IG_C13 - CHAPTER 13 PROPERTY TRANSACTIONS: DETERMINATION OF...

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Unformatted text preview: CHAPTER 13 PROPERTY TRANSACTIONS: DETERMINATION OF GAIN OR LOSS, BASIS CONSIDERATIONS, AND NONTAXABLE EXCHANGES LECTURE NOTES OVERVIEW OF PROPERTY TRANSACTIONS 1. The following models provide an overview of property transactions (see Concept Summary 13-1 in the text ). Model for Gains Amount realized Adjusted basis = Realized gain Postponed (deferred) gain Tax-free gain Capital gain = Recognized gain Ordinary income Model for Losses Amount realized Adjusted basis = Realized loss Postponed (deferred) loss 13-1 13-2 2009 Comprehensive Volume/Instructors Guide with Lecture Notes Disallowed loss Capital loss = Recognized loss Ordinary loss DETERMINATION OF GAIN OR LOSS 2. Realization of Gain or Loss. Useful Purposes for Determining . a. Realization normally is the ceiling on recognition . b. The amount of realized gain or loss is required in order to calculate the amount of the postponed gain or loss associated with a nontaxable exchange . (1) Such postponed gain or loss is required under one of the two basis calculation formulas in order to calculate the adjusted basis of the replacement property received in a nontaxable exchange. 3. Amount Realized . The amount realized is the sum of any money received plus the fair market value of other property received . a. The amount realized includes any liability on the property disposed of if the buyer assumes the liability or the property is sold subject to the liability . The amount of such liability is included in the amount realized even if the debt is nonrecourse and the amount of the debt is greater than the fair market value of the mortgaged property. b. The amount realized includes real property taxes under 164(d) which are imposed on the seller, but are paid by the buyer . c. The amount realized is reduced by selling expenses such as advertising, commissions, and legal fees associated with the sale or other disposition. ETHICAL AND EQUITABLE CONSIDERATIONS Whose Property Tax Bill (page 13-4) ? With proper legal advice, Sachin would have discovered that he would have to pay all of the $4,800 property tax bill for 2008. With this is mind, he could have negotiated a reduction of the purchase price to reflect some or all of the $4,000 obligation that related to Marthas period of ownership. As is stands, however, the $4,000 he is required to pay is Marthas obligation. Martha is permitted to deduct this amount rather than Sachin. Moreover, Sachin can increase his basis in the house by $4,000. But is the effect of incorrectly deducting $4,000 offset by incorrectly reporting $4,000 too much gain? [The basis adjustment was not made.] No, because there is a classification issue. The deduction involves ordinary income rates, while the recognized gain concerns capital gain rates. Thus, there is an obvious difference between a $4,000 deduction and $4,000 less capital gain! Property Transactions: Gain or Loss, Basis, Nontaxable Exchanges 13-3 4. Adjusted Basis . The adjusted basis is the tax basis of the property at the date of...
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IG_C13 - CHAPTER 13 PROPERTY TRANSACTIONS: DETERMINATION OF...

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