Estimated study time: 40 minutes
Content:
Realized gain or loss = amount realized − adjusted basis. Amount realized = cash + FMV of property received + liabilities assumed by buyer. Adjusted basis = original cost + capital improvements − accumulated depreciation − casualty losses previously deducted.
Character of gain/loss determines tax treatment: Capital gain/loss (from capital assets — stocks, bonds, personal property; most investment property); Section 1231 gain/loss (from business-use real property and depreciable personal property held >1 year); Ordinary income/loss (from inventory, accounts receivable, creative works, Section 1245/1250 recapture).
Depreciation recapture: Section 1245 (personal property/intangibles): all depreciation allowed is recaptured as ordinary income to the extent of gain. Section 1250 (real property): only "additional" depreciation (accelerated above straight-line) recaptured as ordinary income for property placed in service before 1987; under current law (MACRS SL only), unrecaptured Section 1250 gain taxed at max 25% rate.
Like-kind exchanges (Section 1031): Defers realized gain (or loss) on exchange of real property held for productive use in trade/business or investment for like-kind real property. Boot received (unlike property — cash, mortgage relief) = recognized gain (lesser of realized gain or boot received). Basis of new property = FMV of old property + gain recognized − boot received − liabilities assumed by buyer + liabilities assumed by taxpayer.
Capital losses: For individuals, net capital losses deductible only against capital gains plus up to $3,000 of ordinary income per year; excess carried forward indefinitely (retains short-term/long-term character). For corporations, capital losses offset only capital gains; no ordinary income deduction; carried back 3 years and forward 5 years.
Installment sales: Income recognized as payments are received. Gross profit percentage (GPP) = gross profit / contract price. Gross profit = selling price − adjusted basis (net of depreciation recapture recognized in year of sale). Each payment × GPP = capital gain portion. Dealer installment sales (inventory) and publicly traded property are excluded.
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