Ch13 - 2015

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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.

Comprehensive Volume

1

Chapter 1!

"roperty #ransactions$

%eter&ination o' (ain or Loss,)asis Considerations, and

*onta+able +changes

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#he )ig "icture -slide 1 o' /

Alice ons a house that she inherited

'ro& her grand&other &onths ago.

#he 'air &ar3et value o' the house at the date o'her grand&other4s death as 5,000.

6er grand&other4s basis 'or the house as

25,000

#he house currently is orth 700,000.

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#he )ig "icture -slide 2 o' /

Alice is considering to options.

#he 'irst is to give the house to her son,

Michael. Michael, his i'e 8andra, and their

daughter "eggy ould live in the house.

#he second option is to sell the house.

"ro9ected selling e+penses ould be

about : o' the selling price.

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#he )ig "icture -slide ! o' /

Alice ould also li3e to 3no the ta+ conse;uenceso' selling her boat. 8he paid 22,000 'or the boat &onths ago and has used it

e+clusively 'or personal use.

)ased on listings in the area, she anticipates that she cansell it 'or 20,000 to 2!,000.

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#he )ig "icture -slide o' /

Alice also has oned a building -ad9usted basis50,000/ used in her business that as recentlydestroyed by a 'ire.

#he insurance co&pany paid Alice 100,000 to co&pensateher 'or the loss. *o she is loo3ing to ac;uire suitable replace&ent property.

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%eter&ination o' (ain or Loss-slide 1 o' /

Reali=ed gain or loss

%i''erence beteen a&ount reali=ed 'ro& sale or

other disposition o' the asset and its ad9usted basis

8ale or other disposition

ins, casualties, conde&nations, the'ts,

bond retire&ents

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A&ount reali=ed 'ro& disposition

#otal consideration received, including cash, ?M@

o' property received, &ortgagesloans trans'erred

to buyer ?air &ar3et value -?M@/$ @alue o' asset deter&ined by

ar&s>length transaction, i.e., a&ount set by transaction

beteen illing buyer and seller ith neither obligated

to enter into transaction

Reduced by any selling e+penses

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%eter&ination o' (ain or Loss-slide ! o' /

Ad9usted basis

Briginal cost -or other ad9usted basis/ plus capital

additions less capital recoveries

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%eter&ination o' (ain or Loss-slide o' /

Capital additions

Cost o' i&prove&ents and better&ents to the

property that are capital in nature and not currently

deductible

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Capital recoveries

A&ount o' basis recovered through$

%epreciation or cost recovery alloances

Casualty and the't losses -and insurance proceeds/

Certain corporate distributions

A&orti=able bond pre&iu&

ase&ents

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Recogni=ed gain or loss

A&ount o' reali=ed gain -loss/ that is included in

-deducted 'ro&/ gross inco&e

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%eter&ination o' (ain or Loss-slide o' /

Reali=ed gains and losses are not alays recogni=ed Reali=ed gains &ay be de'erred or e+cluded

Reali=ed losses &ay be de'erred or disalloed

Reali=ed losses 'ro& the sale, e+change, orconde&nation o' personal use assets -e.g., a personalresidence/ are not recogni=ed 'or ta+ purposes +ception > casualty or the't losses 'ro& personal use assets

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#he )ig "icture > +a&ple

(ain Bn 8ale o' "ersonal se Assets

Return to the 'acts o' #he )ig "icture on p. 1!>1.

Assu&e Alice sells the boat, hich she has

held e+clusively 'or personal use, 'or 2!,000.

Recall that her ad9usted basis o' the boat is

22,000.

Alice has a reali=ed and recogni=ed gain o'

1,000.

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#he )ig "icture > +a&ple D

Loss Bn 8ale o' "ersonal se Assets


Assu&e Alice sells the boat in +a&ple 'or

20,000.

8he has a reali=ed loss o' 2,000, but the loss is

not recogni=ed.

