Federal Taxation ch5

7/24/2019 Federal Taxation ch5

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Chapter 5: Property Transactions:

Capital Gains and LossesPrentice Halls Federal Taxation 2016:Indiid!als

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Taxpayer Iss!es on PropertyTransactions

1& Is there reali'ed "ain or loss(

2& Is there reco"ni'ed "ain or

loss(

)& *hat is the character o+ thereco"ni'ed "ain or loss(

,& *hat is the carry oer -asis tothe assets receied(

5& *hat is the holdin" period(

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Property Transactions /Generally

ale or exchan"e o+ capitalassets ill res!lt in reco"ni'edcapital "ain or loss&

Then% the transaction ill -ecate"ori'ed as short.ter orlon".ter dependin" on ho lon"

the taxpayer has held theproperty&

hort.ter 3 held +or 4 one year&

Lon".ter 3 held +or one year& 5.)Copyri"ht # 2016 Pearson$d!cation% Inc&


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hort.TerCapitalGains

7TCG89

hort.TerCapitalLoss

7TCL89Lon".Ter

CapitalGain

7LTCG89

Lon".TerCapital

Loss7LTCL89

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Property Transactions /Generally contd9

Taxpayer ill co-ine short.ter"ainslosses and lon".ter"ainslosses& ;et LTC GL and ;et

TC GL ill -e co-ined toderie an oerall Lon". or hort.ter GL&

LTCG are taxed at +aora-le rate&LTCL are liited to


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Calc!latin" =eali'ed GainLoss /Generally

=eali'ed GainLoss

3

>o!nt =eali'ed

.

>d?!sted @asis5.6



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Calc!latin" >d?!sted @asis7>@89

Initial @asis

A Capitaladditions

. Capitalrecoeries

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Calc!latin" =eali'ed Gains orLosses

Is theproperty-ein"trans+erred

as a "i+t or-e!est(

Taxpayerill reali'ea "ain toextent>o!ntreceiedexceeds>d?!sted@asis&

Is theao!ntreceied"reaterthan thepropertys>d?!sted@asis(

Has anidentiDa-leeentocc!rred toDx the "ainor loss($&"&% ale orexchan"eCondenationsCas!altiesThe+ts=etireents;o "ain or

lossreali'ed -yrecipient&

;o "ain orloss isreali'ed&

Taxpayer illreali'e a loss toextent the >o!nt=eceied exceeds

>d?!sted @asis&

E$E$

E$

;

;

;

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7=eali'ed8 s&7=eco"ni'ed8

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=eco"ni'ed Gain

=eco"ni'ed GainLoss 3 ao!ntact!ally reported on tax ret!rn&

=eco"ni'ed Gain 4 =eali'ed Gain&

=eco"ni'ed Gain can neer than=eali'ed Gain&

=eason hy =eco"ni'ed Gain doesntalays 3 =eali'ed Gain is -eca!se o+

non.reco"nition or liitation proisions&Losses on non T or @ property !s!ally

not ded!cti-le&



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@asis Considerations



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Cost @asis



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IdentiDcation Iss!es

toc is deeed sold FIF !nlessspeciDcally identiDed&

I+ !t!al +!nd shares% oner can

!se speciDc identiDcation% FIF%or aera"e cost -asis&

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Jeterinin" Jonees @asis inGi+t Property

Is FK o+"i+tedproperty Mdonors

>@(Jid donorpay "i+t tax!pontrans+er(

Joneecarries oerdonors >@&

Jonees-asis 3donorscarryoer-asis

allocated A"i+t tax paid

Jid doneesellproperty +orprice FK

at tie o+"i+t( Nse FK at tieo+ "i+t incalc!latin" GL&Jo not tae intoacco!nt any "i+t

tax paid&

Nse donors >@ in

calc!latin" GL&Jo not add "i+ttax paid tocarryoer -asis&

E$

E$

E$

;

;

;

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>llocatin" Gi+t Tax Paid to @asis*here FK Jonors >@

2015 >nn!al excl!sion 3


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Property =eceied +roJecedent

Generally% donees -asis 3 FK at dateo+ "iers death or alternatie al!ationdate 7>J89

$xception / i+ decedent died in 2010%then special r!les o!ld apply incalc!latin" -asis&

