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Transcript of Ch14 - 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$ Capital
%ains and Losses, & 12'1, andRecapture "rovisions
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#he (ig "icture )slide 1 o* '+
Maurice has co-e to you *or ta advice regarding hisinvest-ents./ e inherited 50,000 *ro- his 3ncle 4oe and, *olloing
the advice o* a *inancial adviser, -ade the *olloing
invest-ents -onths ago. 5,000 *or 100 shares o* 6agle Co-pany stoc7.
50,000 *or a 508 interest in a patent that 9evin, anune-ployed inventor, had obtained *or a special
battery he had developed to poer ::green;; cars./ #o date, 9evin has been unable to -ar7et the battery to an auto
-anu*acturer or supplier.
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#he (ig "icture )slide 2 o* '+
5,000 to purchase a *ranchise *ro-
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#he (ig "icture )slide ' o* '+
Maurice read an article that tal7ed about the
bene*icial ta rates *or capital assets and dividends.
/ e really li7ed the part about ::costless;; capital gains,
although he did not understand it. Maurice has retained his ?ob as a toll booth operator
at the -unicipal airport.
/ is annual co-pensation is '5,000.
Respond to Maurice;s in@uiries.
/ Read the chapter and *or-ulate your response.
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#aation o* Capital
%ains and Losses
Capital gains and losses -ust be separated
*ro- other types o* gains and losses *or to
reasons$
/Long>ter- capital gains -ay be taed at a loer
rate than ordinary gains
/A net capital loss is only deductible up to ',000
per year
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"roper Classi*ication o*
%ains and Losses
epends on three characteristics$
/#he ta status o* the property
Capital asset, &12'1 asset, or ordinary asset
/#he -anner o* the property;s disposition
(y sale, echange, casualty, the*t, or conde-nation
/#he holding period o* the property
Bhort ter- and long ter-
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Capital Assets)slide 1 o* +
&1221 de*ines capital assets as everything
except$
/=nventory )stoc7 in trade+
/Dotes and accounts receivables ac@uired *ro- the
sale o* inventory or per*or-ance o* services
/Realty and depreciable property used in a trade or
business )&12'1 assets+
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Capital Assets)slide 2 o* +
&1221 de*ines capital assets as everything ecept
)cont;d+$
/ Certain copyrightsE literary, -usical, or artistic
co-positionsE or letters, -e-oranda, or si-ilar property #apayers -ay elect to treat a sale or echange o* certain -usical
co-positions or copyrights in -usical or7s as the disposition o* a
capital asset
/ Certain publications o* 3.B. govern-ent
/ Bupplies o* a type regularly used or consu-ed in the
ordinary course o* a business
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Capital Assets)slide ' o* +
#hus, capital assets usually include$
/Assets held *or invest-ent )e.g., stoc7s, bonds,
land+
/"ersonal use assets )e.g., residence, car+
/Miscellaneous assets selected by Congress
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Capital Assets)slide ! o* +
ealers in securities
/=n general, securities are the inventory o* securities
dealers, thus ordinary assets
/oever, a dealer can identi*y securities as an
invest-ent and receive capital gain treat-ent
Clear identi*ication -ust be -ade on the day o*
ac@uisition
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Capital Assets)slide 5 o* +
Real property subdivided *or sale/ #apayer -ay receive capital gain treat-ent on the
subdivision o* real estate i* the *olloing re@uire-ents are-et$
#apayer is not a corporation #apayer is not a real estate dealer Do substantial i-prove-ents -ade to the lots #apayer held the lots *or at least 5 years
/ Capital gain treat-ent occurs until the year in hich the
th lot is sold #hen up to 58 o* the revenue *ro- lot sales is potential ordinaryinco-e
#hat potential ordinary inco-e is o**set by any selling epenses*ro- the lot sales
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Capital Assets)slide o* +
Donbusiness bad debts
/A nonbusiness bad debt is treated as a short>ter-
capital loss in the year it beco-es co-pletely
orthless 6ven i* outstanding *or -ore than one year
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Bale or 6change
Recognition o* capital gains and losses
generally re@uires a sale or echange o* assets
Bale or echange is not de*ined in the Code
#here are so-e eceptions to the sale or
echange re@uire-ent
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Bale or 6change/Forthless Becurities and
& 12!! Btoc7 )slide 1 o* 2+
A security that beco-es orthless creates a
deductible capital loss ithout being sold or
echanged
/ #he Code sets an arti*icial sale date *or the securities on thelast day o* the year in hich orthlessness occurs
Bection 12!! allos an ordinary deduction on
disposition o* stoc7 at a loss
/ #he stoc7 -ust be that o* a s-all business co-pany
/ #he ordinary deduction is li-ited to 50,000 )100,000 *or
-arried individuals *iling ?ointly+ per year
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Bale or 6change/Forthless Becurities)slide 2 o* 2+
Forthless securities ea-ple$
/Calendar year tapayer purchased stoc7 on
ece-ber 5, 201'
/#he stoc7 beco-es orthless on April 5, 201!