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Recovery o' Capital %octrine

#a+payer is entitled to recover cost or other

original basis o' property ac;uired and is not

ta+ed on that a&ount

#o e+tent receive only invest&ent bac3 upon

disposition o' an asset, ta+payer has no gain

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)asis Considerations-slide 1 o' 7/

Briginal basis o' an asset is generally its cost

Bargain purchaseassets have a basis e;ual to

their ?M@

)argain a&ount &ay be inco&e to purchaser -e.g.,

e&ployee E co&pensationF shareholder E

dividend/

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)asis Considerations-slide ! o' 7/

Allocation proble&s$ lu&p>su& purchase

Must allocate basis to each asset obtained

Allocation usually based on relative ?M@ o' assets

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)asis Considerations-slide o' 7/

Allocation proble&s$ (oing concern

purchase

Assign purchase price to assets -e+cluding goodill/

to e+tent o' their total ?M@#hen allocate a&ong assets based on ?M@

Residual a&ount is goodill

(oodill is an a&orti=able G 1H asset

Allocation applies to both purchaser and seller

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Allocation proble&s$ *onta+able stoc3

dividends

)asis o' original shares is allocated over the

original and ne shares

)ased on nu&ber o' shares -co&&on on co&&on/, or

)ased on relative ?M@ -pre'erred on co&&on/

6olding period includes the holding period o' theoriginal shares

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Allocation proble&s$ *onta+able stoc3 rights)asis in rights is =ero unless ta+payer is re;uired

or elects to allocate basis 'ro& stoc3

Re;uired to allocate i' ?M@ o' rights is at least 15: o'the ?M@ o' the stoc3

Allocation is based on relative ?M@ o' rights and stoc3

6olding period includes holding period o' the

stoc3 on hich the rights ere distributed 6oever, i' the rights are e+ercised, holding period o'

nely ac;uired stoc3 begins ith date the rights aree+ercised

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(i't )asis-slide 1 o' 10/

(i't property &ay have a dual basis, i.e., basis

'or gain and loss &ay di''er

)asis is dependent on relationship beteen

?M@ at date o' gi't and donor4s ad9usted basis

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(i't basis 'or cost recovery

#he doneeIs basis 'or cost recovery is the donor4s

basis -doneeIs gain basis/

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(i't )asis-slide ! o' 10/

(i't basis 'or subse;uent gain

Jhen a gi'ted asset is disposed o' by the donee,

the basis 'or calculating any gain is the donor4s

ad9usted basis -carryover basis/

#his basis is called the Kgain basis

(ain basis &ay be increased i' donor incurred gi't ta+

on gi't

6olding period 'or donee includes that o' donor

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(i't )asis-slide o' 10/

(i't basis 'or subse;uent loss

Jhen a gi'ted asset is disposed o' by a donee, the

basis 'or calculating any loss is the lesser o' ?M@

at the date o' gi't or the donor4s ad9usted basis

#his basis is called the Kloss basis

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(i't basis 'or subse;uent loss

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(i't basis hen no gain or loss

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(i't )asis-slide o' 10/

+a&ple o' gi't basis deter&ination

Ale+ received a gi't 'ro& )eth on Nune 15 this year

?M@ o' asset on Nune 15 as D,000

)eth bought the asset on May 5, 1HD5 'or 10,000

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(i't )asis-slide D o' 10/

+a&ple o' gi't basis deter&ination -cont4d/

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(i't )asis-slide H o' 10/

Ad9ust&ent 'or gi't ta+es

#he proportion o' gi't ta+ paid -on gi'ts a'ter 1H7/

by the donor on appreciation o' asset can be added

to basis o' donee#he doneeIs basis is e;ual to$ %onor4s basis O

P-unreali=ed appreciationta+able gi't/ Q gi't ta+

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+a&ple o' gi't ta+$

Cathy received a gi't 'ro& %arren on Nune 15 o'

this year

?M@ on Nune 15 as !,000

%arren had a basis in the asset o' 2H,000

%arren paid gi't ta+ o' D00

Cathy4s basis in the gi'ted property is 2H,200P2H,000 O -5,000-!,000 1,000/ Q D00/

