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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5

#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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&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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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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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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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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#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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#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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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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olding "eriod


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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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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%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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%ains and Losses )slide ! o* +

Income Layers for Alternative Tax on Caital !ain Com"tation

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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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%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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%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


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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%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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& 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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& 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

&1250 R

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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.

R l 6 258 % i

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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

R l 6 t t 258 % i

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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

R l 6 t t 258 % i

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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

R l 6 t t 258 % i

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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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=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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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

Related 6**ects o* Recapture

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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

Related 6**ects o* Recapture

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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.

* h i i

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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.

R * < #h (i "i

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Re*ocus

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Ch14 - 2015

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Transcript of Ch14 - 2015