Property Transactions:

1
Chapter 5

• Property Transactions
• Capital Gains and Losses

2
Learning Objectives

• Determine the realized gain or loss from the sale
  or other disposition of property
• Determine the amount realized from the sale or
  other disposition of property
• Determine the basis of property

3
Learning Objectives

• Distinguish between capital assets and other
  assets
• Understand how capital gains and losses affect
  taxable income
• Recognize when a sale or exchange has occurred
• Determine the holding period for an asset when a
  sale or disposition occurs

4
Determination Of Gain Or Loss

• Realized gain or loss
• Amount realized less the assets adjusted basis

5
Determination Of Gains And Losses

• Amount realized consists of money and FMV of
  property received plus taxpayers debt assumed by
  the buyer less costs of sale

6
Determination Of Basis

• Original basis (Cost)
• plus additions (i.e., Capital
  improvements)
• less reductions (i.e., Depreciation)
• Adjusted basis

7
Recognized Gain Or Loss

• The amount of recognized gain or loss on
  disposition may be less than the realized gain or
  loss due to special statutory provisions
• Like-kind exchange rules
• Section 351 creation of corporation rules

8
Basis Considerations

• In most cases the cost of acquired property is
  the initial tax basis.

9
Basis Considerations

• Original cost basis includes
• Cash
• FMV of other property
• Debt
• Transactional cost
• Uniform capitalization rules are mandated for
  inventory

10
Basis Considerations

• Construction period interest and taxes must be
  capitalized for certain long useful life
  property
• Homogenous property
• Specific identification may not be possible
• Tax law requires a FIFO approach
• Example stock purchases at different prices

11
Property Received As A Gift After 1921

• Donees adjusted basis for gain is donors basis
  plus a gift tax adjustment
• The donees adjusted basis for loss is the lesser
  of the gain basis or FMV at the date of gift
• The gain basis is used for calculating any
  depreciation
• The amount of depreciation is subtracted from
  applicable gain basis or loss basis in the event
  of disposition

12
Property Received From A Decedent

• Basis of inherited property
• FMV at date of death, or
• Alternate valuation date (AVD)
• Six months from date of death or
• Disposition date if not held for six months

13
Definition Of Capital Assets

• For tax purposes capital assets are defined as
  assets other than inventory, depreciable
  property, or real property used in a trade or
  business

14
Other Code Provisions Relevant To Capital Gains
And Losses

• Dealers usually treat securities as inventory
• Non-business bad debts are always treated as
  short-term capital losses
• Certain taxpayers can subdivide land and sell a
  limited number of lots and retain capital gain
  treatment

15
Tax Treatment For Capital Gains And Losses Of
Non-corporate Taxpayers

• Capital gains
• Net capital gains result when net long-term
  capital gains exceed net short-term capital
  losses
• Capital losses
• Net capital losses (after the netting process)
  offset ordinary income to a 3,000 maximum, with
  an unlimited carryover to future years

16
Long Term Capital Assets

• Capital assets held for more than 12 months.
• Tax rate for Net Capital Gains may be taxed
• 5, 15, 25, 28
• Be sure to read this section in the text (pp. 16
  20) carefully.

17
Sale Or Exchange

• Worthless securities
• Securities that become totally worthless in a tax
  year are treated as a capital loss on the last
  day of the year (usually December 31)

18
Holding Period

• Holding period for long-term treatment is more
  than 12 months

19
Holding Period

• Property received as a gift
• If the donees adjusted basis is determined by
  reference to the donors adjusted basis, the
  donors holding period is added to the donees
  holding period
• If the donees adjusted basis is the FMV at date
  of gift, the holding period begins on the day
  after the date of gift (starts over)

20
Holding Period

• Property received from a decedent is always
  subject to a long-term holding period

21
Justification for Preferential Treatment of Net
Capital Gains

• Mobility of capital
• Mitigation of the effects of inflation and the
  progressive tax system
• Lower the cost of capital

22
Tax Planning Considerations

• Selection of property to transfer by gift
• Decision may be influenced by annual exclusion
  (12,000 per year per donee)
• Unwise to gift depreciated property
• Key try to avoid both the gift and estate tax!
• Selection of property to transfer at time of
  death
• Highly appreciated property should be retained
  until death (unless estate tax will be a big
  deal)
• Loss property should be sold before death

23
Compliance and Procedural Considerations

• Capital gains and losses are reported by
  individuals on Schedule D
• To improve taxpayer compliance, every broker is
  required to furnish the government with
  information pertaining to each customer.
• This is reported to the taxpayer on Form 1099-B.
• Taxpayer must use Schedule D to reconcile amounts
  shown on Form 1099-B