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"roperty Ac;uired

'ro& a %ecedent -slide 1 o' /

(enerally, bene'iciary4s basis in inherited

assets ill be the ?M@ o' the asset at

decedent4s date o' death

+ception$

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"roperty Ac;uired


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"roperty Ac;uired

'ro& a %ecedent -slide ! o' /

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"roperty Ac;uired

'ro& a %ecedent -slide o' /

+a&ple o' inherited property valuation$

At Re+4s date o' death, April !0 o' this year, his

assets had an ad9usted basis o' 200,000, and a

?M@ o' 00,000 "@% selected and assets distributed Nune !0F

bene'iciary4s basis is 00,000

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"roperty Ac;uired


+a&ple o' inherited property valuation

-cont4d/

Bctober !0 this year -si+ &onths a'ter date o'

Re+4s death/, the assets had a ?M@ o' 750,000 A@% selected and assets distributed *ove&ber 10F

bene'iciary4s basis is 750,000

A@% selected and assets distributed Nune !0 hen ?M@

o' assets is 70,000F bene'iciary4s basis is 70,000

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"roperty Ac;uired


%eathbed gi'ts

"roperty inherited by ta+payer -or spouse/ hich

as both appreciated and gi'ted by sa&e ta+payer

to decedent ithin 1 year o' decedentIs death)ene'iciary4s basis in property is carryover o'

decedent4s basis -not date o' death ?M@/ (enerally the sa&e basis ta+payer had on date o' gi't

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"roperty Ac;uired

'ro& a %ecedent -slide o' /

8urvivor4s share o' co&&unity property

)oth decedent4s share and surviving spouse4s share o'

co&&unity property receives basis o' ?M@ on date o'

death

8urviving spouse4s share dee&ed to be ac;uired 'ro& decedent

8urvivor4s share in co&&on la state

Bnly 12 o' 9ointly held property o' spouses is included in

the estate

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#he )ig "icture > +a&ple 22

"roperty Ac;uired ?ro& A %ecedent


Alice inherited her grand&other4s house.

At the date o' death, the ad9usted basis 'or the

house as 25,000.

#he house4s 'air &ar3et value at the date o' death

as 5,000.

#he alternate valuation date as not elected.Alice4s basis 'or inco&e ta+ purposes is 5,000.

#his is co&&only re'erred to as astepped-up basis.

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#he )ig "icture > +a&ple 2!

"roperty Ac;uired ?ro& A %ecedent


Assu&e the sa&e 'acts as in +a&ple 22,

e+cept the house4s 'air &ar3et value at the date

o' death as 270,000.

Alice4s basis 'or inco&e ta+ purposes is

270,000.

#his is co&&only re'erred to as astepped-down

basis.

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%isalloed Losses-slide 1 o' 5/

Related parties -G 27/

Losses on sale o' assets beteen related parties are

disalloed

?or inco&e>producing or business property, anyloss disalloed can be used to reduce gain

recognition on subse;uent disposition o' asset to

unrelated party

Bnly available to original trans'eree

*ot available 'or sales o' personal use assets

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Related parties include$

?a&ily &e&bers,

Corporation and a shareholder ho ons greater

than 50: -directly or indirectly/ o' thecorporation, and

"artnership and a partner ho ons greater than

50: -directly or indirectly/ o' the partnership

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%isalloed Losses-slide ! o' 5/

Jash sales

Losses 'ro& ash sales are disalloed

Jash sale occurs hen ta+payer disposes o' stoc3

or securities at loss and ac;uires substantiallyidentical stoc3 or securities ithin !0 days be'ore

or a'ter the date o' the loss sale

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%isalloed Losses-slide o' 5/

Jash sales

%isalloed loss is added to the basis o' the

substantially identical stoc3 or securities that

caused the disalloance%oes not apply to gains reali=ed on disposition o'

securities

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#he )ig "icture > +a&ple !1

Jash 8ale


Alice oned 100 shares o' (reen Corporation stoc3 -ad9ustedbasis o' 20,000/.