/#he loss is dee-ed to have occurred on ece-ber
'1, 201!
#he result is a long>ter- capital loss
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Bale or 6change
Retire-ent o* Corporate
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Bale or 6change/ter- capital gain, i* the option as on stoc7s,
securities, co--odities or co--odity *utures
/
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Bale or 6change/
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#he (ig "icture > 6a-ple 1'
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#he (ig "icture > 6a-ple 1'
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#he (ig "icture > 6a-ple 1'
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#he (ig "icture > 6a-ple 1'
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Bale or 6change/"atents
Fhen all substantial rights to a patent are
trans*erred by a holderto another, the trans*er
produces long>ter- capital gain or loss
/#he holdero* a patent -ust be an individual,
usually the creator, or an individual ho purchases
the patent *ro- the creator be*ore the patented
invention is reduced to practice
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#he (ig "icture > 6a-ple 1!
"atents )slide 1 o* 2+
Return to the *acts o* #he (ig "icture on p. 1!>1.
9evin trans*ers his 508 rights in the battery
patent to the %reen (attery Co.
/=n echange, he receives 1 -illion plus .50 *or
each battery sold.
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#he (ig "icture > 6a-ple 1!
"atents )slide 2 o* 2+
Assu-ing 9evin has trans*erred all substantial rights,
9evin auto-atically has a long>ter- capital gain.
/ (oth the 1 -illion lu-p>su- pay-ent and the .50 per
battery royalty @uali*y )less his basis in the patent+./ 9evin also had an auto-atic long>ter- capital gain hen
he sold 508 o* his rights in the patent to Maurice.
Fhether Maurice gets long>ter- capital gain
treat-ent on the trans*er to %reen (attery ill dependon hether he is a holder)see the discussion belo
and 6a-ple 15+.
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#he (ig "icture > 6a-ple 15
Holder1 and
continuing ith the *acts o* 6a-ple 1!
9evin is clearly a holdero* the patent
/e is the inventor and as not an e-ployee henhe invented the battery.
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#he (ig "icture > 6a-ple 15
Holder
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Bale or 6change/Hranchises, #rade-ar7s, and
#rade Da-es )slide 1 o* '+
#he licensing o* *ranchises, trade na-es,
trade-ar7s, and other intangibles is generally
not considered a sale or echange o* a capital
asset/#here*ore, ordinary inco-e results to trans*eror
6ception$ Capital gain )loss+ -ay result i* the
trans*eror does not retain any signi*icant poer, right,or continuing interest
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Bale or 6change/Hranchises, #rade-ar7s, and
#rade Da-es )slide 2 o* '+
Bigni*icant poers, rights, or continuinginterests include$/Control over assign-ent
/uality o* products and services/Bale or advertising o* other products or services
/#he right to re@uire that substantially all suppliesand e@uip-ent be purchased *ro- the trans*eror
/#he right to ter-inate the *ranchise at ill, and
/#he right to substantial contingent pay-ents
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Bale or 6change/Hranchises, #rade-ar7s, and
#rade Da-es )slide ' o* '+
Fhen the trans*eror retains a signi*icant poer, right,
or continuing interest, the trans*eree;s noncontingent
payments are ordinary inco-e to the trans*eror
/ #he *ranchisee capitaliGes the pay-ents and a-ortiGesthe- over 15 years
Fhether the trans*eror retains a signi*icant poer,
right, or continuing interest, contingent payments are
ordinary inco-e *or the *ranchisor and an ordinarydeduction *or the *ranchisee
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#he (ig "icture > 6a-ple 1
Bale o* Hranchise
Return to the *acts o* #he (ig "icture on p. 1!>1
Maurice sells *or 210,000 to Mauve, =nc., the
*ranchise purchased *ro- ter- capital gain because Maurice has held
the *ranchise *or only nine -onths.
