T4

Question 1

The following realized gains are either deferred or excluded from taxable income (not recognized):

Answer 1

HIDE IT

-Homeowner’s exclusion
-Involuntary conversion
-Divorce property settlement
-Exchange of like-kind property
-Installment sale
-Treasury capital and stock

Question 2

Homeowner’s Exclusion definition, rules, and amount

Answer 2

Exclusion on the gain on the sale of a taxpayer’s personal principal residence

To qualify, a taxpayer must have owned and used the property as a principal residence for 2 or more years during the 5 years before selling it. Periods don’t have to be continuous.

If one spouse doesn’t qualify, must use single amount.

Exclusion may be reduced because of nonqualified use

$250,000 for single, $500,000 for MFJ

Question 3

Hardship provision of the Homeowner’s Exclusion definition and calculation

Answer 3

Taxpayers may be eligible for a reduced exclusion if the sale is due to a change in employment (new employment must be 50+ miles away from residence sold), health, or other unforeseen circumstances AND either the exclusion has been claimed within the previous 2 years or the taxpayer fails to meet the ownership and use requirements.

(Number of months of qualifying ownership / 24 months) x maximum exclusion available to the taxpayer based on filing status

Question 4

Nonqualified use provision of the Homeowner’s Exclusion definition and calculation

Answer 4

A nonqualified use is any use of the home other than use as a principal residence (Ex. renting)

If a taxpayer has a nonqualified use, the portion of the gain attributable to the nonqualified use is not eligible for the exclusion. Does not include time after the house is sold to allow for sale of the home.

(Period of nonqualified use / total period of time the taxpayer owned the property)

Question 5

Involuntary Conversions definition and rules

Answer 5

Nonrecognition treatment is given to gains realized on involuntary conversions of property (Ex. Theft, destruction, condemnation)

No gain is recognized when other similar property is received to replace the involuntarily converted property OR all insurance or condemnation proceeds are reinvested in similar property

If the taxpayer does not reinvest all the insurance or condemnation proceeds in similar property (within 2 years), gain will be recognized to the extent of the amount not reinvested (deferred gain)

Question 6

Basis in replacement property for involuntary conversions

Answer 6

The basis of similar property acquired by reinvestment of insurance or condemnation proceeds is the cost of such property decreased by the amount of any gain not recognized (deferred) on the involuntary conversion.

Question 7

Divorce Property Settlement rules

Answer 7

When a divorce settlement provides for a lump-sum payment or property settlement, it is a nontaxable event.

Question 8

Like-Kind Exchanges calculation of Realized gain, Recognized gain, Deferred gain/loss, and basis of property received

Answer 8

Realized gain = (FMV of everything received) - (NBV of everything given up)

Recognized gain = The lesser of Realized Gain or Boot RECEIVED. If there is not boot, then no gain is recognized.

Deferred gain/loss = Gain realized - Gain recognized

Basis of property received = FMV of property received - Deferred gain + Deferred loss

Question 9

What property qualifies for like-kind exchange

Answer 9

Real property used in a trade or business or held for investment that is exchanged for other real property used in trade or business or held for investment.

Personal property does not qualify.

Question 10

What happens when a like-kind exchange includes debt assumed and debt relief?

Answer 10

Net the debt. If the net is debt assumed it is boot paid, if the net is debt relief than it is boot received.

Question 11

Installment Sales Definition and rules (not steps)

Answer 11

A tax method of reporting gains (not losses) where part of the payments are received in a tax year after the year of the sale. Always cash basis, even if taxpayer is accrual basis.

Question 12

Installment sale steps

Answer 12

1. Gross Profit = Sales price - Adjusted Basis
2. Gross profit percentage = Gross profit / Sales price
3. Gain recognized (taxable income) = Cash collections (excluding interest) x Gross profit percentage

Question 13

Sales that do not qualify for installment sale gain deferral

Answer 13

Sales of:

-Inventory
-Stocks or securities traded on an open market
-Sales at a loss
-Depreciation recapture property

Question 14

Realized losses treatment for involuntary conversions, like-kind exchanges, and installment sales

Answer 14

Involuntary conversions: Realized losses are always recognized

Like-Kind Exchanges: Realized losses are not recognized. All the loss is deferred, and increases the basis in the new property

Installment Sales: Losses are not eligible for installment sales, the whole loss must be recognized immediately.