8he sold 50 shares 'or D,000.

#en days later, she purchased 50 shares o' the sa&e stoc3 'or ,000. Alice4s reali=ed loss o' 2,000 -D,000 a&ount reali=ed >

10,000 ad9usted basis/ is not recogni=ed because it resulted'ro& a wash sale.

Alice4s basis in the nely ac;uired stoc3 is H,000 -,000purchase price O 2,000 unrecogni=ed loss 'ro& the ashsale/.

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"ersonal use assets

Loss on the disposition o' personal use assets is

disalloed

"ersonal use asset loss cannot be converted into abusiness -or production o' inco&e/ use deductible

loss

Briginal loss basis 'or an asset converted is the loer o'

personal use basis or ?M@ at date o' conversion

Cost recovery basis si&ilarly li&ited

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*onta+able #ransactions-slide 1 o' /

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*onta+able #ransactions-slide 2 o' /

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*onta+able #ransactions-slide ! o' /

6olding period 'or ne asset

#he holding period o' the asset surrendered in a

nonta+able transaction carries over to the ne

asset ac;uired

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*onta+able #ransactions-slide o' /

%epreciation recapture

"otential recapture 'ro& the asset surrendered

carries over to the ne asset ac;uired in the

transaction

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Li3e>Sind +changes-slide 1 o' 11/

G10!1 requiresnonta+able treat&ent 'or gains

and losses hen$

?or& o' transaction is an e+change

Assets involved are used in trade or business or

held 'or production o' inco&e

6oever, inventory, securities, and partnership

interests do not ;uali'y

Asset e+changed &ust be li3e>3ind in nature or

character as replace&ent property

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Li3e>3ind property de'ined

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Li3e>Sind +changes-slide ! o' 11/

Jhen ta+payers involved in an e+change arerelated parties#o ;uali'y 'or nonta+able e+change treat&ent,

related parties &ust not dispose o' propertye+changed ithin the 2 year period 'olloinge+change

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Li3e>Sind +changes-slide o' 11/

+change re;uire&ent#he transaction &ust involve a direct e+change o'

property to ;uali'y as a li3e>3ind e+change

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)oot

Any property involved in the e+change that is not

li3e>3ind property is Kboot

#he receipt o' boot causes gain recognition e;ualto the lesser o' boot received -?M@/ or gain

reali=ed

*o loss is recogni=ed even hen boot is received

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)oot

#he trans'eror o' boot property &ay recogni=e gain

or loss on that property

(ain or loss is recogni=ed to the e+tent o' the di''erencebeteen the ad9usted basis and the 'air &ar3et value o'

the boot

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Li3e>Sind +changes-slide o' 11/

)asis in li3e>3ind asset received$ ?M@ o' ne asset

(ain not recogni=ed

O Loss not recogni=ed

E )asis in ne asset

)asis in boot received is ?M@ o' property

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Li3e>Sind +changes-slide D o' 11/

)asis in li3e>3ind property using Code

approach Ad9usted basis o' li3e>3ind asset given

O Ad9usted basis o' boot givenO (ain recogni=ed

?M@ o' boot received

Loss recogni=ed

E )asis in ne asset

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Li3e>Sind +changes-slide H o' 11/

