CPA® > CPA (3) REG > Area III - Federal Taxation of Property Transactions > Flashcards

Area III - Federal Taxation of Property Transactions Flashcards

Learning taxation rules for property transactions. (60 cards)

Study These Flashcards
1
Q

How do you determine the shareholder’s basis when acquiring stock in a corporation with less than 80% control?

A

Adjusted basis of transferred property + Recognized gain - Boot received = Shareholder’s basis.

No taxable event if 80% control is achieved post-property transfer.

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2
Q

What is the formula for the transferor’s basis in a corporate interest?

A

Transferor’s original basis + Recognized gain = New basis

Or

FMV of interest - Adjusted basis of property = Gain

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3
Q

What basis do shareholders and corporations apply to property transactions?

A

Both apply the adjusted basis, not the property’s fair market value (FMV).

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4
Q

How is the basis for an S-Corporation shareholder determined?

A

Starting Basis

+ Income share (including non-taxable income!)

- Distributions (cash or property)

- Non-deductible expenses

- Ordinary losses (but not below zero)

= Ending basis

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5
Q

How is the basis of gifted property determined for the recipient?

A

Loss on sale: Use FMV on gift date.

Gain on sale: Use donor’s basis.

No gain/loss: If donor’s basis < sale price < FMV.

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6
Q

What is the basic formula to calculate the basis in property?

A

Cost of property + Purchase expenses + Assumed debt + Back taxes & interest = Basis

Taxes/interest for periods before ownership aren’t deductible; they increase the basis.

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7
Q

What is the recipient’s basis in gifted property?

A

Gain: Use donor’s basis.

Loss: Use lesser of donor’s basis or FMV at distribution.

Between donor’s basis and FMV: No gain or loss.

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8
Q

How is the basis and holding period of inherited property determined?

A

Basis and holding period are FMV at decedent’s death or alternate valuation date.

If alternate date chosen & sold pre-6 months, use FMV at death. Inherited property is LTCG.

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9
Q

What is the holding period for stock received as a dividend?

A

The holding period for new stock from a dividend inherits the holding period of the original stock.

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10
Q

What type of property qualifies for like-kind exchange treatment?

A

Only real property used in business, located in the US.

TCJA disallows personal property exchanges.

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11
Q

What does ‘boot’ mean in a like-kind exchange?

A

Boot is the total of cash received + unlike property received + liabilities transferred.

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12
Q

In a like-kind exchange, how is net boot paid handled when mortgages are netted?

A
  1. Do not subtract boot paid from cash received.
  2. Ignore the boot paid in the mortgage.
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13
Q

What is an involuntary conversion and when does it not result in a gain?

A

Occurs when property is converted involuntarily with compensation received.

No gain if proceeds are fully reinvested.

Gain = Lesser of realized gain or amount not reinvested.

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14
Q

What conditions allow for the exclusion of gain on a primary residence sale?

A

Must occupy for 2 of the last 5 years.

Loss on home sale is not deductible.

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15
Q

What defines a wash sale?

A

Occurs when stock sold at a loss is repurchased within 30 days.

Disallowed loss increases the basis of new stock, which adopts the acquisition date of the old stock.

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16
Q

Who are considered related parties in property transactions, and how does it affect the transaction?

A

Related parties include:

  • Ancestors
  • Siblings
  • Spouse
  • Descendants
  • Corporations or Partnerships (50%+ shareholder)

In-laws are not related parties.

Transaction effects:

  • Seller cannot take a loss.
  • Gain is always recognized.
  • Related party incurs disallowed loss on sale. Holding period starts upon acquisition.

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17
Q

How are capital losses utilized in a corporation?

A

Capital losses only offset capital gains.

  • Carryback 3 years (option lost if not elected)
  • Carry forward 5 years as short-term capital loss (STCL).
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18
Q

Which assets are excluded from being capital assets?

A
  • Inventory
  • Business interests
  • Accounts Receivable
  • Covenant not to compete

Goodwill is a capital asset.

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19
Q

What are the steps to apply a capital gain or loss?

A
  1. Net short-term gains and losses.
  2. Net long-term gains and losses.
  3. Combine results.
  4. Deduct $3,000.
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20
Q

What amount of ordinary income can an individual’s capital losses offset?

A

$3,000 annually. Excess carried forward for $3,000 each year.

No carryback allowed.

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21
Q

What type of property is subject to section 1231?

A

Section 1231 covers real or personal business property held over a year.

Inventory is never 1231 property.

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22
Q

How are section 1231 gains and losses treated?

