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2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
2013 cch basic principles ch10
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2013 cch basic principles ch10

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  • 1. Chapter 10 Property Transactions: Determination of Basis and Gains and Losses©2012 CCH. All Rights Reserved.4025 W. Peterson Ave.Chicago, IL 60646-60851 800 248 3248www.CCHGroup.com
  • 2. Chapter 10 Exhibits 1. General Rule for Any Type of Disposition 2. Sellers Amount Realized 3. Adjusted Basis 4. Cost of Improvements 5. Lump-Sum Purchases of Several Properties 6. Selling Taxable Stock Dividends—Rules 7. Selling Taxable Stock Dividends—Example 8. Selling Identical, Nontaxable Stock Dividends—Rules 9. Selling Identical, Nontaxable Stock Dividends—ExampleChapter 10, Exhibit Contents A CCH Federal Taxation Basic Principles 2 of 36
  • 3. Chapter 10 Exhibits 10. Selling Nonidentical, Nontaxable Stock Dividends—Rules 11. Selling Nontaxable Stock Rights Less Than 15% FMV Original Stock—Rules 12. Selling Nontaxable Stock Rights Less Than 15% FMV Original Stock— Example 13. Selling Nontaxable Stock Rights ≥ 15% FMV Original Stock 14. Selling Nontaxable Stock Rights ≥ 15% FMV Original Stock— Example 15. Exercising Stock Rights—Tax Treatment for New Stock 16. Exercising Stock Rights—ExampleChapter 10, Exhibit Contents B CCH Federal Taxation Basic Principles 3 of 36
  • 4. Chapter 10 Exhibits 17. Selling Gifts by Donees 18. Selling Property by Related Parties 19. Selling Personal-Use Conversions 20. Selling Inherited Property 21. Selling Common Stock 22. Wash Sales—General Rules 23. Wash Sales—ExampleChapter 10, Exhibit Contents C CCH Federal Taxation Basic Principles 4 of 36
  • 5. General Rule for Any Type of Disposition Amount realized – Adjusted basis of all consideration given = Realized gain or loss ⇓ Recognized (i.e., taxable) gain or loss or Deferred (i.e., postponed) gain or loss or Exempt (i.e., tax-free) gain or disallowed lossChapter 10, Exhibit 1 CCH Federal Taxation Basic Principles 5 of 36
  • 6. Sellers Amount Realized Cash received + Fair market value (FMV) of property received + FMV of services received + Liabilities of seller assumed by buyer (i.e., “debt relief”) – Selling expenses (includes brokerage, advertising, and legal fees paid by seller) = Amount realizedChapter 10, Exhibit 2 CCH Federal Taxation Basic Principles 6 of 36
  • 7. Adjusted Basis Cost (or other adjusted basis) on date of acquisition + Cost of improvements + Buying expenses, including commissions, legal, title search, surveys and appraisal fees paid at date of original purchase _ Depreciation (allowable depreciation reduces basis, even if not taken) – Insurance proceeds received on partial destruction casualties – Deductible loss on partial destruction casualties + Capital gain on partial destruction casualties = Adjusted basisChapter 10, Exhibit 3 CCH Federal Taxation Basic Principles 7 of 36
  • 8. Cost of Improvements Repair and Maintenance Deductions vs. Capital Expenditures Tax Treatment Deductible Unless Personal Use CapitalizedRoofing Patching leaks Adding new roofWiring Mending Major replacementPlumbing Replacing segments Replacing systemsPlastering Filling cracks Installation, renovation, and remodelingPaving and Patching potholes Initial paving, major resurfacingresurfacingFire damage Cleanup, removal, and temporary facilities Modernization incident to restoring former facilitiesLand clearing Ordinary maintenance, bush-hogging Preparing building site for constructionChapter 10, Exhibit 4 CCH Federal Taxation Basic Principles 8 of 36
  • 9. Lump-Sum Purchases of Several PropertiesGeneral Rule. Allocate total cost according to the relative fair marketvalue of each property. ExampleFACTS: A buyer pays a seller a lump-sum amount of $800,000 for land tracts A, B,and C valued at $200,000, $300,000, and $500,000 respectively. ($1,000,000 is the totalvalue of the three tracts.)QUESTION: What is the buyer’s basis in the three tracts?SOLUTION: A: $160,000 ($800,000 x [$200,000 ÷ $1,000,000]) B: $240,000 ($800,000 x [$300,000 ÷ $1,000,000]) C: $400,000 ($800,000 x [$500,000 ÷ $1,000,000])Chapter 10, Exhibit 5 CCH Federal Taxation Basic Principles 9 of 36
  • 10. Selling Taxable Stock Dividends—Rules Upon receipt. Stock dividends are taxable as ordinary income at their fair market value. Upon sale. The basis of new shares of stock received in a taxable stock dividend is their fair market value on the date of receipt . The holding period begins on the day following the date of receipt of the stock dividend.Chapter 10, Exhibit 6 CCH Federal Taxation Basic Principles 10 of 36