+a&ple o' an e+change ith boot$

Ta3 and @ira e+change e;uip&ent o' sa&e general

business asset class

Ta3$ )asis E 25,000F ?M@ E 0,000

@ira$ )asis E 20,000F ?M@ E !0,000

@ira also gives securities$ )asis E ,000F

?M@ E 10,000

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+a&ple -Cont4d/ Ta3 @ira

?M@ "roperty Rec4d!0,000 0,000

O8ecurities 10,000 >0>

#otal ?M@ Rec4d 0,000 0,000Less$ )asis "roperty (iven 25,000 !0,000 U

Reali=ed (ain 15,000 10,000

)oot Rec4d 10,000 >0>

(ain Recogni=ed 10,000 >0>

U20,000 ;uip. O 10,000 8ecurities E !0,000

8ecurities$ -10,000 ?M@ > ,000 basis/ E !,000 gain

recogni=ed by @ira

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+a&ple -Cont4d/ Ta3 @ira

?M@ "roperty Rec4d !0,000 0,000

"ostponed (ain >5,000 >10,000

)asis "roperty Rec4d 25,000 !0,000

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3ind e+changes

l i

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user

< l C i

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year ta+payer

#a+payer4s replace&ent period is 'ro& *ove&ber, 2012 to %ece&ber !1, 2015

< l C i

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8ale o' Residence-slide 1 o' /

Loss on sale

As ith other personal use assets, a reali=ed loss

on the sale o' a personal residence is not

recogni=ed

8ale o' Residence

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(ain on sale

Reali=ed gain on sale o' principal residence is

sub9ect to ta+ation

Reali=ed gain &ay be partly or holly e+cludedunder G121

8ale o' Residence

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8ale o' Residence-slide ! o' /

G121 provides 'or e+clusion o' up to 250,000

o' gain on the sale o' a principal residence #a+payer &ust on and use as principal residence 'or at

least 2 years during the 5 year period ending on date o'sale

8ale o' Residence

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8ale o' Residence-slide o' /

A&ount o' +clusion

250,000 &a+i&u&

Reali=ed gain is calculated in nor&al &anner

A&ount reali=ed on sale is reduced by sellinge+penses such as advertising, bro3er4s

co&&issions, and legal 'ees

8ale o' Residence

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A&ount o' +clusion -cont4d/ ?or a &arried couple 'iling 9ointly, the 250,000 &a+ is

increased to 500,000 i' the 'olloing re;uire&ents are&et$

ither spouse &eets the 2 year onership re;4t, )oth spouses &eet the 2 year use re;4t,

*either spouse is ineligible due to the sale o' another principalresidence ithin the prior 2 years

8tarting in 200D, a surviving spouse can continue to use the

500,000 e+clusion a&ount on the sale o' a personalresidence 'or the ne+t to years 'olloing the year o' thedeceased spouse4s death

8ale o' Residence

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G121 cannot be used ithin 2 years o' its last usee+cept in special situations, such as$

Change in place o' e&ploy&ent,

6ealth,

Bther un'oreseen circu&stances nder these circu&stances, only a portion o' the

e+clusion is available, calculated as 'ollos$

Ma+ +clusion a&ount Q nu&ber o' ;uali'ying &onths

2 &onths

8ale o' Residence

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8ale o' Residence-slide o' /

#he 6ousing Assistance #a+ Act o' 200D

reduces the gain eligible 'or the G 121

e+clusion 'or a vacation ho&e converted to a

principal residenceG 121 e+clusion is reduced by the proportion o' the

periods o' non;uali'ied use co&pared to the period

the property as oned by the ta+payerApplies to sales and e+changes occurring a'ter

%ece&ber !1, 200D

Bther *onrecognition "rovisions

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Bther *onrecognition "rovisions-slide 1 o' 7/

8everal additional nonrecognition provisions

are available$

nder G10!2, a corporation does not recogni=e

gain or loss on the receipt o' &oney or otherproperty in e+change 'or its stoc3 -including

treasury stoc3/


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nder G10!5, no gain or loss is recogni=ed

