Acquisitions of Property
ACQUISITIONS OF PROPERTY
What effect does a property's use have on the cost recovery allowable on the property?
A property's use determines what, if any, deductions can be taken on the property.
Current period expenditures related to a property that is used in a trade or
business or for the production of income can be deducted.
In addition, if the
property has a finite life, its cost can be recovered over the period of use through
either depreciation, depletion, or amortization deductions.
The only recovery
allowed on personal use property is at the property's disposition.
Even then, if the
disposition results in a loss, the capital recovery is allowed only to the extent of
the amount realized on the disposition (i.e., a loss on the disposition of a personal
use property is not deductible).
What is the difference between a property's use and its type?
Type of property refers to whether property is real, personal, or intangible.
type of property can have any of the three uses of property - in a trade or
business, for the production of income, or personal use.
For example, a computer
is always personal property.
The computer can be used in a taxpayer's trade or
business, a production of income activity of the taxpayer, or it could be used as a
Thus, the type of property never changes, but its use may change.
Explain the difference between tangible property and intangible property.
Tangible property has a physical existence; it has shape, form and substance.
Intangible property only exists due to some economic right conferred by the
Intangible property is usually represented by a document (e.g., a patent,
copyright, or covenant not to compete).
However, the value is not in the paper, but
in the economic rights conferred in the document.
How is personal property different from personal use property?
Personal property is a type of property.
It is any tangible property that is not real
Personal use property is a use of property.
It is any property that is
used for personal purposes by the taxpayer.
Therefore, personal use property can
be personal property (e.g., the family car) or real property (e.g., the family
Explain the role an asset's initial basis plays in determining the income to be recognized
upon disposal of the asset.
The initial basis of the asset establishes the amount of capital recovery allowed on
The basis may be recovered over time through depreciation, depletion,
or amortization deductions.
Any basis not recovered when the asset is disposed
of is used to offset any amount realized from the disposition.
Thus, the initial
basis determines the maximum amount of capital recovery on the asset.