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Chapter 11 (part of Chapter 3) Sp 11

Chapter 11 (part of Chapter 3) Sp 11 - ACCT 403 CHAPTER 11...

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ACCT 403 CHAPTER 11 (& part of Chapter 3) – FALL 2011 PROPERTY DISPOSITIONS AND CAPITAL GAINS (page number references are to Chapter 11 unless otherwise noted) I. Computation of Gain or Loss of Property Dispositions A. Gain Realized = Amount Realized - Adjusted Basis. 1. Amount Realized (common calculation) – FMV of property received less selling costs. a. Example 3, page 4. b. Example 1, page 3 (related parties) is discussed in chapter 6 and example 2, page 3 is discussed in chapter 12. c. The book (after Example 3 on page 5) refines this calculation to cover more complicated issues as follows: ( NOT RESPONSIBLE FOR THIS SECTION ) 1. For transactions involving services, the amount realized is increased by the FMV of services received and decreased by the FMV of serrvices provided to the buyer. A. Example 4, page 5. 2. For transactions involving assumable debt (not that common anymore), amount realized is increased by debt relived and decreased by debt assumed. A. See Examples 6 - 9, pages 5-6. 3. Where expenses of the buyer or seller are paid by the other party, amount realized by the seller is increased by the seller’s expenses paid by the buyer and deceased by buyer’s expenses paid by the seller. A. Example 5, page 5. 2. Adjusted Basis generally equals cost + improvements - capital recovery allowances. a. Exceptions to this general rule are covered throughout the text. 3. Subtracting the basis from the amount realized illustrates the cost recovery principle in determining gain realized. a. Therefore, gain realized is not synonymous with cash flow. 4. Note that neither the amount realized or basis is adjusted for inflation. Assuming inflation, the gain realized is overstated. B. Gain Recognized = How much of the gain realized that must be reported as taxable income. 1. IRC Sec. 1001 indicates that gain or loss recognition results from the sale or other disposition of property. Question is, what is the meaning of other disposition. It includes: a. Most bartering transactions [except for like-kind exchanges]. b. The transfer of property in satisfaction of a debt.

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2 2. There are certain transactions, which allow the taxpayer to postpone the recognition of gain. These are discussed in Chapters 12 and 13 and include: a. Like-kind exchanges. b. Involuntary conversions. c. Entity formations 3. Certain transactions can also be excluded from income, such as the sale of a personal residence. This will be covered in a later chapter. II. Classification of Assets and Character of Gain or Loss A. Currently, there are three major categories of assets and five categories of income as follows: 1. Capital Asset/Gain or loss a. Includes all assets other than (1) inventory, (2) receivables, (3) depreciable property and land used in business, and (4) copyright, literary, musical, or artistic composition, or similar property held by the creator ( other than patents ).
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