2010_CCH_Essentials_Chapter_11

2010_CCH_Essentials_Chapter_11 - CCH Essentials of Federal...

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Unformatted text preview: CCH Essentials of Federal Income Taxation Chapter 11 Chapter Property: Capital Gains and Losses, Property: and Depreciation Recapture and ©2009 CCH. All Rights Reserved. 4025 West Peterson Ave. Chicago, IL 60646-6085 www.CCHGroup.com Capital Assets Defined All property that taxpayers own is a capital asset unless it falls into one of the following categories: • • • • • Inventory held primarily for sale to customers Inventory Business receivables, including accounts and notes Business receivable receivable Depreciable property and land used in a trade or business Copyrights; literary, musical, or artistic compositions Copyrights; (unless the taxpayer elects otherwise); letters; memorandums; etc., created by the taxpayer, or letters and memorandums prepared or produced for the taxpayer and U.S. government publications purchased for less than the U.S. normal sales price normal Chapter 11 CCH Essentials of Federal Income Taxation 2 of 17 Short-Term vs. Long-Term Short-term capital gains and losses result from the sale or exchange of capital assets held for one year or less. held Long-term capital gains and losses result if the asset was held for more than one year. the Chapter 11 CCH Essentials of Federal Income Taxation 3 of 17 Carryover Basis A carryover basis and holding period can occur in three ways: • • • The taxpayer uses the previous owner’s basis to The compute the basis in property compute The taxpayer allocates part of the basis in existing The property to the basis of newly acquired property property The taxpayer adjusts the basis in property to The reflect a postponed gain or loss from previously owned property owned CCH Essentials of Federal Income Taxation 4 of 17 Chapter 11 Worthless Securities In the year securities become worthless, the taxpayer is treated as having sold the securities for $0 on the last day of the tax year. For most taxpayers, securities are capital assets. Hence, worthless securities produce a capital loss. capital Chapter 11 CCH Essentials of Federal Income Taxation 5 of 17 Section 1244 Stock For each tax year, the first $50,000 ($100,000 for married couples filing a joint return) of the loss on the sale of Section 1244 stock is recognized as ordinary loss. The remainder of the loss is recognized as a capital loss. Chapter 11 CCH Essentials of Federal Income Taxation 6 of 17 Section 1244 Stock To qualify as Section 1244 stock, the corporation issuing the stock must meet the following requirements: • • The corporation’s contributed capital plus paid-insurplus cannot exceed $1,000,000 at the time the surplus stock is issued, and stock The corporation must be primarily an operating The company rather than an investment company company Chapter 11 CCH Essentials of Federal Income Taxation 7 of 17 Gains from Sales between Gains Certain Related Parties Certain When individuals sell capital assets to a corporation, they should recognize capital gains or losses. However, for individuals who own more than 50% of the value of the corporation’s outstanding stock, capital gain treatment does not apply if the property is depreciable property to the corporation. depreciable Chapter 11 CCH Essentials of Federal Income Taxation 8 of 17 Gains on the Sale of Subdivided Property To receive capital gain treatment, taxpayers must meet the following conditions: • • • • The taxpayer cannot be a real estate dealer The taxpayer cannot be a corporation The taxpayer cannot make substantial The improvements to the lots sold improvements The taxpayer must hold the lots for at least five The years before selling them. Inherited property has no minimum holding requirement no CCH Essentials of Federal Income Taxation 9 of 17 Chapter 11 Gains on the Sale of Subdivided Property Beginning with the year in which the sixth lot is sold, the gain from the sale of the lots is recognized as ordinary income to the extent of 5% of the sales price. • Selling expenses reduce the amount of gain taxed as ordinary income. Chapter 11 CCH Essentials of Federal Income Taxation 10 of 17 Other Ways of Producing Capital Other Gains and Losses Gains • • Nonbusiness bad debts (treated as shortterm capital losses) Net personal casualty or theft gains Net Chapter 11 CCH Essentials of Federal Income Taxation 11 of 17 Section 1231 Property Real and depreciable business property held long-term is known as Section 1231 property. property. Chapter 11 CCH Essentials of Federal Income Taxation 12 of 17 Depreciation Recapture Under the depreciation recapture rules, part or all of the gain on the sale of depreciable property may be taxed as ordinary income. Gain not taxed as ordinary income is Section 1231 gain. The amount of gain taxed as ordinary income depends on the type of property and the depreciation method used to depreciate it. depreciation Chapter 11 CCH Essentials of Federal Income Taxation 13 of 17 Recapture of Section 1231 Losses Before net Section 1231 gain can become long-term capital gain, taxpayers must look back over the past five years and compute the amount of unrecaptured Section 1231 losses. Net Section 1231 gain is taxed as ordinary income to the extent of unrecaptured Section 1231 losses. Unrecaptured Section 1231 losses equal the excess of the net Section 1231 losses (deducted as ordinary losses) over the Section 1231 gains taxed as ordinary income. taxed Chapter 11 CCH Essentials of Federal Income Taxation 14 of 17 Unrecaptured Section 1250 Gain Unrecaptured Section 1250 gain is computed by subtracting any recaptured depreciation from the lesser of (1) the gain or lesser (2) the total depreciation taken on the property. Unrecaptured Section 1250 gain applies only to real property sold at a gain. It does not apply to realty sold at a loss. does Chapter 11 CCH Essentials of Federal Income Taxation 15 of 17 Netting Capital Gains and Losses The order in which losses offset gains between groups is as follows: 1. If the amount in the 15% long-term column is a net loss, use it to If offset any 25% long-term gain first, followed by any short-term net gain. If there is no net 15% long-term capital loss, proceed to step 2. step 2. Use any net short-term capital loss to offset any 25% long-term Use capital gain, and then any net 15% long-term gain. The netting process is complete only when all gains or all losses remain. process NOTE: Substitute 0% for 15% for taxpayers in the 10% or 15% tax brackets. Chapter 11 CCH Essentials of Federal Income Taxation 16 of 17 Computing Installment Gain Gain recognized = Gain Payments received × (Gross profit ÷ Contract price) Chapter 11 CCH Essentials of Federal Income Taxation 17 of 17 ...
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