Your SlideShare is downloading. ×
2013 cch basic principles ch12
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

2013 cch basic principles ch12

457
views

Published on

Published in: Technology, Economy & Finance

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
457
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
22
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Chapter 12 Property Transactions: Treatment of Capital and Section 1231 Assets©2012 CCH. All Rights Reserved.4025 W. Peterson Ave.Chicago, IL 60646-60851 800 248 3248www.CCHGroup.com
  • 2. Chapter 12 Exhibits 1. Capital Assets—Defined 2. Determination of Capital Gains and Losses 3. Steps to Determine Taxable Income 4. Section 1231 Assets 5. Determining Section 1231 Gains and Losses 6. Recap of the Rules 7. Recap of the Rules—Applying the Loss Limitation 8. Computing Casualty and Theft Losses 9. Netting Personal-Use Casualty/Theft Gains/LossesChapter 12, Exhibit Contents A CCH Federal Taxation Basic Principles 2 of 24
  • 3. Chapter 12 Exhibits 10. Personal Casualty and Theft Losses 11. Casualty and Theft Losses 12. Section 1245 Depreciation Recapture 13. Section 1250 Depreciation RecaptureChapter 12, Exhibit Contents B CCH Federal Taxation Basic Principles 3 of 24
  • 4. Capital Assets—Defined Code Sec. 1221 defines capital assets by stating what they are not. “Capital assets” generally refer to any property other than: 1. Ordinary income property (inventory, receivables, creative works created by the taxpayer) 2. Depreciable business property (buildings and machinery) 3. Non-depreciable business property (land) Thus, capital assets would include investment property such as stocks and bonds, and personal use assets such as cars, principal residences, household furnishings and jewelry. (Note: Paintings, manuscripts, and other creative works are capital assets if created by someone other than the taxpayer).Chapter 12, Exhibit 1 CCH Federal Taxation Basic Principles 4 of 24
  • 5. Determination of Capital Gains and Losses Long-term capital gains are taxed up to 15% (0% for individuals in the 10% and 15% tax brackets), except for:  Collectibles gains, which are taxed up to 28%  Section 1202 gains, which are taxed up to 28% (sale of small business stock held more than 5 years).  Un-recaptured Section 1250 gains, which are taxed up to 25%.Chapter 12, Exhibit 2a CCH Federal Taxation Basic Principles 5 of 24
  • 6. Determination of Capital Gains and Losses Step One  Group gains or losses into 4 baskets and determine the net amount in each basket. 1) Short-term gains/losses. 2) 28% long-term gains/losses. 3) 25% long-term gains (you will not have losses in this basket). 4) 15% long-term gains/losses (including 1231 LT capital gains)Chapter 12, Exhibit 2b CCH Federal Taxation Basic Principles 6 of 24
  • 7. Determination of Capital Gains and Losses Step Two  Long-term net losses from the 28% basket are netted first against gains from the 25% basket and then against gains from the 15% basket.  Long-term net losses from the 15% basket are netted first against gains from the 28% basket and then against gains from the 25% basket.  Short-term net losses are also netted against long-term net gains (starting with the 28% basket).  Short-term net gains reduce net losses from the 15% or 28% baskets.Chapter 12, Exhibit 2c CCH Federal Taxation Basic Principles 7 of 24
  • 8. Steps to Determine Taxable Income  If the result is a net short-term capital gain, the amount is included in ordinary income.  If the result is net long-term capital gains, the gains are taxed at the applicable capital gains rates (i.e., each basket’s rate).  If the result is a loss (short-term or long-term), up to $3,000 ($1,500 married filing separately) may be deducted for AGI. The excess can be carried forward indefinitely.Chapter 12, Exhibit 3 CCH Federal Taxation Basic Principles 8 of 24
  • 9. Section 1231 Assets Code Sec. 1231 Assets. Generally, business assets held over 12 months fall under the category “Section 1231.” These assets include depreciable personal and real property and land used in a business. Examples include delivery trucks, the portion of a car’s basis allocable to business transportation, the portion of a principal residence used for a home office, factory, office computers, land, warehouses, office buildings, apartment buildings, and rental houses.Chapter 12, Exhibit 4 CCH Federal Taxation Basic Principles 9 of 24
  • 10. Determining Section 1231 Gains and Losses Gains entering into this calculation represent amounts remaining after applying the recapture rules of Sections 1245 and 1250. Step One (the first netting) Net all business casualty & theft gains and losses.  If the result is a net loss, the losses are ordinary losses (FOR AGI) and gains are included in ordinary income.  If the result is a net gain, the net gain is combined with other section 1231 gains and losses.Chapter 12, Exhibit 5a CCH Federal Taxation Basic Principles 10 of 24
  • 11. Determining Section 1231 Gains and LossesStep Two (the second netting)Net remaining 1231 gains and losses (including net casualty & theft gainsfrom the first netting)  If the result is a net loss, the losses are ordinary losses (deducted FOR AGI) and gains are included in ordinary income.  If the result is a net gain, the net gain generally treated as a long-term capital gain. (It could be treated as ordinary income to the extent of unrecaptured Section 1231 net losses from the past 5 years).Chapter 12, Exhibit 5b CCH Federal Taxation Basic Principles 11 of 24
