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ch7tax1 - Taxation of Business Entities Property...

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Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges Text: Chapter 7 Taxation of Business Entities
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C7 - 2 Outline Realized vs. Recognized Gains/Losses Basis Determination for various methods of asset acquisition. Disallowed Losses: Related Parties Personal-use Assets Non-taxable Transactions: Like-Kind Exchanges Involuntary Conversions Sale of Personal Residence
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C7 - 3 Tax Questions Re: Sale or Disposition of Property Is there a realized gain or loss? If so, is the gain or loss recognized for tax purposes? If the gain or loss is recognized, is it ordinary or capital ? What is the basis of any replacement property that is acquired? What is the holding period of the replacement property?
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C7 - 4 Determination of Gain or Loss Realized gain or loss Difference between amount realized from sale or other disposition of the asset and its adjusted basis Sale or other disposition Includes trade-ins, casualties, condemnations, thefts, bond retirements. Amount realized from disposition Total consideration received, including cash, FMV of property received, mortgages/loans transferred to buyer Fair market value (FMV): Amount set by transaction between willing buyer and seller with neither obligated to enter into transaction. Reduced by any selling expenses (e.g., commissions)
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C7 - 5 Determination of Gain or Loss Adjusted basis Original basis adjusted for capital additions and capital recoveries Capital additions Cost of improvements and betterments to the property that are capital in nature and not currently deductible Capital recoveries Amount of basis recovered through: Depreciation or cost recovery allowances Casualty and theft losses (and insurance proceeds)
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C7 - 6 Recognized Gain or Loss Recognized gain or loss Amount of realized gain (loss) that is included in (deducted from) gross income Realized gains and losses are not always recognized Realized gains may be deferred or excluded (e.g. like-kind exchanges, involuntary conversions, sale of personal residence, transfers to controlled corporations) Realized losses may be deferred or disallowed (e.g. like-kind exchanges, losses on sales to related parties, losses on sale of personal use assets)
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C7 - 7 Basis Considerations Original basis of an asset is generally its cost . Identification problems Security sales where specific identification not possible, use FIFO to compute basis Allocation problems: lump-sum purchase Must allocate basis to each asset obtained Allocation usually based on relative FMV of assets Residual method is used to allocate basis to goodwill and other purchased intangibles (see example 13 in text).
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