  • 11. Selling Taxable Stock Dividends—ExampleFACTS: 1,000 shares of common stock are purchased for $12,000 on March 31, 2011. On September 30, 2011, the shareholder receives a 20% taxable common stock dividend; the FMV is $20 per share. On June 30, 2012, the 200 new dividend shares are sold for $30 per share.QUESTION: Determine the tax treatment for the receipt and sale of the stock dividends.SOLUTION:September 30, 2011, receipt: the $4,000 stock dividend is taxable income $20 per share x (1,000 shares x 20%)June 30, 2012, sale: $2,000 short-term capital gain $6,000 sales proceeds – $4,000 basis of new sharesChapter 10, Exhibit 7 CCH Federal Taxation Basic Principles 11 of 36
  • 12. Selling Identical, Nontaxable Stock Dividends—Rules Upon receipt. Stock dividends are not taxable. Upon sale. Allocate old basis over original and new shares using the following formula: Basis per share = old basis / (number of original shares + number of new shares) The holding period begins on the day following the date of the original acquisition.Chapter 10, Exhibit 8 CCH Federal Taxation Basic Principles 12 of 36
  • 13. Selling Identical, Nontaxable Stock Dividends—Example FACTS: 1. 1,000 shares of common stock are purchased for $12,000 on March 31, 2011. 2. On September 30, 2011, the shareholder receives a 20% nontaxable common stock dividend. 3. On June 30, 2012, the 200 new dividend shares are sold for $30 per share. QUESTION: Determine the tax treatment for the receipt and sale of the stock dividends. SOLUTION: September 30, 2011, receipt: The stock dividends are not taxable. June 30, 2012, sale results is a $4,000 long term capital gain. Amount realized = 200 shares x $30 = $6,000 Adjusted basis = 200 shares x $10 = $2,000 **Basis per share = [$12,000 ÷ (1,000 old shares + 200 new shares)] = $10Chapter 10, Exhibit 9 CCH Federal Taxation Basic Principles 13 of 36
  • 14. Selling Nonidentical, Nontaxable Stock Dividends—Rules Upon receipt. Stock dividends are not taxable. Upon sale. Allocate the original common stock basis between the number of original common stock shares and the number of new preferred stock shares using relative FMVs as of the date of receipt. The holding period of the original common stock does not change. The holding period of the new preferred stock shares includes the holding period of the original shares.Chapter 10, Exhibit 10 CCH Federal Taxation Basic Principles 14 of 36
  • 15. Selling Nontaxable Stock Rights Less Than 15% FMV Original Stock—Rules Basis of the stock rights = 0, but the taxpayer may elect to special allocation rules as if greater than or equal to 15%. Holding period of nontaxable stock rights is same as the holding period of the original stock.Chapter 10, Exhibit 11 CCH Federal Taxation Basic Principles 15 of 36
  • 16. Selling Nontaxable Stock Rights Less Than 15% FMV Original Stock—ExampleFACTS:1. On March 31, 2011, Frost purchased 100 common stock shares at $88 per share.2. On September 30, 2011, Frost received 100 nontaxable stock rights.3. Each common stock and stock right is worth $100 and $10 respectively on September 30, 2011.4. One stock right enables Frost to purchase common stock share for $90.QUESTIONS:Determine (a) the adjusted basis of the new stock rights and the original common stockshares; and (b) the holding period beginning date and the basis of the new stock rights andoriginal common stock shares.Chapter 10, Exhibit 12a CCH Federal Taxation Basic Principles 16 of 36
  • 17. Selling Nontaxable Stock Rights Less Than 15% FMV Original Stock—Example SOLUTION to (a): Adjusted basis of new stock rights: $0, since their value is < 15% FMV of common stock [100 stock rights x $10 FMV per share] < [15% x (100 common stock shares x $100 FMV per share)]; Adjusted basis of original common stock shares: $8,800 (i.e., no change). SOLUTION to (b): Holding period of the stock rights and original common stock shares begins on the day following March 31, 2011.Chapter 10, Exhibit 12b CCH Federal Taxation Basic Principles 17 of 36
  • 18. Selling Nontaxable Stock Rights ≥ 15% FMV Original StockBasis of stock rights =original basis of common stock x FMV stock rights (FMV stock rights + FMV of common stock)Basis of common stock =original basis of common stock x FMV of common stock (FMV stock rights + FMV of common stock)Holding period of nontaxable stock rights is same as the holding period of the originalstock.Chapter 10, Exhibit 13 CCH Federal Taxation Basic Principles 18 of 36
