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Ind. IO Chap. 5 - 2008 - Chapter I:5 Property Transactions...

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Chapter I:5 Property Transactions - Capital Gains and Losses Learning Objectives After studying this chapter, the student should be able to 1. Determine the realized gain or loss from the sale or other disposition of property. 2. Determine the amount realized from the sale or other disposition of property. 3. Determine the basis of property. 4. Distinguish between capital assets and other assets. 5. Understand how capital gains and losses affect taxable income. 6. Recognize when a sale or an exchange has occurred. 7. Determine the holding period for an asset when a sale or disposition occurs. Areas of Greater Significance A solid knowledge of the adjusted basis computation and the concept of realized vs. recognized gain or loss is necessary for further tax study by the student. In addition to the applications in the study of individual taxation, many of the special rules for corporations and partnerships deal with the concepts of gain or loss recognition and adjusted basis. Areas of Lesser Significance In the interest of time, the instructor may determine that the following areas are best covered by student reading, rather than class discussion: 1. Tax treatment of capital gains and losses - corporate taxpayers 2. Compliance and procedural considerations Problem Areas for Students I:IO5-1
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The following areas may prove especially difficult for students: 1. Differentiating between realized gain or loss and recognized gain or loss. 2. Determining the basis of gift property, especially when the property has a different basis if sold for a gain, than if sold for a loss. 3. Understanding the tax definition of a capital asset, as compared with the financial definition of a capital asset. Highlights or Recent Tax Law Changes There are no new items of tax law that have changed since the 2007 edition of this chapter. Teaching Tips 1. The concepts in this chapter are key to several later chapters in this text and to the study of partnership and corporation taxation. Adjusted basis, realized gain or loss, and recognized gain or loss must be mastered by the students at this point in their tax study careers. Emphasize this urgency to the students and provide sufficient time in and/or out of class to answer student questions. 2. A significant rate preference for gain on sale or exchange of long-term capital assets has revitalized the reasons for knowing the capital asset rules. Spend time on how these special rules should affect transaction planning. Lecture Outline I. Determination of Gain or Loss A. Realized Gain or Loss (Examples I:5-2, I:5-3, I:5-4, I:5-5, I:5-8) 1. If a realizing event occurs (normally a sale or exchange), the amount realized less the asset's adjusted basis will equal realized gain or loss. 2. Amount realized consists of money and FMV of property received plus taxpayer's debt assumed by the buyer less costs of sale (i.e., commissions).
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