  • 12. Recap of the Rules 1. Net each category. 2. If the long-term capital shows a gain after offsetting any net short-term capital losses (STCLs) treat the net amount as a net long-term capital gain (LTCG) subject to a maximum 15% or 28% tax rate, depending on which basket survives the netting. 3. If the short-term capital shows a gain after offsetting any net LTCLs, treat the net amount as a net STCG subject to the ordinary marginal tax rate. 4. If the Code Sec. 1231 column total shows a net loss, treat the net amount as an ordinary loss, deductible for AGI, without the $3,000 limitation. Do not offset it against net long-term or short-term capital gains. 5. If the Code Sec. 1231 column total shows a net gain. Treat as ordinary income to the extent of Code Sec. 1231 net losses for the previous five years that have not been recaptured. The remainder of the gain is treated as long-term capital gain.Chapter 12, Exhibit 6 CCH Federal Taxation Basic Principles 12 of 24
  • 13. Recap of the Rules—Applying the Loss Limitation Only $3,000 may be deducted each year for the aggregate of “net” short-term and “net” long-term capital losses. Short-term capital losses are used up first, then long-term capital losses beginning with the highest “baskets.” Unused STCLs and LTCLs are carried forward indefinitely and retain their identity as short term or long term. Remember, that STCLs and LTCLs on the sale of personal use property such as a principal residence or a car used for commuting, are NEVER deductible, and NEVER carried forward.Chapter 12, Exhibit 7 CCH Federal Taxation Basic Principles 13 of 24
  • 14. Computing Casualty and Theft Losses • “Basis” = Cost minus accumulated depreciation (if any). • “⇓“ means “reduce” or “reduced.” • FMV = fair market value. Gain or Loss from Casualty: Nature of the Personal-Use: Business-Use: Casualty: Reimbursements, less: Reimbursements, less: If total destruction or theft: Lower of basis or FMV Basis If partial destruction: Lower of Basis or ⇓FMV Lower of Basis or ⇓ FMV Result: = “Realized” gain or loss = “Recognized” gain or loss *Gain is recognized to the extent that insurance reimbursements exceed adjusted basis.Chapter 12, Exhibit 8 CCH Federal Taxation Basic Principles 14 of 24
  • 15. Netting Personal-Use Casualty/Theft Gains/Losses Combine casualty/theft gains and losses less $100 per event, on personal-use property.  If a net gain, both gains and losses are capital gains and capital losses. Recall that the losses had been reduced by $100 per event but are NOT reduced by the 10% AGI floor.  If a net loss, the net amount is treated as an ordinary itemized deduction, having been reduced by $100 per event AND to be further reduced by the 10% AGI floor.Chapter 12, Exhibit 9 CCH Federal Taxation Basic Principles 15 of 24
  • 16. Personal Casualty and Theft Losses If a personal use gain: = “Tentative” casualty gain If a personal use loss: Reduce by $100 per event to get: “tentative” casualty loss. If all personal use tentative gains The result is a net casualty gain that gets capital and losses net to a GAIN: gains treatment. If all tentative gains and losses Reduce by 10% AGI (applied once to all events’ net to a LOSS: combined net loss.) Any loss remaining is deductible “from” AGIChapter 12, Exhibit 10 CCH Federal Taxation Basic Principles 16 of 24
  • 17. Casualty and Theft Losses Personal Use Business Use Type of deduction “From” AGI “For” AGI Type of gain Capital (Ch. 12) Sec 1231 (Ch. 12)Chapter 12, Exhibit 11 CCH Federal Taxation Basic Principles 17 of 24
  • 18. Section 1245 Depreciation Recapture Purpose – To prevent taxpayers from taking ordinary depreciation deduction and then receiving long term capital gain treatment through Section 1231. Type of Property – Section 1245 is a subcategory of Section 1231. It includes depreciable personal property.Chapter 12, Exhibit 12a CCH Federal Taxation Basic Principles 18 of 24
  • 19. Section 1245 Depreciation Recapture Ordinary income is recognized to the extent of total depreciation taken (not to exceed recognized gain). Excess recognized gain is treated as Section 1231 gain. All losses are treated as Section 1231 losses. There is no recapture of depreciation as ordinary income when there is a recognized loss.Chapter 12, Exhibit 12b CCH Federal Taxation Basic Principles 19 of 24
  • 20. Section 1250 Depreciation Recapture Purpose – To prevent taxpayers from receiving the full benefits of accelerated depreciation and long term capital gain treatment through Section 1231. Type of Property – Section 1250 is a subcategory of Section 1231. It includes depreciable real property.Chapter 12, Exhibit 13a CCH Federal Taxation Basic Principles 20 of 24
  • 21. Section 1250 Depreciation RecaptureGeneral Rule (applies to MACRS property) Unrecaptured Section 1250 gain is taxed up to 25%. Only gain on property held over 12 months is included (i.e. only applies to long-term gain) Excess recognized gain is treated as Section 1231 gain and taxed up to 15%.Chapter 12, Exhibit 13b CCH Federal Taxation Basic Principles 21 of 24
  • 22. Section 1250 Depreciation Recapture Pre-1981 AcquisitionsFor nonresidential and residential real property, the followingrules apply:  Excess depreciation is ordinary income (exception for residential real property - excess depreciation recapture is zero for pre-1976 time period).  Remaining unrecaptured depreciation is in the 25% basket.  Remaining gain is in the 15% basket.Chapter 12, Exhibit 13c CCH Federal Taxation Basic Principles 22 of 24
  • 23. Section 1250 Depreciation Recapture ACRS AcquisitionsFor nonresidential and residential real property, the followingrules apply:  Excess depreciation is ordinary income. For nonresidential real property, if accelerated depreciation was taken, total depreciation is recaptured as ordinary income.  Remaining unrecaptured depreciation is in the 25% basket.  Remaining gain is in the 15% basket.Chapter 12, Exhibit 13d CCH Federal Taxation Basic Principles 23 of 24
  • 24. Section 1250 Depreciation Recapture MACRS AcquisitionsFor nonresidential and residential real property, the followingrules apply:  Unrecaptured depreciation is in the 25% basket.  Remaining gain is in the 15% basket.Chapter 12, Exhibit 13e CCH Federal Taxation Basic Principles 24 of 24

×