What is the difference between realized and recognized?
Realized = it actually happened (ex = your house went up in value by $10,000)
Recognized = it was recorded (ex = you don’t recognize the increase until the house is sold)
When an asset is sold, what items are included in the amount realized for the sale?
Money received (boot)
Cancellation of debt (COD) (boot)
Assumption of debt (boot)
FMV of the property received
Less: selling expenses
What items may be sold or received as a gain, but excluded from taxes?
H – I – D – E – -- I – T
Exchange of like-kind (business)
Treasury capital and stock
Which losses are NOT deductible?
W – R – a – P
Related party transactions
Personal losses (except casualty and theft)
Gain to the extent of ______ is taxable. What is included in this category?
Cash kept and not reinvested
Cancellation of debt (excess debt assumed by the buyer)
What are the rules for using the homeowner’s exclusion?
Up to $500,000 MFJ or $250,000 all others
Must use the property as a principle residence for 2 of 5 years (each spouse is considered separately)
Reduce gain eligible for exclusion by nonqualified use (separate flashcard)
Time to sell the home is not included and is not considered unqualified use as long as the home sits empty
The exclusion is renewable and does not need to be reinvested
A partial exclusion is allowed for hardship calculated as [(# months lived in / 24 months) * exclusion amt]
How is gain or homeowners exclusion affected by nonqualified use of the home? What is the formula?
Any nonqualified use (such as renting the property) in that timeframe does not affect the exclusion amount but will reduce the amount of gain eligible for exclusion
The formula for how much gain is not eligible for non-qualified use = [(yrs of nonqualified use / total yrs owned) x gain = gain not eligible for exclusion]
When are gains recognized for an involuntary conversion?
When any amounts received for the involuntary conversion are not reinvested into similar property.
What are the rules for using the involuntary conversion exclusion? What is the basis of the replacement property?
The loss must be from destruction, theft or condemnation
The amount received (typically ins proceeds or gov pay-off) must be entirely reinvested in a similar property (serve the same use).
The new property must be purchased within
** 2 years if personal property
** 4 years if principlal residence in a federally declared disaster area
** 3 years if condemned business property
Basis (no gain recognized): same as the old asset + any additional investment
Basis (gain recognized): cost of new asset – deferred gain [see R3-16]
Are losses for involuntary conversion recognized? If so, what is the basis of the new asset?
Yes – all losses are recognized
The basis is the purchase price of the new asset.
What are the rules for like-kind exchange of real vs personal property?
Real: Used in a trade, business, or for investment exchanged for any other real property used in a trade, business, or for investment. It doesn’t have to serve the same use. You can trade an office building for a land investment.
Personal: Must be exchanged for other personal property that is in the same asset class (car for truck; copier for printer, NOT car for desk)
What are the timing requirements for a like-kind exchange:
The new property must identified within 45 days of giving up the old property
The new property must be acquired by the earlier of 180 days or the due date of the taxpayer’s return including extensions
When boot is received in a like-kind exchange, how is the boot treated with regard to gain?
Recognized gain is the lower of
** realized gain OR
** boot received
When realized gain is more than recognized gain in a like-kind exchange, what happens to the gain not recognized?
It becomes deferred gain and modifies the basis of the new property
What is the formula to calculate deferred gain?
Realized gain - Recognized gain = Deferred gain
What is the formula for determining the basis of the new property in a like-kind exchange?
Basis = FMV of like-kind property received – deferred gain + deferred loss
How are losses treated in a like-kind exchange?
Losses only adjust the basis of the new property. Losses are not recognized.
What is included in “boot received”
Relief of liabilities (the new owner pays a loan on the property you are selling)
Receipt of non-qualifying property (some property other than the type you’re selling)
A taxpayer owns investment realty worth $40,000 with an adjusted basis of $25,000. He exchanges this property for other realty worth $35,000 plus $5,000 cash. What is the realized gain, recognized gain, and basis of the new property from the like-kind exchange?
Realized gain: $40,000 - $25,000 = $15,000
Recognized gain: $5,000 (the lesser of the realized gain ($15,000) or boot received $5,000)
Deferred gain: $15,000 realized gain - $5,000 recognized gain = $10,000
Basis: $35,000 FMV of new property - $10,000 deferred gain = $25,000
PRACTICE R3-19 TO R3-23
PRACTICE R3-19 TO R3-23
True / False: Corporations must pay tax on the gains received from sale of their own stock, or from reissuing T-Stock?
Corporations do not pay tax on any issue related to their own stock transactions.
What is a Wash Sale?
When a security is sold for a loss and is repurchased within 30 days beforeor after the sale.
How is a loss on a wash sale recorded? What is the date of acquisition of the wash purchase?
No loss is allowed, but the the loss is used to adjust the basis of the wash purchase
Basis = purchase of wash shares – deferred gain + deferred loss
The wash purchase date is the adjusted to become the original stock purchase date
How is a gain on a wash sale recorded? What is the date of acquisition of the wash purchase?
Gain is considered capital gain and recorded immediately
The new purchase price is the basis of the wash purchase
How is a loss in each category recognized for tax purposes: (a) sale of home, (b) involuntary conversion, (c) like-kind exchange?
(a) loss is NOT recognized
(b) loss is recognized
(c) loss adjusts the basis of the new property
True / False: When the gain exceeds $100,000, property acquired from related parties and certain close relatives does not qualify as replacement property.
What types of property cannot be recognized as a like-kind exchange?
Going Concern Value
Real Property in Different Countries
In a like-kind exchange, both parties assume liabilities. How do these 2 liabilities affect gain/loss calculations?
The liability assumed by the taxpayer adds to the adjusted basis.
The liability assumed by the buyer is boot and adds to the total received by the taxpayer.
The two liabilities are netted to determine boot received
True / False: A taxpayer married in year 2. His wife lived in his home for 13 of 24 months before they sold the home. Her portion of the homeowners exclusion is (13/24)*$250,000.
The exclusion is all-or-nothing. If she did not live in the home for 24 months, she does not get an exclusion.
A homeowner used part of the home as an office and depreciated for its use. How is this depreciation treated for tax purposes when the home is sold for a gain?
The depreciation is Section 1231 recapture and taxed as capital gain in the 25% bracket.
How is a nonqualified use of a residential home (such as renting the home) treated differently if the homeowner uses the home as a principle residence for the first 24 month vs uses it as a rental for the first 24 months?
If used as a principle residence first, and then rented the nonqualified portion is not deducted from the gain (no gain for rental recognized) before the homeowner's exclusion is applied.
If used as a rental first, the rental portion (#yrs rented / total years owned) must be deducted from the gain and recognized as capital gain before the homeowner's exclusion can be applied.