Chapter 13 v2 - Income Taxation:Chapter 13 Property...

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Unformatted text preview: Income Taxation:Chapter 13 Property Transactions: Property Basis Determination & Recognition of Gain or Loss Loss 1 Introduction to Property Transactions s Recovery of Cost Doctrine s Realization Concept: “Realization” requires An external transaction s Plus a change in basic property right s EXCEPTIONS: Realized Income may be: • Gifts • Death Transfers • Loans • Recognized immediately • Recognized later (deferred) • Never recognized as income 2 Introduction to Property Transactions General Rule Recognize income as soon as it is realized. EXCEPTIONS: s s s s s Tax exempt bond interest Installment sales Nontaxable exchanges Losses realized on personal use assets, except condemnations and casualties Certain other statutory provisions 3 Definitions Amount Realized; Gain or Loss Realized s Amount realized on sale or disposition of an asset: Amount Cash Received Cash Plus: s s FMV of other property received Liabilities assumed by the buyer (ex., notes receivable given to the seller) Less: s s s s s Equals Amount Realized Selling expenses Cash paid to the buyer Liabilities assumed by the seller (ex., a note payable from the seller to the buyer, usually to equalize to FMVs of the transaction) Liabilities encumbering the property received that are assumed by the seller 4 Definitions Amount Realized; Gain or Loss Realized Amount Realized Less: Adjusted Basis Equals: Gain or Loss Gain Realized Realized 5 General Basis of Property s ADD: s s s s s s Purchase Cost: s Cash paid s FMV of property given up s Unpaid mortgage of property received, if the purchaser Unpaid assumes the mortgage assumes s Debt (notes payable) given to seller Other acquisition costs (legal, appraisals, etc.) Taxes relating to acquisition Interest and taxes on construction Most interest related to acquisition may be capitalized or Most deducted (TP’s option) deducted Capital additions (betterments & improvements) 6 General Basis of Property s LESS: s Depreciation allowed or taken s Liquidating distributions by corporations s Casualties and certain other losses s Amortized bond premiums s EQUALS: Adjusted Basis 7 Basis of Property Converted from Personal to Business Use Property converted from personal use to business use: Basis = lower of adj. basis or FMV at date of conversion. conversion. But, for sale at gain, basis = original basis - accum. depr. But, NOTE: Sometimes this means no gain or loss on sale. Example: Example: house: $40,000 COST, $30,000 FMV at conversion, $35,000 SP house: 8 Basis of Inherited Property s General Rule: Basis* FMV at date of death or s Alternative valuation date: FMV at date of death plus 6 mos. if estate tax Alternative is due and estate has declined in value is s Holding Period = Deemed Long-term s s EXAMPLE P bought property at $100. bought FMV at death = $250. W inherits property, sells at $310. inherits Gain (long-term) = ($310 - 250) = $60 *The “step-up” in basis rules are scheduled to be repealed with respect to deaths *The occurring after the year 2009 9 Basis of Inherited Property Exception #1 Income in Respect of a Decedent Income Or, “IRD” Items Or, (Section 691) EXAMPLE Decedent has earned income, but has not received it by time of death. Either the estate or the heirs include it in their income, depending on who has it at tax time. The TP has no basis in it until it is taxed. 10 Basis of Inherited Property Exception #2 EXAMPLE For decedents who acquired property w/in one year of death and that property passes back to donor or donor’s spouse, new basis = donor’s old basis (no step-up) S Prop: FMV = 50,000; b = 10,000 F Dies Dies w/in w/in 1 yr. Prop. willed to S S’s Basis = 10,000 if he receives it within one year. 11 Basis of Property Acquired by Gift s General Rule: Carryover Basis s Adjust basis for gift tax paid on the appreciation of Adjust the property up to the date of the gift. The adjustment is called the “gift tax adjustment.” Add the gift tax adjustment to the carryover basis the s Gift Tax =(FMV date of gift) - donor’s basis x (Gift tax paid) Adjment FMV date of gift 12 Basis of Property Acquired by Gift s FMV at date of gift < donor’s basis: an exception s Basis for gain/loss depends on whether asset is later Basis sold for more or less than donor’s basis sold If sold at a gain, basis for gain is donor’s basis If sold at a loss, basis for loss is lower of FMV or the donor’s basis at date of gift s Holding Periods Starts on donor’s date of acquisition, generally s Starts on date of gift for situation “if sold at a Starts loss” ...applies if LCM and subsequent sale at loss s 13 “Nontaxable” Exchanges: Summary Section Action Elective or Mandatory 1031 Deferral of gain or loss on Mandatory Like-kind exchange 121 Exclusion of gain from sale Mandatory of personal residence 1033 Defers gain on involuntary a) Mandatory for direct conversions conversions b) Elective for indirect conversions 14 Section 1031 Like-Kind Exchanges Like-Kind s Mandatory deferred gain or loss on