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Bale or 6change
Lease Cancellation "ay-ents
Lessee treat-ent/ #reated as received in echange *or underlying leased
property Capital gain results i* asset leased as a capital asset )e.g., personal
use +
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olding "eriod)slide 1 o* '+
Bhort>ter-
/Asset held *or 1 year or less
Long>ter-
/Asset held *or -ore than 1 year
olding period starts on the day a*ter the
property is ac@uired and includes the day o*
disposition
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olding "eriod)slide 2 o* '+
Dontaable 6changes/ olding period o* property received includes holding period o* *or-er
asset i* a capital or &12'1 asset
#ransactions involving a carryover basis
/ Hor-er oner;s holding period tac7s on to present oner;s holdingperiod i* a nontaable transaction and basis carries over
Certain disalloed loss transactions/ 3nder several Code provisions, realiGed losses are disalloed.
/ Fhen a loss is disalloed, there is no carryover o* holding period.
e.g., Related party losses, sale or echange o* personal use assets
=nherited property is alays treated as long ter- no -atterho long it is held by the heir
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olding "eriod)slide ' o* '+
Bhort sales
/ #apayer sells borroed securities and then repays the
lender ith substantially identical securities
/ %ain or loss is not recogniGed until the short sale is closed/ %enerally, the holding period *or a short sale is deter-ined
by ho long the property used *or repay-ent is held
=* substantially identical property )e.g., other shares o* the sa-e
stoc7+ is held by the tapayer, the short>ter- or long>ter- character
o* the short sale gain or loss -ay be a**ected
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#he (ig "icture > 6a-ple 21
olding "eriod
Return to the *acts o* #he (ig "icture on p. 1!>1
Assu-e that Maurice purchased the "urple
stoc7 on 4anuary 15, 201'.
/=* he sells it on 4anuary 1, 201!, Maurice;s
holding period is -ore than one year.
/=* instead Maurice sells the stoc7 on 4anuary 15,
201!, the holding period is eactly one year, andthe gain or loss is short ter-.
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#a #reat-ent o* Capital
%ains and Losses )slide 1 o* +
Doncorporate tapayers/Capital gains and losses -ust be netted by holding
period
Bhort>ter- capital gains and losses are netted Long>ter- capital gains and losses are netted
=* possible, long>ter- gains or losses are then nettedith short>ter- gains or losses
/=* the result is a loss$/ #he capital loss deduction is li-ited to a -ai-u- deduction
o* ',000
/ 3nused a-ounts retain their character and carry*orardinde*initely
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#a #reat-ent o* Capital
%ains and Losses )slide 2 o* +
Doncorporate tapayers )cont;d+
/=* net *ro- capital transactions is a gain, ta
treat-ent depends on holding period
Bhort>ter- )assets held 12 -onths or less+/ #aed at ordinary inco-e ta rates
Long>ter- )assets held -ore than 12 -onths+
/ An alternative ta calculation is available using pre*erential
ta rates
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#a #reat-ent o* Capital
%ains and Losses )slide ' o* +
Doncorporate tapayers )cont;d+
/Det long>ter- capital gain is eligible *or one or
-ore o* *ive alternative ta rates$ 08, 158, 208,
258, and 2N8 #he 258 rate applies to unrecaptured 1250 gainand is
related to gain *ro- disposition o* &12'1 assets
#he 2N8 rate applies to collectibles
#he 08O158O208 rates apply to any re-aining net
long>ter- capital gain
/ 3nder the A-erican #apayer Relie* Act o* 2012, the 208 rate
applies beginning in 201' hen the tapayer;s regular ta
brac7et is '.8
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#a #reat-ent o* Capital
%ains and Losses )slide ! o* +
Income Layers for Alternative Tax on Caital !ain Com"tation
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#a #reat-ent o* Capital
%ains and Losses )slide 5 o* +
Collectibles, even though they are held long ter-, aresub?ect to a 2N8 alternative ta rate
Collectibles include any$
/ For7 o* art/ Rug or anti@ue
/ Metal or ge-
/ Bta-p
/ Alcoholic beverage/ istorical ob?ects )docu-ents, clothes, etc.+
/ Most coins
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#a #reat-ent o* Capital