A

Casualty Losses on 1231 Property - Net the losses:

  • Net Loss: Treated as ordinary loss
  • Net Gain: Combine with other 1231 gains

1231 Net Loss: Exceeds gains, ordinary loss

1231 Net Gain: Exceeds losses, treated as LTCG

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23
Q

What is the treatment for section 1245 depreciation recapture, and when does it apply?

A

Recapture as ordinary gain up to depreciation.

Remainder is 1231 gain (LTCG)

No 1245 losses.

  • 1231 Gain: LTCG
  • 1245 Gain: Ordinary
  • Casualty Gain: LTCG
  • 1231 Loss: Ordinary
  • 1245 Loss: N/A
  • Casualty Loss: Ordinary

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24
Q

What properties qualify for section 1250 treatment, and how are gains/losses handled?

A

1250 property refers to real estate.

Use 1250 for gains only. Losses use 1231.

Individuals: Post-1986, gain is 1231 LTCG.

If straight-line depreciation, use 1231.

Corporations: Section 291, 20% classified as ordinary gain.

Remainder is 1231 LTCG.

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25
When are 1231, 1245, and 1250 gains or losses always considered ordinary?
Always ordinary when the asset is held **less than** one year.
26
What is the initial basis of purchased property typically composed of?
* Purchase price * Closing costs * Any additional costs to prepare the asset for use ## Footnote The initial basis serves as the starting point for calculating depreciation and any future gain or loss on the sale of the property.
27
# True or False: Repair costs are included in the basis of purchased property.
FALSE ## Footnote Repair costs are generally expensed as incurred and not capitalized into the asset's basis.
28
# Fill in the blank: Under MACRS, residential rental property is depreciated over \_\_\_\_\_\_ years.
27.5 years ## Footnote The 27.5-year recovery period applies to residential rental property under the Modified Accelerated Cost Recovery System (MACRS).
29
What does MACRS stand for?
Modified Accelerated Cost Recovery System ## Footnote MACRS is the current tax depreciation system in the United States, allowing accelerated depreciation of property for tax purposes.
30
List two key characteristics of MACRS depreciation methods.
* Accelerated depreciation rates * Different recovery periods for different classes of assets ## Footnote MACRS provides different methods, like the 200% and 150% declining balance methods, to accelerate the depreciation deduction in earlier years of an asset's life.
31
How is the basis of property adjusted after depreciation is taken?
Reduced by the accumulated depreciation ## Footnote This adjusted basis is crucial for calculating gain or loss upon the sale or disposal of an asset.
32
# True or False: Intangible assets are amortized over their useful life using MACRS.
FALSE ## Footnote Intangible assets are typically amortized over a 15-year period using the straight-line method, not MACRS.
33
What is the maximum recovery period for amortization of intangibles under Section 197?
15 years ## Footnote Section 197 intangibles, such as goodwill and patents, are amortized over a maximum of 15 years using the straight-line method.
34
# Fill in the blank: Goodwill is amortized over \_\_\_\_\_\_ years for tax purposes.
15 years ## Footnote Goodwill and other intangibles acquired in a business acquisition are amortized over 15 years according to IRS regulations.
35
List three types of intangibles that can be amortized under Section 197.
* Goodwill * Trademarks * Patents ## Footnote These intangibles are subject to amortization rules set by the IRS to spread their cost over the useful life.
36
What is the primary advantage of MACRS for taxpayers?
Accelerates depreciation deductions, reducing taxable income in earlier years ## Footnote This acceleration can improve cash flow in the short term by deferring taxes to later years.
37
# True or False: Land is depreciable under MACRS.
FALSE ## Footnote Land is not depreciable because it does not wear out, become obsolete, or get used up.
38
What does the term 'half-year convention' refer to in MACRS?
A rule that assumes assets are placed in service or disposed of at the midpoint of the year ## Footnote This convention simplifies the calculation of depreciation by allocating half a year's worth of depreciation in the first and last year.
39
What type of property does the mid-quarter convention apply to in MACRS?
If more than 40% of depreciable property is placed in service in the last quarter of the tax year ## Footnote The mid-quarter convention aims to prevent taxpayers from accelerating too much depreciation by placing assets in service at the end of the year.
40
What is the formula for calculating the depreciation deduction using the MACRS 200% declining balance method?
Depreciation deduction = 2 × (Cost - Accumulated Depreciation) × (1 / Useful Life) ## Footnote The 200% declining balance method allows for a larger depreciation deduction early in the asset's life, switching to straight-line when advantageous.
41
What is the basic principle behind a Section 1031 like-kind exchange?
Allows deferral of capital gains tax on exchanged properties that are similar in nature. ## Footnote A Section 1031 like-kind exchange enables investors to defer paying capital gains taxes on an investment property when it is sold, as long as another similar property is purchased with the profit gained by the sale of the first property.
42