I+ arried decedent lied in a

co!nity property state% thes!riin" spo!se a!toatically "ets astepped.!p -asis in hisher Q o+ theproperty as ell as the decedents Q&



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Conertin" Personal NseProperty to @!siness Nse

@asis +or -!siness p!rposes 3loer o+: FK on date o+ conersionR =%

ners >@ on date o+ conersion&I+ FK M Jonors -asis on date o+

conersion% then: FK less depreciation taen9 ill -e

!sed to calc!late loss& ners >@ on date o+ conersion

less depreciation taen9 ill -e !sedto calc!late "ain&

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>llocation o+ @asetP!rchase



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;on.Taxa-le tocJiidends;on.taxa-le stoc diidends ill

-e allocated a portion o+ the -asis+ro the stoc !pon hich the

diidend as iss!ed&e -asis per share +or all shares

3

Total @asis

S o+ shares no oned -y TP



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;on.Taxa-le toc =i"hts 3 @asis

FK ri"hts M 15 FK stoc% then-asis o+ ri"hts 3 0

FK ri"hts U 15 FK stoc% then-asis !st -e allocated -eteen

ri"hts and stoc -ased on relatieFK&



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toc =i"hts contd9

I+ ri"hts expire -e+ore -ein" !sed%then -asis is reallocated -ac tothe stoc&

I+ ri"hts are exercised% then -asiso+ ri"hts added to cost -asis o+stoc&

I+ ri"hts are sold% then -asis is!sed to deterine GL&



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V 1221 / >ll Property is a Capital>sset $WC$PT:



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V 1221 contd9

el+.created !sical ors /taxpayer ho created theproperty ay no ae an

election to treat its sale orexchan"e as capital V 1221-9)99&

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V 12)1 Property

The sale o+ either V 1221 or V12)1 property co!ld createcapital GL&

I+ sold property is not a capitalasset% then GL is ordinary innat!re&

V 12)1 property incl!des:

a& Trade or -!siness property that is

s!-?ect to depreciation& 5.2,Copyri"ht # 2016 Pearson$d!cation% Inc&


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V 12)1 Property contd9

>ny "ain reco"ni'ed !pon sale o+V 12)1 property ay -e s!-?ectto depreciation recapt!re&

=ecapt!re ill conert that parto+ the "ain +ro capital in nat!reto ordinary incoe&



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ther Proisions Goernin"Capital GL



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Kaxi! =ates on Certain Lon".Ter Capital >ssets

Cate"ory Kax& =ates

ther L.T CG0% 15% 20

Nnrecapt!redV 1250 "ain 25

Collecti-les 2

V 1202 stoc2

Kaxi! rate depends on taxpayers>GI&

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;ettin" =eali'ed CapitalGLT$P 1: ;et GL -y hort.ter orLon".ter&

Part a / Co-ine TCL ith TCGRnet ill -e ;TCG or ;TCL&

Part - / Co-ine LTCL ith LTCGRnet ill -e ;LTCG or ;LTCL&



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;ettin" =eali'ed Capital GLcontd9

T$P 2: Co-ine =es!lts +rotep ne in +olloin" anner:

Part a / Co-ine any ;TCG ithany ;LTCL&

Part - / Co-ine any ;TCL ithany ;LTCG&

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T$P ): Co-ine the res!lts +rotep To% Parts a and -& =es!lt ill -e;et Capital Gain 7;CG89 or ;etCapital Loss 7;CL89&

Part a / I+ tep To% part - is a ;LTCG%

then deterine hether the "ain is+ro collecti-les% V 1202 stoc% or!nrecapt!red V 1250 "ain& e"re"atethe "ain into these cate"ories&



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T$P )% Part - / >ny losses +rotep To% part a% that red!ce

;LTCG ill oXset the cate"ory ithhi"hest ar"inal rate Drstcollecti-les and V 1202 stoc9 and

then ill "o to the next hi"hestcate"ory V 12,5 "ain9% etc&



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tep ,% Part a / I+ the res!lt o+ tep) is a ;CG% then deterinehether there is still ore than

one cate"ory o+ "ain reainin"& I+so% the respectie axi! ratesill need to -e applied +or each

cate"ory&

tep ,% Part - / I+ the res!lt o+ tep

, is ;CL% then deterine hether.5.))