%ains and Losses )slide o* +
uali*ied dividend inco-e paid *ro- current or acc.6 P " is eligible *or the 08O158O208 long>ter-capital gain rates/ A*ter deter-ining net capital gain or loss, @uali*ied
dividend inco-e is added to the net long>ter- capital gainportion o* the net capital gain and is taed as 08O158O208gain
/ =* there is a net capital loss, it is still deductibleforA%=
Li-ited to ',000 per year ith the re-ainder o* the loss carryingover
=n this case, the @uali*ied dividend inco-e is still eligible to betreated as 08O158O208 gain in the alternative ta calculation
/ =t is not o**set by the net capital loss
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#a #reat-ent o* Capital
%ains and Losses )slide o* +
#he alternative ta on net capital gain applies only i*
taable inco-e includes so-e net long>ter- capital
gain
/Det capital gain -ay be -ade up o* various rate layers Hor each layer, co-pare the regular ta rate ith the alternative ta
rate on that portion o* the net capital gain
/ #he layers are taed in the *olloing order$
258 gain, 2N8 gain, the 08 portion o* the 08O158O208 gain, the
158 portion o* the 08O158O208 gain, and then the 208 portion o*the 08O158O208 gain.
#his allos the tapayer to receive the loer o* the
regular ta or the alternative ta on each layer o* net
capital gain
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#he (ig "icture > 6a-ple '
uali*ied ividend =nco-e
Return to the *acts o* #he (ig "icture on p. 1!>1
A*ter holding the "urple stoc7 *or 10 -onths,
Maurice receives '50 o* dividends.
/=* "urple is a do-estic or @uali*ying *oreigncorporation, these are @uali*ied dividends eligible
*or the 08O158O208 ta rate.
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#a #reat-ent o* Capital
%ains and Losses > Corporate #apayers
i**erences in corporate capital treat-ent
/#here is a DC% alternative ta rate o* '5 8
Bince the -a corporate ta rate is '5 8, the alternative
ta is not bene*icial
/Det capital losses can only o**set capital gains )i.e.,
no ',000 deduction in ecess o* capital gains+
/Det capital losses are carried bac7 ' years andcarried *orard 5 years asshort-term losses
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&12'1 Assets)slide 1 o* !+
&12'1 assets de*ined
/epreciable and real property used in a business or
*or production o* inco-e and held 1 year
/=ncludes ti-ber, coal, iron, livestoc7, unharvested
crops
/Certain purchased intangibles
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&12'1 Assets)slide 2 o* !+
&12'1 property does not include the *olloing$
/ "roperty not held *or the long>ter- holding period
/Donpersonal use property here casualty losses eceed
casualty gains *or the taable year/ =nventory and property held pri-arily *or sale to custo-ers
/ Copyrights, literary, -usical, or artistic co-positions and
certain 3.B. govern-ent publications
/ Accounts receivable and notes receivable arising in theordinary course o* a trade or business
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&12'1 Assets)slide ' o* !+
=* transactions involving &12'1 assets result in$
/Det &12'1 loss K ordinary loss
/Det &12'1 gain K long>ter- capital gain
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&12'1 Assets)slide ! o* !+
"rovides the best o* potential results *or the
tapayer
/
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Bpecial Rules Hor
Certain &12'1 Assets )slide 1 o* 2+
Casualty gains and losses *ro- &12'1 assets
and *ro- long-term nonpersonal use capital
assets are deter-ined and netted together
=* a net loss, ite-s are treated separately/ &12'1 casualty gains and nonpersonal use capital asset
casualty gains are treated as ordinary gains
/ &12'1 casualty losses are deductibleforA%=
/Donpersonal use capital asset casualty losses are deductiblefromA%= sub?ect to the 28 o* A%= li-itation
=* a net gain, treat as &12'1 gain
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Bpecial Rules Hor
Certain &12'1 Assets )slide 2 o* 2+
#he special netting process *or casualties P the*ts
does not include conde-nation gains and losses
/ A & 12'1 asset disposed o* by conde-nation receives
& 12'1 treat-ent "ersonal use property conde-nation gains and losses
are not sub?ect to the & 12'1 rules
/ %ains are capital gains
"ersonal use property is a capital asset
/ Losses are nondeductible
#hey arise *ro- the disposition o* personal use property