  • 19. Selling Nontaxable Stock Rights ≥ 15% FMV Original Stock—ExampleFACTS: On March 31, 2011, Frost purchased 100 common stock shares at $88 per share. On September 30, 2011, Frost received 100 nontaxable stock rights. Each common stock and stock right is worth $100 and $20 on September 30, 2011. One stock right enables Frost to purchase 1 common stock share for $90.QUESTIONS: Determine (a) the adjusted basis of the new stock rights and the originalcommon stock shares; and (b) the holding period of the new stock rights if sold on June30, 2012.Chapter 10, Exhibit 14a CCH Federal Taxation Basic Principles 19 of 36
  • 20. Selling Nontaxable Stock Rights ≥ 15% FMV Original Stock—Example SOLUTION to (a): Basis of stock rights: $1,467 or $14.67 per stock right. $1,467 = (100 common stock shares x $88 per share) x 100 stock rights x $20 per right $2,000 + $10,000 SOLUTION to (b): Basis of common stock: $7,333 or $73.33 per share of stock. $7,333 = (100 shares x $88 per share) x 100 common stock shares x $100 per share ($2,000 + $10,000) Holding period of nontaxable stock rights is long-term (i.e., from the day following March 31, 2011 to June 30, 2012).Chapter 10, Exhibit 14b CCH Federal Taxation Basic Principles 20 of 36
  • 21. Exercising Stock Rights— Tax Treatment for New Stock New Stock Taxable Stock Rights Nontaxable Stock Rights Basis FMV of rights Adjusted basis of when received rights, if any + + Exercise price Exercise price Beginning Holding Begins on the day following Begins on the day following Period date of exercise date of exerciseChapter 10, Exhibit 15 CCH Federal Taxation Basic Principles 21 of 36
  • 22. Exercising Stock Rights—ExampleFACTS: On September 30, 2011, a taxpayer receives at no cost 100 stock rights valued at $3 per share. The stock rights enable the taxpayer to purchase common stock at $15 per share. On June 30, 2012, the taxpayer exchanges 100 stock rights plus the $1,500 exercise price for 100 shares of common stock.QUESTION: What is the tax treatment for the new stock if the stock rights are (a)taxable upon receipt; and (b) nontaxable on receipt?New Stock Taxable Stock Rights Nontaxable Stock RightsBasis $18 per share $15 per share ($3 FMV of rights when received + $15 ($0 cost of rights when received + $15 exercise exercise price) price)Beginning Holding The day following June 30, 2012, The day following June 30, 2012, thePeriod the date of exercise date of exerciseChapter 10, Exhibit 16 CCH Federal Taxation Basic Principles 22 of 36
  • 23. Selling Gifts by Donees Gift Sales. When a donor gives a donee a gift, the value of the gift is excluded from the donee’s income. When the donee later sells the gift property to third party, special rules govern the determination of the donee’s basis for computing gain or loss.Chapter 10, Exhibit 17a CCH Federal Taxation Basic Principles 23 of 36
  • 24. Selling Gifts by Donees Donees Adjusted Basis (AB) Donees Holding Period (HP) “Gain” basis Same as donors AB. Same as donors HP. “Loss” basis Lesser of: If donors basis is used,  Donors basis or HP = donors HP.  FMV at gift date (but use GAIN If FMV is used, basis for depreciation.). HP begins on gift date. “No gain or loss” For depreciation, use GAIN basis. Same HP for GAIN basis. basis Gift tax rule. When a donee assumes a donors basis, the basis includes: [Gift tax paid by donor x (FMV at gift date - Donors basis at gift date)] taxable amount of the giftChapter 10, Exhibit 17b CCH Federal Taxation Basic Principles 24 of 36
  • 25. Selling Property by Related PartiesRelated-party Sales. When a related party sells to a secondrelated party at a loss, the related-party loss (but not the gain) isdisallowed, regardless of the reasonableness of the amount.When the second related party later sells the property to anunrelated third party, special rules govern the determination ofthe second related party’s gain or loss.Chapter 10, Exhibit 18 CCH Federal Taxation Basic Principles 25 of 36
  • 26. Selling Personal-Use ConversionsPersonal-use Conversions. A “personal-use conversion” is aproperty that has changed in function from personal use tobusiness or investment use (e.g., a principal residenceconverted into a rental house or into business offices).Special rules must be applied to determine the basis of apersonal-use conversion when it is sold. These rules areintended to prevent a taxpayer from converting a personal-useproperty that has declined in value, to business (or investment)use and then selling the property to recognize a business orcapital loss. (Recall that personal-use losses are generally notdeductible.)Chapter 10, Exhibit 19a CCH Federal Taxation Basic Principles 26 of 36