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T$P 5: >pply Loss Liitation =!les

Part a: I+ part o+ tep Fo!r% part - iscate"ori'ed as short.ter capital lossR thenit is !sed Drst to oXset !p to ny excessTCL can -e carried +orard&

I+ there is less than


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tep 5% Part -: I+ a portion o+ tepFo!r% part - is cate"ori'ed as a

lon".ter capital loss and thereare no +!rther nettin"opport!nities aaila-le% then any

excess LTCL ill need to -e carriedoer to the +olloin" years ret!rn&



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;ettin" =eali'ed Capital GL / Indiid!als

T>=T

;LT CG ay -etaxed on the

red!ced rates +orLT CG&

Co-ine LT CLith LT CG& Joesthis res!lt in a ;LT

CL(

T CL areded!cti-le as

ordinary lossesand can oXsetordinary incoeitho!t liitation&

Co-ine T CL

ith T CG& Joesthis res!lt in a;T CG(

Co-ine ;T CG ith;LT CL to coe !p ith>d?!sted ;et CapitalGain 7>;CG89 or>d?!sted ;et Capital Loss

7>;CL89& Joes theco-ination res!lt in>;CG(

>;CG is taxed atpre+erential rates%dependin" on hetherassets ere collecti-les%1202 sall stoc%!nrecapt!red 1250"ain% or all other LT CG&

>;CL is ded!cti-le!p to


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V 1202 Y!aliDed all @!sinesstoc 7Y@89

Indiid!als can excl!de a o+"ain +ro sale o+ Y@&

toc !st -e held +or 5 years

prior to sale&toc !st hae -een ac!ired

a+ter >!"!st 10% 1)&

$xcl!sion ay not exceed"reater o+:

1&


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V 1202 Y!aliDed all @!sinesstoc contd9

*hen >c!ired $xcl!sion

Prior to 21200 50

21200.2B2010 B5

22010.12)1201) 100

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ale or $xchan"e

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*orthless ec!rities

V 165 / sale or exchan"e hasocc!rred in the year that asec!rity that is a capital asset

-ecoes orthless&ec!rities incl!de stocs and

-onds&

Taxpayer ay reali'e andperhaps reco"ni'e a loss +or theao!nt o+ the sec!ritys -asis

since the ao!nt reali'ed ill -e 5.,0Copyri"ht # 2016 Pearson$d!cation% Inc&

i + -


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=etireent o+ Je-tInstr!entsTaxpayer ill hae a copleted sale

or exchan"e !pon a de-tinstr!ents retireent&

>o!nt receied 3 at!rity ao!nt&>@ is "enerally hat the taxpayer

paid +or it&

I+ -ond disco!nt &25 x at!rity

al!e x S years to at!rity9% thenthe disco!nt is considered ori"inaliss!e disco!nt 7IJ89&

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ri"inal Iss!e Jisco!nt

Taxpayer ill need to reco"ni'e IJoer the years to at!rity&

IJ ill -e taxa-le as interest incoe%and ill add to the -asis o+ the -ond&

The ao!nt o+ IJ to -e reco"ni'edill -e deterined -y the 7constantinterest rate ethod&8

Karet disco!nt -onds are treatedsiilarly -!t !se the strai"ht.lineethod in allocatin" the disco!nt&



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IJ / Constant Interest =ateKethod

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ptions / Kethods o+ Jisposition

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Patents

V 12)5 / LTCG treatentperitted !pon sale o+ patent%een i+ held +or M 1 year&

V 12)5 re!ires that the holdertrans+er all s!-stantial ri"hts tothe patent in order to !se LTCG

treatent&=i"hts trans+erred are not

s!-stantial i+ liited

"eo"raphically or +or less than5.,5



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Holdin" Periods 7HP89

Holdin" Periods dictate hether aGL is short.ter or lon".ter&

Generally:

hort.ter i+ property held 4 1 year& Lon".ter i+ property held 1 year&

$xceptions:

Gi+ts and @e!ests&

;on.taxa-le exchan"es V 10)19&

;on.taxa-le toc Jiidends and=i"hts&


T Pl i


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Tax Plannin"Considerations

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