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%eneral "rocedure *or
& 12'1 Co-putation )slide 1 o* '+
Btep 1$ Casualty Detting
/Det all recogniGed long>ter- gains P losses *ro- casualties
o* & 12'1 assets and nonpersonal use capital assets
=* casualty gains eceed casualty losses, add the ecess to the other
& 12'1 gains *or the taable year
=* casualty losses eceed casualty gains, eclude all casualty losses
and gains *ro- *urther & 12'1 co-putation
/ All casualty gains are ordinary inco-e
/ Bection 12'1 asset casualty losses are deductibleforA%=
/
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%eneral "rocedure *or
& 12'1 Co-putation )slide 2 o* '+
Btep 2$ & 12'1 Detting
/ A*ter adding any net casualty gain *ro- previous step to
the other & 12'1 gains and losses, net all & 12'1 gains and
losses
=* gains eceed the losses, net gain is o**set by the ::loo7bac7;;
nonrecaptured & 12'1 losses *ro- the 5 prior ta years
/ #o the etent o* this o**set, the net & 12'1 gain is classi*ied as
ordinary gain
/ Any re-aining gain is long>ter- capital gain
=* the losses eceed the gains, all gains are ordinary inco-e
/ Bection 12'1 asset losses are deductiblefor A%=
/
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%eneral "rocedure *or
& 12'1 Co-putation )slide ' o* '+
Btep '$ & 12'1 Loo7bac7 "rovision
/#he net & 12'1 gain *ro- the previous step is
o**set by the nonrecaptured net & 12'1 losses *or
the *ive preceding taable years #o the etent o* the nonrecaptured net & 12'1 loss, the
current>year net & 12'1 gain is ordinary inco-e
/ #he nonrecaptured net & 12'1 losses are those that have not
already been used to o**set net & 12'1 gains ter- capital gain treat-ent
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Loo7bac7 "rovision 6a-ple
#apayer had the *olloing net &12'1 gainsand losses$
2012 !,000 loss
201' 10,000 loss201! 1,000 gain
/=n 201!, tapayer;s net &12'1 gain o* 1,000ill be treated as 1!,000 o* ordinary inco-eand 2,000 o* long>ter- capital gain
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Bection 12'1 Detting "rocedure
56
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epreciation Recapture)slide 1 o* '+
Assets sub?ect to depreciation or cost recovery
-ay be sub?ect to depreciation recapture hen
disposed o* at a gain
/Losses on depreciable assets receive &12'1treat-ent
Do recapture occurs in loss situations
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epreciationRecapture)slide 2 o* '+
epreciation recapture characteriGes gains that
ould appear to be &12'1 as ordinary gain
/#he Code contains to -a?or recapture provisions
&12!5
&1250
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epreciation Recapture)slide ' o* '+
epreciation recapture provisions generally
override all other Code Bections
/#here are eceptions to depreciation recapture
rules, *or ea-ple$ =n dispositions here all gain is not recogniGed
/ e.g., li7e>7ind echanges, involuntary conversions
Fhere gain is not recogniGed at all
/ e.g., gi*ts and inheritances
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&12!5 Recapture)slide 1 o* '+
epreciation recapture *or &12!5 property
/Applies to tangible and intangible personalty, and
nonresidential realty using accelerated -ethods o*
ACRB )placed in service 1N1>N+ Recapture potential is entire a-ount o* accu-ulated
depreciation *or asset
Method o* depreciation does not -atter
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&12!5 Recapture)slide 2 o* '+
Fhen gain on the disposition o* a &12!5 asset
is less than the total a-ount o* accu-ulated
depreciation$
/#he total gain ill be treated as depreciationrecapture )i.e., ordinary inco-e+
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&12!5 Recapture)slide ' o* '+
Fhen the gain on the disposition o* a &12!5
asset is greater than the total a-ount o*
accu-ulated depreciation$
/#otal accu-ulated depreciation ill be recaptured)as ordinary inco-e+, and
/#he gain in ecess o* depreciation recapture ill
be &12'1 gain or capital gain
&12!5 R 6 l
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&12!5 Recapture 6a-ple)slide 1 o* 2+
Cost 2!,000
Acc. epr. >20,000 !,000
RealiGed %ain 22,000Bec. 12!5 /
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&12!5 Recapture 6a-ple)slide 2 o* 2+
Ba-e as previous ea-ple ecept 4a7e sold
the -achine *or 1N,000.
