Chapter7_Lecture - Chapter 7 Property Transactions: Basis,...

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Chapter 7 Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges Determination of Gain or Loss Realized gain or loss o Difference between amount realized from sale or other disposition of the asset and its adjusted basis o Sale or other disposition Includes trade-ins, casualties, condemnations, thefts, bond retirements Amount realized from disposition o Total consideration received, including cash, FMV of property received, mortgages/loans transferred to buyer Fair market value (FMV): Value of asset determined by arms-length transaction, i.e., amount set by transaction between willing buyer and seller with neither obligated to enter into transaction o Reduced by any selling expenses Adjusted basis o Original cost (or other adjusted basis) plus capital additions less capital recoveries Capital additions o Cost of improvements and betterments to the property that are capital in nature and not currently deductible Capital recoveries o Amount of basis recovered through: Depreciation or cost recovery allowances Casualty and theft losses (and insurance proceeds) Certain corporate distributions Amortizable bond premium Easements Recognized gain or loss o Amount of realized gain (loss) that is included in (deducted from) gross income Realized gains and losses are not always recognized o Realized gains may be deferred or excluded o Realized losses may be deferred or disallowed Capital Recovery Doctrine Taxpayer is entitled to recover cost or other original basis of property acquired and is not taxed on that amount To extent receive only investment back upon disposition of an asset, taxpayer has no gain
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Basis Considerations Original basis of an asset is generally its cost Bargain purchase assets have a basis equal to their FMV o Bargain amount may be income to purchaser (e.g., employee = compensation; shareholder = dividend) Identification problems o Security sales where specific identification not possible, use FIFO to compute basis Allocation problems: lump-sum purchase o Must allocate basis to each asset obtained o Allocation usually based on relative FMV of assets Allocation problems: Going concern purchase o Assign purchase price to assets (excluding goodwill) to extent of their total FMV o Then allocate among assets based on FMV o Residual amount is goodwill Goodwill is an amortizable § 197 asset o Allocation applies to both purchaser and seller Allocation problems: Nontaxable stock dividends o Basis of original shares is allocated over the original and new shares Based on number of shares (common on common), or Based on relative FMV (preferred on common) o Holding period includes the holding period of the original shares Gift Basis Gift property may have a dual basis, i.e., basis for gain and loss may differ Basis is dependent on relationship between FMV at date of gift and donor’s adjusted basis Gift basis for cost recovery
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Chapter7_Lecture - Chapter 7 Property Transactions: Basis,...

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