9
Acquisitions Chapter of Property
Preview of Coming Attractions
y Chapter 9 begins four chapters dealing with property
3Acquisition (Chapter 9) 3Depreciation (Chapter 10) 3Disposition (Chapter 11) 3Special Issues (Chapter 12)
9-2
Tax Definition of Property The term property refers to long-lived assets owned by a taxpayer. The amount invested in an asset is the propertys basis.
9-3
Concept Review Under the capital recovery concept, a propertys basis may be recovered before any taxable income is realized from disposal of property.
9-4
Classes of Property
Property is classified by both its use and its type.
9-5
Use of Property
u Property is used for
Trade or business, Production of income (investment), or Personal purposes
u The same property may be used differently by different taxpayers
9-6
Types of Property
y All property may be classified by type as either tangible or intangible
3Intangible property lacks physical substance and has only an economic existence 3Tangible property has physical substance
I Tangible real property (realty) consists of land and structures permanently attached to land I Tangible personal property (personalty) is all other tangible property
9-7
Property Investment Cycle
Property Acquisition Period of Use Property Disposition
Initial Basis
plus additional capital
minus capital recoveries
Adjusted Basis
9-8
Increases in Basis
y There are two broad categories of increases
Additional capital investments
I Capital expenditures I Costs of defending ownership I Special assessments
Reinvestment of income from the property
I Taxable income from conduit entities
9-9
Decreases in Basis
y There are three broad categories of decreases
Annual tax deductions for cost recovery
I Depreciation, depletion or amortization I Losses from conduit entities
Disposition of all or part of the property Capital recovery due to income exclusion
9-10
Basis in Conduit Entities
y Basis in a conduit entity is adjusted yearly for items passed through to owners
3Increased for additional capital invested, taxable and nontaxable income, and owners share of entity liabilities 3Decreased for deductible or nondeductible expenses, cash or property distributed to the owner, and owners share of liability reductions
9-11
Property Dispositions
Amount Realized minus: Adjusted Basis
Realized Gain
Realized Loss
Recognized Gain
Recognized Loss
9-12
Initial Basis
Amount invested =
Cash paid, + FMV of property or services given + Increases in liabilities related to the purchase + Any cost incurred to get the asset ready for its intended use
9-13
Basis in Bargain Purchase
y The all-inclusive income concept requires income recognition equal to the difference between an assets FMV and its sales price y The assets basis = amount paid plus the amount of income recognized
9-14
Purchase of Multiple Assets
y Total basis is allocated between assets based on the relative FMV of each
9-15
Purchase of Assets of a Business
y Purchase price is allocated to individual assets by their FMVs or through specific agreement y Excess purchase of price over FMV of assets is considered Goodwill y Purchase of corporate stock does not confer ownership of the business assets
9-16
Basis in Constructed Assets
Basis includes y Direct construction costs
3Actual costs of physical construction
y Indirect construction costs
3General costs of the business that support the construction
I For example: interest, taxes, equipment depreciation, general admin., etc.
9-17
Basis of Property Acquired by Gift
On the date of gift, compare FMV of property to the donors basis. If FMV > donors basis
3Basis in the property is the donors basis plus any gift tax paid on net appreciation
9-18
Basis of Property Acquired by Gift (continued)
If Donors basis > FMV y Basis is determined when property is eventually sold
3If sold for more than donors basis, use donors basis (gain) 3If sold for less than FMV, use FMV as basis (loss) 3If sold for an amount between the two, use sales price as basis (no gain or loss)
9-19
Holding Period for Property Acquired by Gift
y If donors basis is used, holding period carrys over and begins on the donors acquisition date y If FMV is used, holding period begins on the date of gift
9-20
Basis of Property Acquired by Inheritance yThree dates are important
3Primary valuation date is the date of death 3Alternate valuation date is six months after the date of death 3Distribution date is the date a beneficiary receives the property
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Basis of Property Acquired by Inheritance (continued)
y Basis is generally the FMV of the property on the primary valuation date y If the estate is valued on the alternate valuation date
3Basis is the FMV of the property on the earliest date received, either
I Date of distribution, or I Alternate valuation date
9-22
Holding Period of Property Acquired by Inheritance
The holding period for property acquired by inheritance is automatically long term.
9-23
Basis in Property Converted From Personal to Business Use
On the date of conversion, compare the assets personal-use basis to its FMV. y If FMV > personal basis
3Personal basis is used for depreciation and gain or loss calculations
9-24
Basis in Property Converted From Personal to Business Use
y If Personal basis > FMV
3Use FMV for depreciation 3Basis for sale is determined when the property is sold
I If sold for > personal basis, use personal basis: (gain) I If sold for < FMV, use FMV: (loss) I If sold for an amount between the two, no gain or loss is recognized
9-25
Basis in Securities Stock Dividends
Stock dividends are generally nontaxable dividends.
Basis per share = Original cost Total shares held after dividend
Stock dividends become taxable when taxpayers may receive cash instead of shares. Income = FMV of stock at distribution.
9-26
Basis in Securities Wash Sales
A wash sale occurs when a security sold at a loss is replaced with a substantially similar security +/- 30 days from the sale. y Loss is not deductible under the substance-over-form doctrine y Nondeductible loss amount is added to the basis of the replacement security
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