A-ount RealiGed 1N,000
Ad?. (asis>Cost 2!,000Acc. epr. >20,000 !,000
RealiGed %ain 1!,000
Bec. 12!5 /
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&1250 Recapture)slide 1 o* '+
epreciation recapture *or &1250 property
/Applies to depreciable real property
6ception$ Donresidential realty classi*ied as &12!5
property )i.e., placed in service a*ter 1N0 and be*ore1N, and accelerated depreciation used+
/=ntangible real property, such as leaseholds o* &
1250 property, is also included
&1250 R
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&1250 Recapture)slide 2 o* '+
Bection 1250 recapture rarely applies since only thea-ount o* additional depreciation is sub?ect torecapture/ #o have additional depreciation, accelerated depreciation
-ust have been ta7en on the asset Btraight>line depreciation is not recaptured )ecept *or property
held one year or less+
/ epreciable real property placed in service a*ter 1N cangenerally only be depreciated using the straight>line-ethod
#here*ore, no depreciation recapture potential *or such property
/ & 1250 does not apply i* the real property is sold at a loss
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&1250 Recapture)slide ' o* '+
#he & 1250 recapture rules also apply to the
*olloing property *or hich accelerated depreciation
as used$
/ Additional first-year depreciation& 1N)7+S eceedingstraight>line depreciation ta7en on leasehold
i-prove-ents, @uali*ied restaurant property, and @uali*ied
retail i-prove-ent property.
/Immediate expense deduction& 1)*+S eceeding straight>
line depreciation ta7en on leasehold i-prove-ents,
@uali*ied restaurant property, and @uali*ied retail
i-prove-ent property.
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Real 6state 258 %ain)slide 1 o* !+
Also called unrecaptured 1250 gain or 25%
gain
/258 gain is so-e or all o* the &12'1 gain treated
as long>ter- capital gain/3sed in the alternative ta co-putation *or net
capital gain
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Real 6state 258 %ain)slide 2 o* !+
Mai-u- a-ount o* 258 gain is depreciation
ta7en on real property sold at a recogniGed
gain reduced by$
/Certain &1250 and &12!5 depreciation recapture
/Losses *ro- other &12'1 assets
/&12'1 loo7bac7 losses
Li-ited to recogniGed gain hen total gain isless than depreciation ta7en
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Real 6state 258 %ain)slide ' o* !+
Bpecial 258 %ain Detting Rules
/ Fhere there is a & 12'1 gain *ro- real estate and that gain
includes both potential 258 gain and potential
08O158O208 gain, any & 12'1 loss *ro- disposition o*
other & 12'1 assets Hirst o**sets the 08O158O208 portion o* the & 12'1 gain
#hen o**sets the 258 portion o* the & 12'1 gain
/ Also, any & 12'1 loo7bac7 loss
Hirst recharacteriGes the 258 portion o* the & 12'1 gain
#hen recharacteriGes the 08O158O208 portion o* the & 12'1 gain
as ordinary inco-e
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Real 6state 258 %ain)slide ! o* !+
Det & 12'1 %ain Li-itation
/ #he a-ount o* unrecaptured & 1250 gain -ay not eceed
the net & 12'1 gain that is eligible to be treated as long>
ter- capital gain
/ #he unrecaptured & 1250 gain is the lesser o*
#he unrecaptured & 1250 gain, or
#he net & 12'1 gain that is treated as capital gain
/ #hus, i* there is a net & 12'1 gain, but it is all recaptured by
the 5 year & 12'1 loo7bac7 loss provision, there is no
surviving & 12'1 gain or unrecaptured & 1250 gain
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Related 6**ects o* Recapture)slide 1 o* N+
%i*ts
/#he carryover basis o* gi*ts, *ro- donor to donee,
also carries over depreciation recapture potential
associated ith asset/#hat is, donee steps into shoes o* donor ith
regard to depreciation recapture potential
