Chap 17

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Chap 17 Powered By Docstoc
					Chap I13

1231 Assets
Depreciable property & real property used in trade or business are 1231 assets if held
over 1 year.

Appears then that net 1231 gains would be ord income.

 Sec 1231 states may be LTCG (taxed at 5/15%) if held for over 1 year. Recapture
provisions limit this.

If have net 1231 loss, it is ord loss, fully deductible (as opposed to capital).

The net 1231 gain from above is offset by nonrecaptured net 1231 losses claimed in the 5
preceding tax years. To the extent that there are nonrecaptured 1231 losses, the net 1231
gains are reclassed as ordinary income. Only the excess is given LTCG treatment.

Other 1231 property includes :

timber, coal, iron ore, unharvested crops and certain livestock

Sec 631: cutting of timber held for over 1 year and used in trade or business can, if
elected be treated as a sale/exchange of the timber and eligible for 1231 treatment.

1231 gain/loss = FMV of timber on 1st day of tax year – adjusted basis (cost-depletion)

Ex: AB= 300,000
FMV on 1/1 = 500,000
Sell to mill on 5/15 for 650,000
Total gain = 650,000-300,000= 350,000
631 gain = 500,000-300,000= 200,000
ordinary income = 650,000-500,000= 150,000

expenses in cutting the timber are deductible as ordinary deductions in year incurred. A
631 election is binding on all subsequent years unless receive IRS approval.

If 1231 assets disposed by casualty/theft – a special netting rule applies.

1. Casualty g/l from 1231 assets and casualty g/l from non-personal-use capital assets
   are determined.

a. If above is gain, add excess to other 1231 gains

b. If above is loss, exclude all casualty gains and losses from 1231 computations. All
   casualty gains are ordinary income. 1231 casualty losses are deductible for AGI as
   ord losses. Other casualty losses are deductible from AGI (subject to 10% AGI limit).
2. After adding net casualty gains from above to other 1231 gains and losses, net all
   1231 gains and losses.

a. If gains > losses, the net gain is 1231 gain (LTCG) subject to “lookback” rule

b. If losses > gains, all gains are ordinary income. The 1231 asset losses (noncasualty)
   are deductible for AGI. Other casualty losses are deductible from AGI.

Personal use property casualty gains (losses) are not entitled to 1231. If net is gain, it is
CG. If loss, deduct from AGI subject to 10% of AGI.

1245 Recapture:

mandates classifying gain on sale of 1231 assets as ordinary income, not LTCG (1231
gain) to extent you received deductions from ordinary income for depr exp, so you don’t
receive preferential cap gain treatment on sale.

1245 assets:

1. all depreciable personal property

2. amortizable personal property (patents, copyrights and software)

3. Nonresidential real property depreciated under ACRS (1981-86 vintage) 15,18 & 19
   year lives, using accelerated depreciation

 Amount recaptured: Total depreciation taken up to amount of gain. If sales price is <=
original cost, all gain will be ordinary income.

1250 recapture:

1250 assets: Depreciable real property not subject to 1245 rules. Residential real property
acquired after 12/31/75 and before 1/1/87 and nonresidential real property acquired after
12/31/69 and before 1/1/81.

Recapture the excess of accelerated over straight line taken over life of asset

Unrecaptured 1250 gain (25% tax rate): amount of LTCG, not otherwise treated as ord
income, which would be ord income if Sec 1250 provided for full recapture and not just
the excess. In essence it’s the amount of straight-line depreciation, but limited to amount
of net remaining gain (after initial 1250 excess depr already recognized). For 1250
property, only have (5/15%)LTCG if selling price > original cost

Other recapture issues:
1. Acquire property by gift – the donors recapture potential carries over to the donee.

2. Acquire property by inheritance – recapture is eliminated.

3. Donate depreciable property – amount of deduction is reduced by recapture potential.

4. Installment sales – the amount of depreciation recapture is picked up as ordinary
   income in year of sale, not deferred as payments made. Only defer 1231 gain

Like-kind exchanges. If boot is received, any gain recognized is ordinary income up to
recapture potential. Any unused recapture potential c/o’s to new asset.

For Corporations:

1245 recapture is the same.

1250 recapture – corps are subject to additional recapture (Sec 291) of 20% of excess of
recaptured amount if property was 1245 over amount recaptured as 1250. (20% of lesser
of a) depreciation not recaptured under Sec 1250 or b) gain remaining after Sec 1250