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ch14 - H Chapter Fourteen H PROPERTY TRANSACTIONS BASIS...

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H Chapter Fourteen H PROPERTY TRANSACTIONS: BASIS DETERMINATION, RECOGNITION OF GAIN OR LOSS SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 14-1 Gain or loss is realized any time a sale or other disposition occurs. Such gain or loss is measured by the difference between the amount realized and the adjusted basis of the property given up. This gain or loss realized is recognized if it is taken into consideration in determining the year’s tax liability. A loss may be realized but not be deductible (i.e., recognized), as is the case with losses on the sale of personal use property. (See pp. 14-3 through 14-6.) 14-2 The ‘‘return-of-capital’’ principle refers to the fact that a taxpayer may, on the disposition of property, recover his or her adjusted basis tax free. Gain is recognized only to the extent the taxpayer realizes more than that basis; and loss, only to the extent the taxpayer realizes less than the basis. (See p. 14-3.) 14-3 Generally, the amount realized is the amount of money received (net of money paid), plus the fair market value of other property received, plus liabilities discharged (net of liabilities assumed). (See Exhibit 14-3, and pp. 14-4 and 14-5.) 14-4 As noted in Question 14-3 above, such liabilities are included in the amount realized. Their effect is summarized as follows: 1. Liabilities discharged are tantamount to the receipt of cash and therefore cause an increase in the amount realized. 2. Liabilities incurred are equivalent to paying cash and therefore reduce the amount realized. This occurs when the taxpayer is personally liable for the debt, and is also true if the taxpayer is not personally liable but is the beneficial owner of the property. If a taxpayer is discharged of some liabilities and incurs other debt in the same transaction, the obligations are netted in determining the amount realized. (See Exhibit 14-3 and pp. 14-4 and 14-5.) 14-5 Cost basis is the amount of money paid for property plus the fair market value of the other property given up for it. Liabilities owed to the seller and existing liabilities assumed by the buyer are treated like money paid. (See p. 14-6.) 14-6 Donee’s basis ¼ donor’s basis þ gift taxes paid on appreciation. Gift taxes paid on appreciation ¼ [(fair market value at date of gift ± donor’s basis/taxable value of gift] ² gift taxes paid. (See Example 12 and pp. 14-7 and 14-8.) 14-1
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14-7 The general rule does not apply when the fair market value at date of gift is less than the basis under the general rule and the property is ultimately sold for less than the basis under the general rule. In such cases, the adjusted basis for determining the loss is fair market value on the date of the gift. If, in using this basis, a gain results, neither gain nor loss is recognized. For example, if David gave property that had cost $6 x and was worth $4 x to Lisa, these rules apply. If Lisa sells the property for $3 x , she realizes a loss of $1 x . If she sells for $4.5 x , she realizes neither a gain nor a loss. However, if the sales price exceeds the donor’s basis of $6 x , the general rule applies. For example, a sale for $8
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