Chapter 11 - Property Dispositions

Chapter 11 - Property Dispositions - Chapter 11 Property...

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Chapter 11 – Property Dispositions I. Introduction a. 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 transaction b. Property Disposition Procedure: Amount Realized from Disposition Less: Adjusted Basis of Property Equals: 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 loss i. Categorized as one of the following: 1. Ordinary gains and losses 2. Capital gains and losses 3. Section 1231 gains and losses 4. Personal use gains and losses II. Realized Gain or Loss a. Amount Realized: i. Amount realized from a disposition must be calculated to determine whether the taxpayer has realized a gain or loss 1. Amount realized is the gross sales price less all expenses incurred to complete the sale a. Gross sales price:
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i. Amount agreed upon by the seller and the buyer 1. FMV of the property ii. Includes: 1. Amounts received by the seller from the buyer a. Cash b. FMV of property received c. FMV of services received d. Amount of the seller’s expenses paid by the buyer e. Amount of the seller’s debt assumed by the buyer 2. Less: Amounts given by the seller to the buyer a. Amount of the buyer’s expenses paid by the seller b. Amount of the buyer’s debt assumed by the seller b. Effect of Debt Assumptions: i. A buyer’s assumption of the seller’s debt increases the gross sales price 1. Any debt of the buyer assumed by the seller in the transaction reduces the gross sales price III. Capital Gains and Losses a. Result from the disposition of capital assets i. Net capital gains receive preferential treatment over other types of income, whereas deductions for capital losses have been limited b. Capital Asset Definition: i. A capital asset is defined as any asset that is not: 1. An inventory item 2. A receivable 3. Real or depreciable property used in a trade or business
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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 creator 5. Certain U.S. government publications c. Long-Term versus Short-Term Classification: i. Preferential treatment for capital gains has always been limited to net long- term capital gains 1. To be a long-term gain or loss, the property must be held for more than 12 months a. Holding Period: i. Length of time the taxpayer actually owns the property ii. 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 period 1. 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 acquisition 2. Inherited property is always considered long-term
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This note was uploaded on 04/24/2011 for the course MGMT 504 taught by Professor Hatcher during the Spring '08 term at Purdue University-West Lafayette.

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Chapter 11 - Property Dispositions - Chapter 11 Property...

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