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Property Transactions

Property Transactions. Gain or Loss and Basis. Gains/Losses from Property. Proceeds – adjusted basis = gain/loss Adjusted Basis: Generally Cost (unless gift, exchange, inheritance) + capital additions – depreciation, §179, casualty/theft loss taken to date

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Property Transactions

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  1. Property Transactions Gain or Loss and Basis

  2. Gains/Losses from Property • Proceeds – adjusted basis = gain/loss • Adjusted Basis: Generally Cost (unless gift, exchange, inheritance) + capital additions – depreciation, §179, casualty/theft loss taken to date • Includes exchange of common solely for preferred stock in same corporation valued at FMV • Real property traded for personal property: FMV • Exchanges of stock in different corporations: FMV • Exchange of partnership Interests: FMV

  3. 1. N sold a summer cabin to Y for $30,000 in cash and a recreational vehicle. Y had an adjusted basis in the RV of $15,000 at the time of the sale, although its fair market value was $22,000. N had an adjusted basis in the cabin of $44,000. Assume there were no selling costs. What was N's amount realized in the sale? a. $55,000 b. $45,000 c. $52,000 d. $44,000

  4. 2. T purchased the following lots of ZYX Corporation stock: 25 Shares Purchased 4/30/1998 Cost $1,800 40 Shares Purchased 5/20/1998 Cost $3,000 25 Shares Purchased 9/21/1998 Cost $2,000 T sold 70 shares in December, 1998, for $6,300, but was unable to identify specific shares to be sold by certificate number and date of purchase. What was T's adjusted basis in the shares sold? a. $5,200 b. $5,250 c. $5,360 d. $6,300

  5. When Basis Is Not Cost • If gift that has appreciated: use donor’s basis + gift tax paid on (appreciation/total taxable gift); holding period is donor’s date of purchase • If gift that has depreciated: use lower of donor’s basis or FMV at time of gift; holding period begins with gift • If inheritance: use step-up basis; holding period always long-term • If nontaxable exchange: substitute basis • If bargain purchase, use FMV

  6. 3. The adjusted basis to the recipient of property bequeathed by a decedent generally is which of the following? a. Fair market value on the valuation date of the decedent's estate. b. Adjusted basis to the decedent on the valuation date of his or her estate. c. Fair market value on the valuation date of the decedent's estate, less estate taxes paid on the transfer. Adjusted basis to the decedent on the valuation date of his or her estate, plus estate taxes paid on the transfer.

  7. Basket Purchase Allocation • Similar to GAAP treatment • Relative FMV • Goodwill figured last

  8. Gain/Loss Recognition • Sometimes, gain deferred (casualty gain reinvested) • Or not recognized (gain on sale of personal residence up to $250k single, $500k MFJ) • Sometimes loss not deductible (personal use assets) or limited/carried over (related party transactions, wash sales +/-30 day rule)

  9. Like-kind Exchanges • U.S. real property for U.S. real property (often using a 3rd party) • Personal property much closely match function of property given up • Property held for productive use or investment (excludes: inventory, investments, trusts; livestock of different sexes does not qualify) • If related party, 2-yr holding period • Need not be simultaneous exchange, but must be near-simultaneous identification of property to be exchanged • Mandatory treatment

  10. TV Tax Green Acres • Oliver Douglas and his wife trade a Manhattan penthouse for a farm in upstate New York. • Does did qualifies as a like-kind exchange? • Would trading a Mercedes and tractor swap qualify?

  11. Effect of Boot on Like-kind Exchanges • “Boot” is non-like-kind property, usually cash or assumed liability • If net boot received, gain recognized is lesser of realized gain or boot received. • Basis of boot received is FMV • Basis of like-kind property is substitute basis +/- net boot given +/- gain or loss recognized, or • Amount after tax that you’re out-of-pocket • Holding period for boot begins with exchange, like-kind property has carry-over holding period

  12. 6. Which of the following exchanges of property (used for business or investment purposes) are not like‑kind exchanges? a. Warehouse for condominium b. Beach house for yacht c. Cadillac business car for an Escort business car d. Apartment building for vacant lot

  13. Involuntary Conversions • From destruction, theft, seizure, (threat of) condemnation • Gains deferred to the extent of similar or related use replacement property purchased. • Exception: if condemned real property, only need be “like-kind” • Replacement must be no later than 2 tax years after year of gain (3 years if due to condemnation), with extensions sometimes granted • Loss recognition is mandatory

  14. Effect of Boot on Involuntary Conversions • “Boot” is non-like-kind property, usually cash or assumed liability • If net boot received, gain recognized is lesser of realized gain or boot received. • Basis of boot received is FMV • Basis of like-kind property is substitute basis +/- net boot given +/- gain or loss recognized, or • Amount after tax that you’re out-of-pocket • Holding period for boot begins with exchange, like-kind property has carry-over holding period

  15. 4. Which of the following is not considered an involuntary conversion? a. Voluntary sale of property after public announcement that it will be condemned for use as a highway right of way b. Weather damage that meets all tests for casualty loss treatment except the suddenness test c. Theft of property d. Actual condemnation of property because it was structurally unsuit­able for occupancy

  16. Gain/Loss on Sale of Residence • Loss not recognized – personal use asset • 1st - $250k/$500k MFJ gain on principal not recognized, once every 2 years, as liberally excepted (then pro-rated) • Principal residence in 2 of last 5 years • Depreciation from renting, home office recaptured • Applied before involuntary conversion deferral • May elect to forego

  17. TV Tax Fresh Prince of Bellaire • At the end of the series the judge sells the family residence • How much of the gain if any is excludable?

  18. 5. Which of the following is true about the gain excluded on the sale of a personal residence by certain individuals? a. The taxpayer generally must be at least 55 years of age on the date of sale. If husband and wife sell a jointly owned residence, both must be at least 55 years of age. b. The residence must have been used by the taxpayer as his/her person­al residence for at least five of the seven years preceding the sale. c. Any portion of gain in excess of the limit must be recognized. d. Only one residence qualifies for this exclusion during a person's lifetime.

  19. Other (Be Familiar w/ List, Not Details for Tax I) • Exchange of insurance policies • Transfer of pension • Exchange of property to form a Corporation or Partnership • Exchange of stock in qualified reorganization • Conversion of preferred to common stock • Sales of stock to employee stock ownership plans • Reacquisition of real property in foreclosure • Transfer of property between spouses (or incident to divorce) • Rollover of publicly traded securities into specialized small business investment co. • Rollover of qualified small business stock

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