413sol11-04 - Chapter 11: Property Dispositions 11-1 _...

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Chapter 11: Property Dispositions 11-1 ___________________________________________________________________ CHAPTER 11 PROPERTY DISPOSITIONS ___________________________________________________________________ DISCUSSION QUESTIONS 1. In determining the amount of a realized gain or loss to be recognized in the current year, certain types of gains and losses are deferred while others are disallowed. What is the difference between deferring a gain or loss realized in the current period and disallowing the recognition of a current period loss? Give at least one example of each that has been studied to date in this course. A deferred gain or loss is one which does not affect current year taxable income. However, a deferred gain or loss will have an effect on taxable income in a subsequent tax year. A disallowed loss is a loss which does not affect the current year taxable income, nor does it affect a future year's taxable income. That is, it is never deductible. Examples of deferred losses: A wash sale is a current period loss that is deferred through the basis of the shares acquired. A suspended loss from a passive activity is deferred and deducted against future passive income or deducted when the activity is sold in a fully taxable transaction. Examples of disallowed losses: A personal use loss is a loss on the sale of a personal use asset and is never deductible. A related party loss is a loss on the sale of an asset to a related party and is never deductible for the taxpayer realizing the loss. The disallowed loss may be used to offset subsequent gains on sale of the property by the purchaser, but the offset is not fully guaranteed. 2. What effect does the assumption of a seller's debt have on the amount realized from the disposition of a property? The assumption of a seller's debt is equivalent to the buyer paying the seller cash and the seller using the cash to pay off the debt. Therefore, assumptions of debt are part of the sales price of the property and increase the amount realized from the disposition. 3. Are brokerage commissions paid on the sale of stock a current period expense? Explain. Brokerage commissions paid on the sale (or purchase) of stock are never current period expenses. Commissions paid to acquire stock are added to the basis of the stock as part of the cost of obtaining the stock. When the stock is sold, the basis is deducted against the amount realized from the sale. The commissions paid on the sale reduce the amount realized from the sale and affect the gain or loss on the sale of the stock. 4. In a transaction in which the seller of property agrees to take other property from the buyer as part of the sales price, why is the buyer's adjusted basis unimportant in determining the amount realized by the seller?
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Chapter 11: Property Dispositions 11-2 The buyer's basis in other property represents the buyer's unrecovered capital investment in the property. It is based on the initial cost of the property to the buyer adjusted for changes in capital investment during the time it was held.
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413sol11-04 - Chapter 11: Property Dispositions 11-1 _...

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