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Unformatted text preview: C HAPTER S IXTEEN PROPERTY TRANSACTIONS: CAPITAL GAINS AND LOSSES SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 16-1 A capital asset is defined in § 1221 as being any asset other than one rendered or from the sale of inventory; a. Depreciable property and land used in a trade or business; b. A copyright, literary, or artistic composition, a letter or memorandum, or similar property held by the creator, or a letter or memorandum held by the person for whom created, plus any property in the hands of a taxpayer whose basis is determined by reference to that of the creator, or person for whom created; and c. A publication of the U.S. government that is received from the Government by any means other than purchase at the price at which it is offered to the public, and held by the taxpayer who received such publication or a transferee whose basis is found with reference to his or her basis. This definition might be described as a definition by exclusion or by exception. The assets that are not excluded by this definition, and therefore are capital assets, are personal use assets and assets held solely for investment. (See pp. 16-4 and 16-7.) 16-2 The sale of a sole proprietorship is treated as the sale of the individual assets of the business. Any capital assets generate capital gain or loss; any inventory results in ordinary gain or loss; etc. The same would be true if a business were sold by a partnership or corporation. However, interests in partnerships or corporations (stock) are generally treated as capital assets upon sale; but, exceptions exist in each case. See the appropriate chapters for more detail. (See p. 16-7.) 16-3 The holding period requirement for long-term is “more than one year.” For purchased property, the holding period is calculated by counting the day of sale, but not the date of purchase. Whole months are used. So, property purchased on the fourth day of the fourth month is held more than one year on the fifth day of the fourth month of the following year. (See Examples 7 through 9 and pp. 16-11 and 16-12.) 16-4 Generally, the holding period for property acquired by gift includes the holding period of the donor. If, however, the basis of the property is not found by reference to the donor’s basis, as would be the case if the basis is the fair market value at the date of gift, the holding period begins on the date of the gift. (See Examples 11 and 12 and p. 16-12.) 16-5 Section § 1223 provides that the holding period begins on the date of the decedent’s death. However, if the property is sold within one year, § 1223(11) provides that the gain or loss will be treated as long-term (more than 12 months). Quite simply, all sales of capital assets that are inherited and have a basis that is determined based on fair market value under § 1014, will result in long-term gain or loss. (See Example 13 and p. 16-13.) 16-6 December 30 is the date of the sale and the last day of the holding period. (See Example 9 and p. 16-11.)and p....
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- Taxation in the United States