# True or False: Under Section 1031, personal property can be exchanged for real property.
FALSE ## Footnote Section 1031 only permits like-kind exchanges of real property for real property, excluding exchanges between real and personal property.
43
What is the time limit to identify a replacement property in a Section 1031 exchange?
45 days from the sale of the original property. ## Footnote The Internal Revenue Code specifies a strict 45-day window to identify potential replacement properties, emphasizing the need for timely action in a 1031 exchange.
44
What is the maximum time allowed to complete a Section 1031 exchange after selling the original property?
180 days. ## Footnote The 180-day window runs concurrently with the 45-day identification period, meaning the entire exchange must be completed within 180 days of the initial sale to qualify for tax deferral under Section 1031.
45
# Define: involuntary conversion
Occurs when property is destroyed, stolen, condemned, or disposed of under the threat of condemnation. ## Footnote An involuntary conversion can result in a gain or loss when the owner receives insurance or compensation that differs from the property's adjusted basis.
46
What tax treatment can be applied to gains from involuntary conversions?
The gains can be deferred if the proceeds are reinvested in similar property within a specified period. ## Footnote To defer tax on gains from an involuntary conversion, the taxpayer must reinvest in similar property within two years for personal property and three years for real property.
47
# True or False: Gains from the destruction of personal-use property must always be recognized.
TRUE ## Footnote Unlike business or investment property, personal-use property gains resulting from involuntary conversion are generally recognized for tax purposes.
48
What is the exclusion limit for the sale of a personal residence for single taxpayers?
250000 ## Footnote Single taxpayers can exclude up to $250,000 of gain from the sale of their primary residence if they meet certain ownership and use tests.
49
# Fill in the blank: To qualify for the personal residence exclusion, the taxpayer must have owned and used the home as their principal residence for at least \_\_\_\_\_\_ years out of the last five years.
2 ## Footnote The ownership and use tests require the taxpayer to have owned and used the property as their main home for at least two of the five years preceding the sale.
50
What is the exclusion limit for married taxpayers filing jointly on the sale of a personal residence?
500000 ## Footnote Married couples filing jointly can exclude up to $500,000 of gain on the sale of their primary residence if both spouses meet the ownership and use tests.
51
Under what condition can a taxpayer qualify for a partial exclusion of gain from the sale of a personal residence?
If the sale is due to a change in employment, health, or unforeseen circumstances. ## Footnote A partial exclusion may be available if the sale becomes necessary due to specific reasons, allowing a pro-rated exclusion based on the duration of ownership and use.
52
# True or False: A taxpayer may use the personal residence exclusion more than once within a two-year period.
FALSE ## Footnote The exclusion for the gain from the sale of a personal residence can generally only be claimed once every two years, unless qualifying under certain exceptions.
53
What is the primary tax advantage of a Section 1031 like-kind exchange?
Deferral of capital gains taxes. ## Footnote By deferring capital gains taxes, investors can reinvest the entire proceeds from the sale into a new property, potentially enhancing their investment growth.
54
What is a boot in a Section 1031 exchange?
Non-like-kind property received in the exchange, typically cash. ## Footnote Receiving a boot can trigger partial tax liabilities, as it represents value received beyond the like-kind property.
55
How is gain calculated in an involuntary conversion?
Gain is the amount received (e.g., insurance proceeds) minus the adjusted basis of the property. ## Footnote If the compensation received exceeds the adjusted basis, the difference is the recognized gain unless deferred by reinvestment.
56
What conditions must be met for a property to qualify under Section 1031?
* Must be held for productive use in trade, business, or investment. * Must be exchanged for like-kind property. ## Footnote Properties used primarily for personal use do not qualify for a Section 1031 exchange.
57
Does a primary residence qualify for a Section 1031 exchange?
No ## Footnote A primary residence is not considered an investment property, thus it does not qualify for deferral under Section 1031.
58
Can losses from the involuntary conversion of personal-use property be deducted?
No ## Footnote Losses from involuntary conversions of personal-use property are generally not deductible for tax purposes.
59
What happens if a taxpayer does not purchase a replacement property in an involuntary conversion?
The gain is recognized and taxed in the year the proceeds are received. ## Footnote Without reinvestment, the taxpayer cannot defer the gain and must pay applicable taxes.
60
What is the primary risk of not meeting the 1031 exchange deadlines?
Loss of tax deferral benefit. ## Footnote Failing to meet the 45-day identification and 180-day exchange deadlines results in a taxable event, as the exchange would not qualify for tax deferral.
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