Chapter 11 - Dispositions The amount realized by a taxpayer...

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Dispositions The amount realized by a taxpayer from a sale or disposition is the value of everything received in a transaction less selling costs. When the asset is acquired as a gift, the asset’s basis is the original basis of the asset if the FMV on the date of gift exceeds the initial basis, so the donor’s basis carries over to the done. But if the FMV on date of gift is less than the donor’s basis, then special dual basis rules apply. The donor uses the carry over basis if it sells for a gain and the FMV if it sells for a loss. If the assets sells for somewhere in-between the donor’s basis and the FMV at the date of sale, then the ’one’s basis at the time of sale is assumed to equal the selling price so the done does not recognize gain or loss. If the asset is inherited, then the basis is the FMV of the asset on the date of the descendant’s death. If the property was converted from person to business use then a special rule applies. The basis would then be dependent on if the asset appreciated or declined in value during the time the property was used personally. If the FMV is above the taxpayer’s basis, then the taxpayer’s basis will be used. If the FMV is below the tax payer’s basis, the FMV will be used. Realized gain or loss is calculated by subtracting the adjusted basis from the amount realized. So basically take the initial basis of the asset and subtract all related depreciation expenses and that is your adjusted basis. Amount realized is explained above. Character of Gain of Loss Ordinary assets are generally assets created or used in a taxpayer’s trade of business. Inventory is an ordinary asset because it is held for sale to customers in the ordinary course of business. Receivables are ordinary assets because they are generated from the sale of inventory. Other assets used in trade or business such as machinery and equipment are also ordinary assets as long as they are used in business for one year or less. When taxpayers sell ordinary assets at a gain, that gain is recognized as ordinary income taxed at ordinary rates. When an ordinary asset is sold at a loss, they can deduct the loss against other ordinary income. A capital assets is generally something held for investment (stock or bond), for the production of income, or for person use (your car, house, or personal computer). Whether or not an asset is a capital asset depends on how it is used. Generally, individual taxpayers prefer capital gains to ordinary income because certain capital gains are taxed at lower rates and capital gains can be used to offset capital losses that cannot be deducted against ordinary income. Individuals also prefer ordinary losses to capital losses because ordinary losses are deductible without limit while capital losses are limited to $3000 after netting with capital gains.
Corporate taxpayers prefer capital gains because capital gains can be used to offset capital losses.

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