'ro& the e+change o' certain insurance

contracts or policies


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Bther *onrecognition "rovisions-slide ! o' 7/

nder G10!7, a shareholder does not recogni=egain or loss on the e+change o' co&&on stoc3

'or co&&on stoc3 or pre'erred stoc3 'or

pre'erred stoc3 in sa&e corporation


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Bther *onrecognition "rovisions-slide o' 7/

nder G10!D, no loss is recogni=ed 'ro& therepossession o' real property sold on an

install&ent basis

(ain is recogni=ed to a li&ited e+tent


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nder G101, trans'ers o' property beteenspouses or 'or&er spouses incident to divorce

are nonta+able


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nder G10, i' the a&ount reali=ed 'ro& thesale o' publicly traded securities is reinvestedin co&&on stoc3 or a partnership interest o' a

speciali=ed s&all business invest&entco&pany, reali=ed gain is not recogni=edA&ounts not reinvested ill trigger recognition o'

gain to e+tent o' de'iciency

8tatutory li&its are i&posed on the a&ount o' gain;uali'ied 'or this treat&ent

Bnly individuals and C corporations ;uali'y

R ' B #h )i "i t

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Re'ocus Bn #he )ig "icture -slide 1 o' 5/

Gift of Inherited House

Alice says that this is the only gi't that she ould&a3e to Michael this year. 8he has &ade no prior gi'ts to any individual that e+ceeded

the annual e+clusion a&ount -i.e., currently 1,000/.

Jith this in'or&ation, you in'or& Alice that no gi'tta+ ould be due on the gi't o' the house to Michael. 6oever, she ould use up 5D7,000 -700,000 > 1,000/

o' her li'eti&e gi't ta+ e+clusion.

Michael4s basis 'or the house ould be a carryover o'Alice4s basis o' 5,000.

#he 'air &ar3et value at the date o' the decedent4s death.

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Sale of Inherited House

Alice4s ad9usted basis 'or the house is

5,000

#he 'air &ar3et value on the date o' her

grand&other4s death.

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Re'ocus Bn #he )ig "icture -slide ! o' 5/

8he ould have a recogni=ed gain o' D!,000 as calculatedbelo.

A&ount reali=ed -700,000 > 2,000/ 55D,000

Less$ Ad9usted basis -5,000/Reali=ed and recogni=ed gain D!,000

#he house is a capital asset, and Alice4s holding period is long

ter& since she inherited the house. #hus, the gain ould be classi'ied as a long>ter& capital gain -i.e.,eligible 'or a 15: or 20: ta+ rate/.

#he ?ederal inco&e ta+ due ould be 12,50 -D!,000 W 15:/.

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Re'ocus Bn #he )ig "icture -slide o' 5/

What If? Alice is leaning toard selling the house.

6oever, she 3nos that her grand&other ould not anther to have to pay inco&e ta+es on the sale.

Alice in;uires as to hether there is any ay that shecould reduce the ?ederal inco&e ta+ on the sale to 0.

Xou in'or& Alice o' the e+clusion provision under G121 o' the Code.

8he can ;uali'y 'or this e+clusion o' reali=ed gain provisioni' she satis'ies the at least to>out>o'>'ive>years onershipand use re;uire&ents.

#his ould necessitate her &oving into the house 'or 2years and occupying it as her principal residence.

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What If?

?ro& a ta+ planning perspective, hat could Alice

have done so that none o' the 50,000 o' reali=ed

gain in +a&ple 5 'ro& the involuntary conversionas recogni=edY

#o postpone all o' the 50,000 reali=ed gain, Alice ould

have to reinvest all o' the 100,000 o' insurance proceeds

received in another building. nder this circu&stance, the basis o' the replace&ent

building ould be a carryover basis o' 50,000 -100,000

cost 50,000 de'erred gain/.

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If you have any comments or suggestions concerning this

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Taxation, please contact

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S&'( )neonta

Ch13 - 2015

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Transcript of Ch13 - 2015