  • 27. Selling Personal-Use Conversions Adjusted Basis (AB) Holding Period (HP) “Gain” basis AB at conversion date less accumulated HP begins on day of depreciation (but use LOSS basis for conversion. depreciation.) “Loss” basis Lesser of HP begins on day of  AB at conversion date less accumulated conversion. depreciation* or  FMVat conversion date “No gain or loss” For depreciation, use lesser of HP begins on day of basis  AB at conversion date or conversion.  FMVat conversion date * Accumulated depreciation is determined from the conversion date to the sale date.Chapter 10, Exhibit 19b CCH Federal Taxation Basic Principles 27 of 36
  • 28. Selling Inherited PropertyHeirs basis = “Step-up” or “step-down” basis using FMV ofproperty as of either: 1. Date of death or 2. If elected by executor (not heir), the earlier of: a. 6 months after date of death or b. Date received by heir if before 6 months.The FMV at the 6-month date may not be greater than thevalue at the date of death.Chapter 10, Exhibit 20a CCH Federal Taxation Basic Principles 28 of 36
  • 29. Selling Inherited Property Holding period = ALWAYS long-term, even if held by heir for 1 day and then sold. Special rule. If a donee wills “appreciated” property back to donor and dies within 1 year of receipt from donor, then the donor/heirs basis is the donee/decedents BASIS as of the date of death (i.e., the original basis), NOT the FMV at date of death.Chapter 10, Exhibit 20b CCH Federal Taxation Basic Principles 29 of 36
  • 30. Selling Common Stock Three methods may be used to determine basis: Specific identification may be used if the certificate numbers can be identified. (With this method, taxpayers may select specific shares based on FIFO, LIFO, highest basis, lowest basis, etc. Average cost is also available if the shares were bought and sold through a broker or agent.)Chapter 10, Exhibit 21a CCH Federal Taxation Basic Principles 30 of 36
  • 31. Selling Common Stock First-In, First-Out may be used if specific shares cannot be identified. (However, average cost is also available if the shares were bought and sold through a broker or agent.) Average cost may be used if the shares were bought and sold through a broker or agent. (Specific identification is also allowed if the shares are bought and sold through a broker or agent, provided that the certificate numbers can be identified.)Chapter 10, Exhibit 21b CCH Federal Taxation Basic Principles 31 of 36
  • 32. Wash Sales—General Rules Purpose. To prevent investors from avoiding taxes by selling at a loss, then buying back identical shares. Definition. A wash sale is a sale of shares that:  Realizes a LOSS, and  Where substantially IDENTICAL SHARES are BOUGHT within 30 days BEFORE or AFTER the date of sale (i.e., a 61-day period.) Basis of new shares = Cost of new shares + Postponed loss from wash sale of old sharesChapter 10, Exhibit 22 CCH Federal Taxation Basic Principles 32 of 36
  • 33. Wash Sales—Example FACTS: On January 1, 2008, 100 ABC shares are purchased for $200 per share. On December 10, 2012, 50 ABC shares are sold for $160 per share. On December 20, 2012, 10 ABC shares are purchased for $140 per share. QUESTIONS: (a) Is the December 10, 2012, sale a “wash sale”? (b) If so, how much loss is postponed? How much is recognized? (c) Determine the basis of the December 20, 2012, shares. (d) Determine when the holding period of the December 20, 2012, shares begins.Chapter 10, Exhibit 23a CCH Federal Taxation Basic Principles 33 of 36
  • 34. Wash Sales—Example SOLUTION to (a): Yes, this is a wash sale because two events occurred: 1. The December 10, 2012, sale resulted in a ($2,000) realized loss: ($160 x 50 shares) – ($200 x 50 shares) 2. Identical shares were purchased within 30 days of the sale (i.e., the 10 ABC shares bought on December 20, 2012)Chapter 10, Exhibit 23b CCH Federal Taxation Basic Principles 34 of 36
  • 35. Wash Sales—Example SOLUTION to (b): Loss postponed: ($400); Loss recognized: ($1,600) Only that portion of loss attributable to the wash sale is postponed as shown below: Portion attributable to wash sale: ($400) postponed loss [10 shares/50 shares x (2,000) = (400)] Portion NOT attributable to wash sale: ($1,600) recognized loss [40 shares/50 shares x (2,000) = (1,600)]Chapter 10, Exhibit 23c CCH Federal Taxation Basic Principles 35 of 36
  • 36. Wash Sales—ExampleSOLUTION to (c):Basis of December 20, 2012, shares: $1,800 $1,400 [10 shares bought on December 20, 2012 x $140 cost per share]+ 400 [Postponed loss on December 10, 2012 wash sale, computed= $1,800 at (b)] SOLUTION to (d): Beginning holding period of the December 20, 2012 shares: the day following January 1, 2008 (i.e., the holding period “tacks on” to the holding period of the original shares)Chapter 10, Exhibit 23d CCH Federal Taxation Basic Principles 36 of 36

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