students2009-Ch14 Property - Chapter 14 Property...

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0 Chapter 14 Property Transactions: Basis Determination & Recognition of Gain or Loss
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PROPERTY TAXATION ISSUES •Tax consequences of sale or other disposition –Taxable event –Cost Recovery Principle –Realization Event –Gain or Loss Realized –Gain or Loss Recognized –Character –Time for Reporting So Norm, what does all this mean?
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Property Transactions: Definitions • Realization Concept – “Realization” requires • An external transaction • Plus a change in basic property right –Examp les
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Realization Event Is there a sale or other disposition? Worthless securities Surrendering life insurance policy for cash surrender value Transfer of property in payment of debt Abandonment Demolition
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Is there a sale or other disposition? Transfer of property to spouse Contributions of appreciated property Foreclosure Gifts of property subject to liability Realization Event
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Property Transactions: Definitions • Cost recovery doctrine (6,000) Return of capital; cost recovery Cost (Adjusted Basis) $4,000 Gain $10,000 Sales price ???? Gain or loss 6,000 Cost of property $10,000 Sales Price
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Property Transactions: Definitions •Computation of gain or loss realized (§1001(a)) Amount realized Adjusted basis Gain or loss realized
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Property Transactions: Definitions •General rules of gain or loss recognition •Gain –Inclusion of gain (§ 61(a)(3)) •Normally included •Loss –Deduction of loss (§ 165) Not deductible unless authority Trade or business Investment Casualty or theft
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Amount realized (§ 1001(b)) Cash received + FMV of other property received + Liabilities assumed by the buyer + Liabilities or encumbrances on property transferred to the buyer (mortgages) Selling expenses Cash paid to the buyer Liabilities assumed by the seller Liabilities encumbering the property received that are assumed by the seller Amount realized Property Transactions: Definitions
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PROPERTY TAXATION ISSUES •Gain or Loss Realized •Gain or Loss Recognized •Character of Recognized Gain or Loss Don’t forget WHEN!
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Adjusted Basis of Property • Adjusted basis Original basis +Capitalized expenditures Depreciation and recovery of basis Adjusted basis • Original basis depends on method of acquisition –P u r c h a s e –G i f t –I n h e r i t a n c e – Nontaxable exchange – Conversion from personal to business use
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Basis of Property: PURCHASED Cost : • Cash + FMV of property given up • Debt (notes payable) given to seller • Assumption of debt • Other acquisition costs (legal, appraisals, etc.) –Sa les taxes – Delivery and freight – Legal fees; recording fees – Title insurance –App ra isa ls – Installation – Interest and taxes on construction – Capital additions (betterments & improvements) – Taxes & interest if developed Add these on!
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Basis of Property: PURCHASED Identification issues Sale of stock Sale of inventory Problem 23
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Basis of Property: PURCHASED Allocation of purchase price $1,000,000 Cash, Inventory, Receivables, Buildings, Land, Equipment, Covenant Not to Compete, Goodwill, Licenses, Trademarks Buyer Seller
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This note was uploaded on 03/21/2010 for the course ACCOUNTING 533 taught by Professor Eric during the Spring '09 term at Universidade do Minho.

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students2009-Ch14 Property - Chapter 14 Property...

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