- 30-Day rule applies
- The disallowed loss adds to the basis of the new stock.
- New stock takes on the date of acquisition of old stock.
Who is considered a related party in a property transaction? How does it affect the transaction?
Who are related parties in a property transaction:
- Ancestors
- Siblings
- Spouse
- Descendants
- Corporation or Partnership
- If 50+% shareholder
- Note: In-laws are NOT related parties.
How does it affect the transaction?
- Seller
- Can’t take a loss on a related party sale
- Gain is always recognized.
- Related party
- Gets disallowed loss when sold
- Holding period begins when acquired
How are capital losses taken in a corporation?
Capital losses only offset capital gains.
Carryback 3 years - if you elect not to carryback, you lost the option in the future.
Carry forward 5 years - only as STCL.
What assets are NOT capital assets?
Assets that are not capital assets include:
- Inventory
- Business interest
- Accounts Receivable
- Covenant not to compete
- Goodwill is a capital asset
What are the steps in applying a capital gain or loss?
How to apply a capital gain or loss:
- Net all STCG and STCL.
- Net all LTCG and LTCL
- Add together
- Deduct $3,000
How much ordinary income can be offset by an individual’s capital losses?
$3,000 per year. Unused is carried forward and taken $3,000 each year.
No carryback is allowed.
Which property is governed by section 1231?
Section 1231 governs Real or Personal Business Property held more than a year.
Inventory is never 1231 Property.
How are section 1231 gains and losses handled?
Casualty Losses on 1231 Property - Net the losses
- Net Loss = Ordinary Loss
- Net Gain = Combine with other 1231 Gains
1231 Net Loss - If 1231 Losses exceed gains, treat as Ordinary Loss
1231 Net Gain - If 1231 Gains exceed losses, treat at LTCG
- 1231 Gain = LTCG
- 1231 Loss = Ordinary Loss
How is section 1245 depreciation recapture handled; and when does it apply?
To the extent of depreciation, treat as ordinary gain.
Remainder is 1231 gain, which is LTCG - There are no 1245 Losses.
1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG
1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary
What property qualifies for section 1250 treatment; and how are gains/losses handled?
1250 property is Real Estate.
Use 1250 for Gain only. For losses, use 1231.
Individuals: Post-1986 property with a gain is 1231 LTCG.
If Straight Line depreciation is used, don’t use 1250 - Entire gain is 1231.
Corps: Section 291 requires 20% of depreciation classified as ordinary gain.
Remainder is 1231 LTCG.
When are 1231, 1245 and 1250 gains or losses always ordinary?
They are always ordinary when the asset is held less than one year.
