Chapter 8 - Chapter 8 Basis -Original Basis= the starting...

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Chapter 8 Basis -Original Basis= the starting tax basis in the property. -Cost basis usually equals purchase price -Substituted basis where the transaction was through gift or inheritance or involved some tax deferral -Adjusted Basis (AB)= the current tax basis in property. Holding Period -The period of ownership attributed to the holder of the property. Important in determination of long-term versus short-term for purposes of capital gain tax rate preferences. -For a fully taxable transaction (by outright purchase or otherwise, the holding period starts over on the date of the transaction) -For gifts of tax-deferred transactions, the holding period before the transaction “tacks” Unrealized Gains/Loss -Unrealized Gain/Loss -Mere appreciation or decline in value while holding the asset. -Unrealized gains and losses are neither realized nor recognized -Ex) brokerage reports, mutual fund statements, retirement statements Realized Gains/Loss -Sale or exchange of property results in realized gain or loss. -Realized= AR-AB -AR= amount realized -Cash received + FMV of property received + FMV of services received + relief of debt – selling expenses (commission). -AB= adjusted basis -Original basis + additions (adding rims to a car) - accumulated depreciation Missed Class Capital Asset -Assets held for investment or for personal use -Capital assets (under section 1221) are everything Except: -Inventory -Accounts Receivable -Real (whether depreciable or not) or depreciable property used in a trade or business and Section 197 intangibles, held LT (these are section 1231 property)
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Capital Gains -Individuals obtain preferential taxation on long-term (>1 year) capital gains- generally 15% -Corporations do not get the rate Capital Losses -Only deduct capital losses UP TO capital gains -Excess of capital loss over capital gains -Individual taxpayers: -Can deduct 3,000 of net losses per year against ordinary income -Carry forward excess against capital gains -Corporations: -NO deduction for net loss in current year -Carry back 3 years and forward 5 years against capital gains Examples : -X, an individual has 10,000 of capital gains and 25,000 capital losses. Other income is 50,000. What is the effect? -Bring down the 50,000 to 47,000, and carry forward 12,000 -145,000 capital gains and 45,000 losses. Other income was 250,000. How much tax should be paid? -100,000 gain: some will be taxed at 10%, may only be 10,000-15,000 and rest
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Chapter 8 - Chapter 8 Basis -Original Basis= the starting...

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