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Chapter 12

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).

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Chapter 12

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  1. Chapter 12 Property Transactions

  2. 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)

  3. Amount Realized = selling price – selling expenses • Adjusted Basis = cost + capital additions - capital recoveries

  4. 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

  5. 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

  6. liabilities • timing • exchanger

  7. Involuntary Conversion -1033 • definition • replacement property (similar or related in service or use) (t/p use v. functional use) • time limit • basis

  8. Other Nonrecognition • Transfers between spouses incident to divorce 1041

  9. 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selling costs • principal personal residence • basis of new property (cost now) • Section 121 modified 1997, 1998; 1034 repealed • form 2119 - Discontinued

  10. Sale of ResidenceTaxpayer Relief Act of 1997 • Code Sec 1034 - rollover of principal personal residence gain-repealed • Code 121 - exclusion (modified) • 250000 exclusion • 500000 exclusion if MFJ

  11. 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)

  12. (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)

  13. 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)

  14. OR • 250000 on each MFS

  15. 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

  16. 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)

  17. 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

  18. 97 law - spouses can separately qualify for 250,000 each on ownresidences MFJ or MFS

  19. 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)

  20. 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

  21. 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

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