Tax Exam 2 Chapter 10 (3rd)

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What is the Amount realized of a sold asset?

Everything of value received from the buyer less any selling costs.

How does Amount realized change when you are disposing of Real Property?

You have to increase the amount realized by the amount of debt relief.

How do you find the adjusted basis?

Cost basis - Cost recovery deductions

What is an ordinary Asset?

Used in trade or business for 1 year or less.
Inventory, Accounts receivable, machinery (less than 1 year).

What is a capital asset?

Generally something held for investment (Stocks or bonds) for the production of income (for-profit activity that doesn't rise to the level of a trade or business), or for personal use (house, car, or personal computer).

Which are better capital gains or ordinary gains for INDIVIDUALS?

Generally people prefer capital gains because:
They possibly can be taxed at lower rates
may offset capital losses which ordinary income cannot do.

Which are better Capital losses or ordinary losses for INDIVIDUALS?

Generally people prefer ordinary losses because:
they are deductible without limit while you can only deduct $3000 of net capital losses against ordinary income each year.

How far forward and back can capital losses be carried for corporations?

5 years forward, and 3 years back.

How far forward can capital losses be carried for individuals

They can be carried forward indefinitely but not carried back.

Which is better capital Gains or Ordinary Gains for CORPORATIONS?

Capital Losses because:
They are taxed at preferential rates.

What qualifies as 1231 assets?

Depreciable assets and land used in a trade or business (including rental property) held by taxpayers for more than one year.

What do you characterize a 1231 Net caplital gain and loss as?

1231 net gain = Long term Capital Gain
1231 net loss = Ordinary loss

Are S 1231 assets favored?

Yes because they are a capital gain if they are a net gain and an ordinary loss if they are a net loss.

What kind of assets are pure 1231 assets?

Land.

Does the depreciation recapture apply to 1231 gains or losses?

1231 gains.
It does not affect 1231 losses.

What are th three different Categories that a 1231 asset can be put into in depreciation reacapture?

Pure S 1231 (Land)
S 1245 (Personal Property and Intangibles)
S 1250 (Depreciable Real Property)(for flow through entities)(Taxed at 25% for individuals/flowthrough entity)
S 291 for corporations (20% rule)

How do you characterize the sale of 1245 assets?

The gain from the sale of 1245 assets is characterized as ordinary income. The amount of the sale above the historical cost is characterized as 1231 gain.

Under what method is depreciable real property depreciated?

Straight-line method.

What is S 291 Depreciation?

A depreciation recapture rule that applies only to corporation for the disoposal of depreciable real property.

How do you apply S 291 Depreciation

Take lesser of recognized gain or accumulated depreciation and multiply that number by 20% to get the amount of ordinary income. The amount of recognized gain less the 291 is the 1231 gain.

What is S 1239, and what does it do?

Characterizing gain on sale of depreciable property to related parties.
Entire gain is characterized as ordinary gain to seller.
Basically the seller recognizes ordinary income for depreciation deductions the buyer will receive in the future.

Can you net Capital gains or (losses) wtih ordinary losses?

No you can net capital

Can you net capital Gains and Capital Losses?

Yes

Can you net Capital Gains and 1231 losses?

No. 1231 losses are ordinary losses and they cannot be netted with capital Gains.

How does 1231 lookback work?

1. Incur 1231 gain in current year.
2. look back up to 5 years to see if you ever incurred a 1231 loss.
3. If 1231 losses were incurred in past 5 years then the losses carry forward and the 1231 gains of this year are re-characterized into ordinary gains in the current year up to the amount of past 1231 losses.

Do you Recognize installment sales gain on sale immediately or over time?

You recognize it over time using the following equation:
Amount of payment to recognize in 1 year = Payment received x (Gain realized / amount realized)

How do you determine the basis of an installment note receiveable?

(1-Gross Profit Percentage) x remaining payments on note.

Can you recognize a sale to a related party?

No

If a related party sells the asset at a gain greater than the disallowed loss how much can they deduct?

They can deduct the entire disallowed loss.

If a related party sells the asset at a gain less then the total disallowed loss how much can they deduct?

They can only deduct the disallowed loss to the extent of the gain.

If the related party sells the asset at a loss how much of the disallowed loss can they deduct?

The disallowed loss expires and none of it is deducted.

What is the character of a gain in excess of depreciation for a 1250 gain?

a 1231 gain.

Can a 1250 gain be netted with 1231 gains and losses?

Yes.

What is the order of netting and finding tax liability for 1250 Gains?

1. Net 1250 gains with 1231 gains/losses
2. multiply the netted amount by the appropriate rate according to its character.

If a related party buys stock from you then sells it at a loss do they recognize the loss?

Yes, but they don't get to deduct any loss from the disallowed loss.

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