Character of Gain

1
Character of Gain Loss, II

• Jon Davis
• Accountancy 312

2
Brief Review

• Property Basis, Realization of G/L
• Capital G/L
• Capital assets, defined
• Effect of holding period
• Corporate taxpayers
• Individual taxpayers
• Netting procedures

3
Complexity Opportunity!!!

• Why Bill Gates probably doesnt pay much tax.
• Changing the character of income
• Shifting income/loss between taxpayers

4
1231 Assets Overview

• 1231 gets the best of both worlds
• Capital gains if net gain
• Ordinary losses if net loss
• Why???
• 1231 Assets
• Depreciable or real property in trade or biz
  held gt 1 yr
• Livestock, crops, 197 intangibles
• Casualty gains if net gain for year

5
Todays Objectives

• Be able to identify assets qualifying for 1231,
  1245 and 1250
• Have a basic understanding the 1231 netting
  process
• Understand 1245, 1250 and 291 recapture
• Understand the 1231 lookback rule
• Understand the effect of disposition on recapture

6
1231 Assets are Not

• Inventory
• Accounts Receivable
• Literary, artistic, and musical compositions
• Certain government documents (the Nixon rule)

7
Netting Overview

• Recapture provisions applied
• 1245, 1250, 291
• Casualty gain and loss netting
• 1231 assets and non-personal use capital assets
• 1231 netting
• Net gain
• Lookback rule
• The rest flows into capital gain/loss netting
• Net loss -gt everything is ordinary

8
1245 Recapture

• 1245 Property
• Personalty, 197, ACRS nonresidential realty,
  unitary ag structures, old elevators, and other
  esoterica
• All cost recovery (179, 197, 167, 168) is
  recaptured, to extent of gain
• Installment method is not allowed

9
1250 Recapture

• Depreciable realty and leaseholds that are not
  1245
• Residential (1975 to 1986 acquisition)
• Nonresidential (1969 to 1980)
• Excess of accelerated over SL
• Recall unrecaptured 1250 is a type of capital
  gain for individuals
• No installment method for recaptured amount!

10
291 Recapture

• Applies only to corporations
• 20 of excess of as if 1245 over 1250 actually
  recaptured

11
The Lookback Rule

• Post 1231 netting, any net 1231 gain may be
  reclassified
• It becomes ordinary to the extent of
  nonrecaptured 1231 losses in past 5 years

12
Dispositions of 1231 Property

• Gift
• Recapture carries over to donee
• Death
• Recapture is lost
• Yet another tax motive for murder!
• Others

13
Wrap Up

• Dont get caught in the details!!!
• Well get some hands on next class.
• At this point, you should have a basic
  comprehension of the netting processes and
  different kinds of assets and recaptures.
• Application is next!