exchange of Mandatory business/investment property business/investment s To qualify, property must be like-kind s Real estate can be exchanged for real estate s For personalty, property exchanged must be in same For General Asset Class or Product Class for safeGeneral harbor s Section 1031 excludes: inventories, stocks, bonds, Section notes, non-U.S. property, interest in Partnerships notes, 15 Like-Kind Exchange Between Like-Kind Related Parties Related s Deferral of Gain permitted if exchange between Deferral related persons remains intact for at least two years after the exchange. after s Any gain that is deferred on exchange between Any related persons is recognized if exchanged property is sold within two years of the exchange. is s Transferor will be treated as if the property was sold Transferor on the exchange date…recognizing “deferred” gain as of the date the transferee sold the property (transferee pays tax on post-exchange appreciation). (transferee 16 Section 1031 Like-Kind Exchanges with Boot s When boot is received in a like-kind exchange: Recognize as income lesser of boot received or gain Recognize realized realized s No loss is recognized when boot is received s s The receipt of boot may cause recognition of Gain The (boot does not disqualify Section 1031) (boot s Treat liabilities forfeited as boot received, liabilities Treat assumed as boot given…net liability relief is treated assumed net as boot received 17 Like-Kind Exchange of Like-Kind Mortgaged Property Mortgaged s X-chg. of mortgaged property treat as x-chg involving boot -- TP who is relieved of treat mortgage treated as having received cash in amount of mortgage mortgage s if both properties x-chg’d are mortgaged, treat difference in if mortgages as boot mortgages s Realized losses on Sec. 1031 exchanges are not recognized Realized (but loss on boot property given up is recognized) (but s Basis of property received is adjusted by: s subtracting deferred gains s adding deferred losses s 18 Like-Kind Exchanges - Timing s Timing “simultaneous” exchange required s simultaneous IF simultaneous s s Prop. to be rec’d in the exchange is identified Prop. w/in 45 days after TP gives up his/her property and and s Incoming property is actually rec’d w/in 180 Incoming days after TP transfers property out, or by the date of the tax return (including extensions), whichever is earlier. whichever 19 Basis of Property Rec’d in Sec. 1031 Exchange Adj. Basis of Property Given Adj. Up Up Plus: Less: s Gain recognized s Boot rec’d (not including mortgages out) mortgages s Liabilities assumed by Liabilities s Liabilities assumed by TP transferee (notes receivable to s Liabilities encumbering property Liabilities transferor) transferor) rec’d rec’d s Liabilities encumbering Liabilities property transferred out property s Boot paid (cash or property) Equals: Basis of property rec’d 20 Section 121 Exclusion of $250,000 ($500,000 MFJ) of Gain on Sale of Personal Residence Gain s Purpose of Sec. 121 s To exclude $250,000 ($500,000 MFJ) of gains on sale of a personal To residence residence s Eligibility s s TP must own and occupy home as principal residence for at least 2 of 5 TP prior years. prior The full exclusion is available only if TP has not utilized exclusion in The previous two years. previous A partial exclusion is allowed if TP moves for employment, health, or other unexpected circumstances. Partial exc. = Full exc. x # of months req. are met 24 months 21 Section 121 Example s S (Single TP) sells her home and realizes a $125,000 (Single gain. S, who is moving to a new state to take a new job, has owned the home for only 9 months. job, S may exclude $ 93,750 of her realized gain. $250,000 x 9 months = $93,750 24 months 22 Mortgage Forgiveness Debt Mortgage Relief Act of 2007 : Personal Residence Personal s Mortgage Forgiveness Debt Relief Act of 2007 applies to years 2007-2009 ((H.R. 3648/extended thru 2012 with H.R. 1424) and excludes from gross income up to $2 million ($1 million for married, filing separately) forgiven on debt used to buy, build or substantially improve a principal residence during 2007-2009. The excluded amount will reduce the residence’s basis, but not below zero. The exclusion applies if the discharge is directly related to a decline in the value of the residence or to the taxpayer’s financial condition (The Act does not apply to vacation homes). not 23 Mortgage Forgiveness Debt Mortgage Relief Act of 2007 : Personal Residence Personal s The basis reduction could result in a recognized gain The when the home is sold. However, such gain would qualify for the general rules for excluding gain (i.e., $250,000 and $500,000). $250,000 s The Act also permits surviving spouses to qualify for the The $500,000 joint-filing home-sale exclusion if (1) the residence is sold not later than two years after the first spouse's death; and (2) the exclusion requirements were met immediately before the spouse's death. 