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Related 6**ects o* Recapture)slide 2 o* N+
=nheritance
/eath is only ay to eli-inate recapture potential
/#hat is, depreciation recapture potential does not
carry over *ro- decedent to heir
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Related 6**ects o* Recapture)slide ' o* N+
Charitable contributions
/Recapture potential reduces the a-ount o*
charitable contribution deductions that are based
on HMT
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Related 6**ects o* Recapture)slide ! o* N+
Dontaable transactions/ Fhen the trans*eree carries over the basis o* the trans*eror,
the recapture potential also carries over =ncluded in this category are trans*ers o* property pursuant to the
*olloing$/Dontaable incorporations under & '51
/ Certain li@uidations o* subsidiary co-panies under & ''2
/Dontaable contributions to a partnership under & 21
/Dontaable reorganiGations
/ %ain -ay be recogniGed in these transactions i* boot isreceived =* gain is recogniGed, it is treated as ordinary inco-e to the etent
o* the recapture potential or recogniGed gain, hichever is loer
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Related 6**ects o* Recapture)slide 5 o* N+
Li7e>7ind echanges and involuntaryconversions/"roperty received in these transactions have a
substituted basis (asis o* *or-er property and its recapture potential issubstituted *or basis o* ne property
/Any gain recogniGed on the transaction ill *irst
be treated as depreciation recapture, then as &12'1or capital gain Any re-aining recapture potential carries over
Related 6**ects o* Recapt re
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Related 6**ects o* Recapture)slide o* N+
=nstall-ent sales
/Recapture gain is recogniGed in year o* sale
regardless o* hether gain is otherise recogniGed
under the install-ent -ethod
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Related 6**ects o* Recapture)slide o* N+
"roperty ividends
/A corporation generally recogniGes gain on the
distribution o* appreciated property to shareholders
/Recapture applies to the etent o* the loer o* therecapture potential or the ecess o* the property;s
HMT over its ad?usted basis
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Related 6**ects o* Recapture)slide N o* N+
Bales beteen related parties
/Bales o* depreciable assets beteen related parties
can cause the total gain to be recogniGed as
ordinary inco-e Applies to related party sales or echanges o* property
that is depreciable in hands o* trans*eree
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Re*ocus #o @uali*y *or the bene*icial
ta rate, the holding period *or the stoc7 -ust be longerthan one year.
Hro- a ta perspective, Maurice should retain his stoc7invest-ents *or at least an additional three -onths and a day.
#o be eligible *or the ::costless;; capital gains, his taable inco-eshould not eceed ',00 *or 201!.
#he dividends received on the "urple stoc7 are V@uali*ieddividendsW eligible *or the 08O158O208 alternative ta rate.
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Re*ocus Bince he is a ::holder;; o* the patent, it ill@uali*y *or the bene*icial capital gain rate regardlesso* the holding period i* the patent should produceinco-e in ecess o* his 50,000 invest-ent.
/ oever, i* he loses -oney on the invest-ent, he ill beable to deduct only ',000 o* the loss per year )assu-ingno other capital gains+.
#a>ee-pt bonds./ #he a*ter>ta return on the taable bonds ould be less
than the '8 on the ta>ee-pt bonds./ =n addition, the interest on the taable bonds ould
increase his taable inco-e, possibly -oving it out o* thedesired 158 -arginal ta rate into the 258 -arginal tarate.
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Re*ocus
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