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Chapter 17 Notes

Chapter 17 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 17 – Property Transactions: Sec. 1231 and Recapture Provision 1. Sec. 1231 Assets: a. Sec. 1231 defined: 1. depreciable and real property used in trade or business or for production of income and held greater than 1 year 2. includes: timber, coal, iron, livestock, unharvested crops, and certain purchased intangibles. b. Sec. 1231 property does not include the following: 1. property not held for the long term holding period 2. non personal use property where casualty losses exceed casualty gains for the taxable year. 3. inventory and property held primarily for sale to customers 4. copyrights, literary, musical and artistic compositions and certain U.S. government publication 5. accounts receivable and notes receivable arising in the ordinary course of a trade or business c. If transactions involving Sec. 1231 assets result in: 1. Net 1231 loss = ordinary loss 2. Net 1231 gain = long term capital gain Provides the best of potential results for the taxpayer: Ordinary loss that is fully deductible “for” AGI Gains subject to long term capital gains tax rates 2. Depreciation Recapture: a. Assets subject to depreciation or cost recovery many be subject to depreciation recapture when disposed of at a gain. 1. losses on depreciable assets receive Sec 1231 treatment. No recapture occurs in loss situations b. Depreciation recapture characterizes gains that would appear to Sec 1231 as ordinary gain. 1. the Code contains two major recapture provisions: Sec 1245 & 1250 1
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c. Depreciation recapture provisions generally override all other Code Sections 1. there are exceptions to depreciation recapture rules, for example” a. in a disposition, where all gains is not recognized (like kind exchange, involuntary conversion) b. where gain is not recognized at all ( gifts and inheritances) 3. Sec. 1245 Recapture:
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Chapter 17 Notes - Bob Ryan DePaul University Accounting...

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