Question 15

Treasury and Capital Stock Transactions (by Corporation) gain rules

Answer 15

The following transactions are exempt from both gains and losses (Nontaxable)

-A corporation selling its own stock
-A corporation repurchasing its own stock
-A corporation re-issuing its own stock

Question 16

Capital Assets definition and tax treatment when sold

Answer 16

Property (real or personal) held by the taxpayer for investment or personal use (NON-BUSINESS ASSETS)

Treated as capital gains/losses when sold

Question 17

Noncapital Assets definition and tax treatment

Answer 17

Business-use assets

Treated as ordinary gains/losses when sold, but some may be capital or ordinary (Ex. 1231, 1245, 1250)

Question 18

Section 1231 assets definition

Answer 18

Assets used in a taxpayer’s trade or business and are held for more than 12 months.

Question 19

How are Net 1231 ordinary losses treated for taxes?

Answer 19

They are fully deductible, unlike the $3,000 limitation for individuals or capital gains limitations for capital losses.

Question 20

How are Net 1231 gains treated for taxes?

Answer 20

They are treated as Capital gains

Question 21

Section 1231 Look-Back Rule

Answer 21

When a taxpayer has a net Section 1231 gain for the year, the taxpayer must first “look back” to see if there were any net Section 1231 losses deducted as ordinary losses during the previous 5 YEARS.

If so, the taxpayer must recapture this ordinary treatment by treating the current year net Section 1231 gain as ordinary income.

Question 22

Section 1245 property definition and examples

Answer 22

Subset of 1231 property

Depreciable PERSONAL property used in a trade or business for more than 12 months

Ex. Vehicles, computers, machinery, and equipment.

Question 23

Section 1250 property definition and examples

Answer 23

Subset of 1231 property

Depreciable REAL property used in a trade or business for more than 12 months

Ex, Warehouse, office building, NOT Land

Question 24

Depreciation recapture is what type of gain?

Answer 24

Ordinary gain

Question 25

For depreciable real property, what are the different sections for individuals vs. corporations?

Answer 25

Individuals: 1250 (Taxed at max 25%) Corporations: 291 (20% of excess depreciation taxed as ordinary)

Question 26

Individual Taxpayer Flowchart of Gain or Loss from Section 1231, Section 1245, and Section 1250 Assets

Answer 26

If Loss, Land, or Section 1250 property, it joins the Section 1231 pool. If Section 1245 property, depreciation recapture of lesser of gain recognized or accumulated depreciation. The rest goes to 1231 pool. If 1231 pool is negative, it is an ordinary loss If 1231 pool is positive, split into two categories: Unrecaptued Section 1250 gain and Regular net Section 1231 gain Unrecaptured Section 1250 gain is the lesser of recognized gain for each 1250 asset sold at a gain or accumulated depreciation for each Section 1250 asset sold at a gain. Apply 5-year lookback rule to unrecaptured 1250 gain. Cancellations are ordinary income, the remaining are taxed at 25% Regular net Section 1231 gain is gain remaining after removing unrecaptured Section 1250 gain. Apply the remaining lookback to the 1231. Any cancellations are ordinary income and the rest are taxed at 0/15/20% LTCG rate.

Question 27

Corporate Taxpayer Flowchart of Gain or Loss from Section 1231, Section 1245, and Section 1250 Assets

Answer 27

If Loss or Land, it joins the Section 1231 pool. If Section 1245 property, depreciation recapture of lesser of gain recognized or accumulated depreciation. The rest goes to 1231 pool. If Section 1250 property, depreciation recapture of 20 PERCENT of lesser of gain recognized or accumulated depreciation. The rest goes to 1231 pool. If 1231 pool is negative, it is an ordinary loss If 1231 pool is positive, apply look-back rule. Cancellations are ordinary income, the remains are capital gain.

Question 28

What types of relatives are related parties?

Answer 28

Ancestors and lineal descendants (father, son, grandfathers) Aunts/nephews aren't lineal because you move to the side on the family tree. No in-laws or step relationships

Question 29

What type of related-party transaction gains are taxed as capital gains?

Answer 29

Sales of non-depreciable property (Ex. land) between all related parties except spouses and an individual and a 50%+ controlled corporation or partnership

Question 30

Holding period and basis for when related party property is sold to an unrelated property.

Answer 30

Holding period is always the related-party transaction date If sold higher, use relative's basis to determine gain If sold between, no gain or loss If sold lower, use purchase price to determine loss

Question 31

Three common examples of loans affected by imputed interest rules:

Answer 31

1. Gifts 2. Compensation-Related Loans 3. Corporation-Shareholder Loans

Question 32

Rules relating to amount of imputed interest loans

Answer 32

If <$10,000, No imputed interest is calculated If >$10,000 and <$100,000, imputed interest is limited to the amount of the borrower's net investment income for the year. If >$100,000, no limits on imputed interest