Chapter 12

Property Transactions

• Issues:

• Realization, recognition, ordinary v. capital (character), basis, cap gains rate

• Determination of Gain– Amount realized - Adjusted Basis= Gain or

Loss– Amount realized = money + FMV of property +

liabilities (assumed or subject to)

• Amount Realized = selling price – selling expenses

• Adjusted Basis = cost + capital additions - capital recoveries

Basis

• Usually cost• Allocations of purchase price• Basis of gift• Basis of inherited property• Conversion from personal use (lesser FMV/AB)• Disallowed Losses - Tax 2

– related taxpayers– wash sales

• Nontaxables Exchanges - Like Kind Exchanges 1031– Exchange, use, like-kind– boot = non like kind prop.– Basis = basis (given up) - $(boot rec’d) + gain

recog’d - loss recog’d (+ basis boot given up)– FMV (new prop) - postp’d gain + postp’d loss

• liabilities

• timing

• exchanger

• Involuntary Conversion -1033– definition– replacement property (similar or related in

service or use) (t/p use v. functional use)– time limit– basis

• Other Nonrecognition– Transfers between spouses incident to divorce

1041

• Sale of Residence - New Section121– loss v. gain– calculation of gain: Amt realized - basis = gain:

AR = selling price - selling costs– principal personal residence– basis of new property (cost now)– Section 121 modified 1997, 1998; 1034

repealed – form 2119 - Discontinued

Sale of ResidenceTaxpayer Relief Act of 1997

• Code Sec 1034 - rollover of principal personal residence gain-repealed

• Code 121 - exclusion (modified)

• 250000 exclusion

• 500000 exclusion if MFJ

• Effective

• Sales after 5/6/97:

• 5/7/97-8/14/97: election to apply new

• After 8/4/97: new applies unless elect out

• Owned by TP 2 of 5 yrs preceding

• Used by TP at least 2 of 5 (principal pers res)

• (Plus generally not use exclusion more frequently every 2 yrs)

• 2 yr Waiver: Ownership - changes in empl, health (proration) Use - Includes invol conversions

• If own <2 yrs, proportion of exclusion (98 law) (below)

• Joint return:

• Both must meet use, 1 ownership (for 500000)

• Neither used exclusion w/i 2 yrs prec (for 500000)

• If both spouses each sell 1 or 2 resids: 1 or 2 250000 in joint return (meet 2 and 5 yr tests)

• OR

• 250000 on each MFS

Sale of prin residence Relief Provision• 97 law (new section 121) - Gen Reqs -

Recap:

• prop owned and used 2 years (as prin resid) in 5 year period

• 5 yr window - prop need not be prin resid date of sale

• only exclude once every 2 years

Relief Provision(IRS R&R Act 1998)

• Once every 2 years waived - special circs

• change in employment or health reasons

• or unforeseen circs (regs)

• fraction # qualifying months (owned & used) 24 mos

• Times the exclusion (250,000 or 500,000) (5/6/97)

Sale of Prin Resid - Exclusion - Married Couples (97 & 98 Law)

• 97 law - MFJ can use 500, 000 exclusion if

1) either spouse own resid 2 of last 5

2) both spouses use 2 of last 5

3) neither spouse has used exclusion within last 2 yrs

• 97 law - spouses can separately qualify for 250,000 each on own residences MFJ or MFS

98 law (clarification)

• Can separately qualify 250,000 each on joint residence

• if 1 spouse fails any of 3 conditions, 250,000 applies for each (as if unmarried) (joint)

• and, in this situation each spouse is treated as owning during the 2 yr period that either owned (interesting)

Basis of Property from a Decedent EGTRRA ‘01

• Because of Estate Tax repeal in 2010

• 2010: modified carryover (instead of step up to FMV

• Lesser of AB of decedent or FMV DOD

• No 6 month alter note valuation

Basis of Property from a Decedent EGTTRA ’01 (cont)

• Executor can step basis 1.3 m (plus certain unused capital, net op, built-in losses

• And step up an additional 3 m for property passing to the surviving spouse