ACTG 3036 n Federal Income Tax Property Transactions

ACTG 3036

n Federal Income Tax

Property Transactions

Tax Formula Economic Income - Exclusions Gross Income - Deductions for Adjusted Gross Income - Greater of Standard or Itemized Deductions - Exemptions Taxable Income X Tax Rates Income Tax n

Types of Gains and Losses Ordinary 2. Capital 3. § 1231 1.

Ordinary Gains- § 64 - All gains taxable unless specifically excluded -§ 61(a)(3) Defined as an gain other than a capital or § 1231 gain Included in gross with no special treatment

Ordinary Losses - § 65 - - Defined as any loss from a sale or exchange of any asset that is not a capital or § 1231 asset Deductibility determined under § 165(c) If deductible, no limitation on other income that can be offset with the loss

Capital Assets § 1221 - All Property except: 1. Inventory or other property primarily for sale to customers in the ordinary course of business 2. Property used in a trade or business 3. Any letter, book composition art work or similar property created by the taxpayer 4. Accounts or notes receivable acquired for inventory 5. Publication of US government other than one acquired by purchase 6. Certain Financial Derivatives 7. Hedging transactions 8. Supplies

Musical Compositions n Copyright sales of musical composition are not treated as capital assets-§ 1221(b)(3)

Capital Gains and Losses § 1222 1. 2. Must involve the sale or exchange of a capital asset Short-term : Gains and losses from assets held for one year or less Long-term: Gains and losses from assets held for more than one year

Miscellaneous Rules - - - Worthless stock or securities deemed sold on last day of taxable year that the stock or security becomes worthless- § 165(g)(1) Holding period tacks if acquired in a nontaxable exchange-§ 1223(1) - Gift-§ 1223(2) All property acquired from a decedent is deemed to be held more than one year- § 1223(9)

Capital Gains and Losses - Net Short term Gains against Short Term Losses Net Long Term Gains against Long Term Losses

Capital gains and losses - If short term losses exceed long term gain, the difference is a short term capital loss If long term losses exceed short term gains, the difference is a long term loss If net short term gains exceed long term losses, the difference is short term capital gain If long term gains exceed short term losses, the difference is long term capital gain

Capital gains and losses - If both long and short term net losses do not further add the losses If both long and short term net gains, do not add - Short term gains taxed as ordinary income - Long term gains get preferential rates

Capital Gains and Losses 1. Net Short-Term Capital Gain taxed at ordinary income rates

Long-Term Capital Gains - - - Taxed at maximum rate of 28%- § 1(h) - Applies to gain from collectibles and qualified small business stock Unrecaptured 1250 gain taxed at 25%- § 1(h)(1)(D) - Gain from depreciation deductions taken on real property Other gains taxed 15% or 20% depending on tax bracket of taxpayer- § 1(h)(1)(C) - 0% if in two lowest tax brackets- § 1(h)(1)(B)

Losses - - Short term losses offset short term gains If excess offset long term gains Highest rate classes utilized first Long term losses offset long term gains Offset gains and losses within each rate group Highest rate bracket utilized first Then offset short term gains Capital Losses only deductible up to capital gains for year plus $ 3, 000. Any excess carried forward- 1211(b) Any long-term capital loss carryover is 28% LTCL

Dividends - - Qualified dividends taxed at same rate as long term capital gains- § 1(h)(11) - Dividends from domestic corporation and foreign corporations traded on a US exchange Dividends cannot offset capital losses

§ 1231 Assets Definition- § 1231(b) 1. 2. Property held by taxpayer for more than one year Must either be: Depreciable property used in a trade or business or Real property (land) used in a trade or business

§ 1231 Assets Definition- § 1231(b) n May not be one of the items other than property used in a trade or business excluded from capital gain treatment u Inventory etc

§ 1231 Assets Tax Treatment- § 1231(a) - If net § 1231 gains net gain is treated as a long term capital gain If net § 1231 loss, net loss is treated as an ordinary loss

Special Rule for Involuntary Conversions If net gain proceed as normally n If net loss- loss is deductible § 1231(b)(4)(C) n

§ 1231 Recapture - - Any net § 1231 gains recaptured (treated as ordinary income) to the extent of net § 1231 losses deducted as ordinary in prior five years - § 1231(c) Only applies if there has been net § 1231 losses within five years of net gains If so § 1231 gain in current year treated as ordinary income to extent of net losses within last five years.