24 Housing and Economic Recovery Housing Act of 2008: Act Personal Residence Personal s Creates new First-time Homebuyer Credit for an Creates individual who is a first-time homebuyer of a personal residence in U.S. residence s The first-time homebuyer credit is equal to the lesser of The $7,500 or $3,750 for married filing separately or 10 percent of the purchase price of the home (between April 8, 2008 and January 1, 2009 as adjusted under American Recovery and Reinvestment Act of 2009 – previously July 1, 2009). s Credit phases out at AGI over $150,000 (MFJ), $75,000 (Single); Credit full phase out at $170,000 (MFJ) and $95,000 (Single) full 25 Housing and Economic Recovery Housing Act of 2008: Act Personal Residence Personal s Although a home purchased in 2009 may be deemed Although purchased as of December 31, 2008 for purposes of claiming this “credit”, the American Recovery and Reinvestment Act of 2009 provides a more generous credit opportunity. s However, this credit must be recaptured over fifteen However, years with no interest. years s The recapture (6.67% of the total credit) begins in the The second taxable year after the taxable year in which the home is purchased. 26 American Recovery and American Reinvestment Act of 2009: Reinvestment Personal Residence Personal s Creates new $8,000 First-time Homebuyer Credit for an individual who is a first-time homebuyer of a personal individual residence in U.S. residence s The first-time homebuyer credit is equal to the lesser of The $8,000 or $4,000 for married filing separately or 10 percent of the purchase price of the home (after December 31, 2008 through November 30, 2009). December s New “No Pay-Back” provision (i.e., required New repayments) after 36 months in the home. s Credit phases out at AGI over $150,000 (MFJ), $75,000 (Single); Credit full phase out at $170,000 (MFJ) and $95,000 (Single) full 27 Housing and Economic Recovery Housing Act of 2008: Act Personal Residence Personal s An additional standard deduction is provided for real An estate taxes for non-itemizers. estate ----Maximum additional standard deduction is lesser of the real estate taxes or $1,000 (MFJ) and $500 (Single) estate ­­Provision extended thru December 31, 2009 by Tax Extenders and AMT Relief Act of 2008 s These provisions (e.g., the first-time homebuyer credit and the These additional standard deduction for real property taxes for nonadditional itemizers) are retroactive and will impact the 2009 filing itemizers) season. season. 28 Housing and Economic Recovery Housing Act of 2008: Act Personal Residence Personal s For sales and exchanges after December 31, 2008, Section 121 is amended to limit 2008, exclusion of gain to ONE sale or exchange every 2 years and provides a special rule for certain sales by surviving spouses. 29 Housing and Economic Recovery Housing Act of 2008: Act Personal Residence Personal s Under Sec. 121(b)(5)(A), Sec. 121(a) shall not apply to Under the gain from the sale of a principal residence allocated to “nonqualified use” (i.e., vacation home or rental). s “Nonqualified use” does not include periods when the Nonqualified homeowner vacated their property for military service, a change of employment, health conditions, or other unforeseen circumstances. s Sec. 121(b)(5)(B) - gain shall be allocated to periods of Sec. nonqualified use based on the ratio which property owned by the taxpayer relates to property owned. 30 Housing and Economic Recovery Housing Act of 2008: Act Personal Residence Personal s Exclusion Calculation: Gain Exclusion Exclusion Reduced by Ratio of Months of Nonqualified Use Over Total Months of Ownership Use s Determine Months of Nonqualified Use s All nonqualified use before 1/1/09 is ignored s Period of ownership after last use as a principal Period residence is not treated as nonqualified use residence s Any period of 2 years or less for change of Any employment, health conditions, military service (10 years or less), or other unforeseen circumstance is not counted as nonqualified not 31 Disallowed Losses Wash Sale Losses DEFINITION Where TP sells stock or securities and within 30 days before or after the sale acquires substantially identical stock or securities s Add unrecognized loss to the basis of the replacement Add stock/securities to enable later recovery of basis stock/securities s Holding period of old stock/securities carries over 32 Disallowed Losses s No loss deductions are allowed for the following: s Loss on sale or disposition of personal use assets s Losses on property acquired by gift are limited to the loss Losses subsequent to the gift subsequent s Losses on property converted from personal use to Losses business use are limited to the loss happening after conversion conversion s Losses on sales between related parties are Losses disallowed, but: if the asset is later sold to an outside party at a gain, the gain may be reduced by the previously disallowed loss previously 33 ...
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This note was uploaded on 06/06/2011 for the course ACE 346 taught by Professor Peter during the Spring '11 term at University of Illinois, Urbana Champaign.

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