Chapter 16 Notes

Chapter 16 Notes - Bob Ryan DePaul University Accounting...

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Bob Ryan DePaul University Class Notes Accounting 380 Tax Treatment of Individuals and Property Transactions Text 2012 Chapter 16 – Property Transactions: Capital Gains and Losses 1. Taxation of Capital Gains and Losses: Welcome to ObamaTax a. Capital gains and losses must be separated from other types of gains and losses for two reasons: 1. long term capital gains may be taxed at a lower rate than ordinary gains. 2. a net capital loss is only deductible up to $3,000 per year. 2. Proper Classification of Gains and Losses: a. Depends on three characteristics: 1. the tax status of the property a. capital asset, Sec. 1231 asset, or ordinary asset 2. the manner of the property’s disposition a. by sale, exchange, theft, or condemnation 3. the holding period of the property a. short term or long term 3. Capital Assets: a. Sec. 1221 defines capital assets as everything except: 1. inventory (stock in trade) 2. notes and accounts receivable acquired from sale of inventory or performance of services 3. realty and depreciable property used in the trade or business (Sec. 1231) 4. certain copyrights, literary, musical or artistic compositions, or letters, memoranda, or similar property. 5. certain publication of the U.S. government. 6. supplies of the type regularly used or consumed in the ordinary course of business. b. Capital assets are: 1. assets held for investment (stocks, bonds, land) 2. personal use assets (residence, car) 1
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3. miscellaneous assets selected by Congress c. Dealers in securities: 1. in general, securities are the inventory of securities dealers, thus ordinary assets. 2. however, a dealer can identify securities as an investment and receive capital gains treatment. Clear indication must be made on the day of acquisition. d. Real property subdivided for sale: 1. Taxpayer may receive capital gain treatment on the subdivision of real estate if the following requirements are met: a. taxpayer is not a corporation b. taxpayer is not a real estate dealer c. no substantial improvement made to the land d. taxpayer held the lots for at least 5 years e. capital gain treatment occurs until the year in which the 6 th lot is sold: 1. then up to 5% of the revenue from lot sales is potential ordinary income 2. that potential ordinary income if offset by any selling expenses from the lot sales e. Non business bad debts: 1. a non business bad debt is treated as a short term capital loss in the year it becomes completely worthless, even if outstanding for more than one year. 4.
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This note was uploaded on 01/27/2012 for the course ACC 548 taught by Professor Ryan during the Spring '11 term at DePaul.

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Chapter 16 Notes - Bob Ryan DePaul University Accounting...

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