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Chapter 11 – Property DispositionsI.Introductiona.A taxpayer realizes gain or loss on property when the form or substance of the property or its underlying property rights changes as a result of an arm’s length transactionb.Property Disposition Procedure:Amount Realized from DispositionLess: Adjusted Basis of PropertyEquals: Realized Gain (Loss)Less: Amount deferred (disallowed)Equals: Recognized Gain (Loss)c.After calculating the amount of gain or loss to be recognized, you must determine the character of the gain or lossi.Categorized as one of the following:1.Ordinary gains and losses2.Capital gains and losses3.Section 1231 gains and losses4.Personal use gains and lossesII.Realized Gain or Lossa.Amount Realized:i.Amount realized from a disposition must be calculated to determine whether the taxpayer has realized a gain or loss1.Amount realized is the gross sales price less all expenses incurred to complete the salea.Gross sales price:
i.Amount agreed upon by the seller and the buyer1.FMV of the propertyii.Includes:1.Amounts received by the seller from the buyera.Cashb.FMV of property receivedc.FMV of services receivedd.Amount of the seller’s expenses paid by the buyere.Amount of the seller’s debt assumed by the buyer2.Less: Amounts given by the seller to the buyera.Amount of the buyer’s expenses paid by the sellerb.Amount of the buyer’s debt assumed by the sellerb.Effect of Debt Assumptions:i.A buyer’s assumption of the seller’s debt increases the gross sales price1.Any debt of the buyer assumed by the seller in the transaction reduces the gross sales priceIII. Capital Gains and Lossesa.Result from the disposition of capital assetsi.Net capital gains receive preferential treatment over other types of income, whereas deductions for capital losses have been limitedb.Capital Asset Definition:i.A capital asset is defined as any asset that is not:1.An inventory item2.A receivable3.Real or depreciable property used in a trade or business
4.A copyright, literary, musical, or artistic composition, letter or memorandum, or similar property held by the person creating the property or held by a person who received the property as a gift from its creator5.Certain U.S. government publicationsc.Long-Term versus Short-Term Classification:i.Preferential treatment for capital gains has always been limited to net long-term capital gains1.To be a long-term gain or loss, the property must be held for more than 12 monthsa.Holding Period:i.Length of time the taxpayer actually owns the propertyii.Whenever a taxpayer’s basis is determined, either in whole or in part, by reference to another asset’s basis, the holding period of the other asset is included in the taxpayer’s holding period1.If the taxpayer’s basis is made by a reference to a market value at the date of acquisition, the holding period begins at the date of acquisition2.Inherited property is always considered long-termd.