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Property Dispositions
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Learning Objectives
1.
2.
3.
4.
5.
6.
Dispositions
10-3
Dispositions
Amount Realized
10-4
10-5
Dispositions
Adjusted Basis
10-6
10-7
Dispositions
Realized
Different
10-8
Example
Suppose Teton sold the machinery for a total amount of
$200,000 and the basis of the machinery is $191,173.
What is the realized gain or loss on the sale of machinery?
Gain realized = Amount realized Adjusted basis
= 200,000 191,173
= 8,827
10-9
Dispositions
10-10
Dispositions
Recognized
10-11
Dispositions
Mathematical calculation
No direct impact on taxable income
10-12
Short-term (one
year or less)
Ordinary
Inventory and
Accounts
Receivable
Long-term (more
than one year)
Depreciable
assets
Investment
assets
ST Capital Gains
Ordinary
1231 gain
Gain: capital gain
Loss: ordinary
loss
LT Capital Gains
10-13
Type of assets
Capital assets
1231 Assets
10-14
1231 Assets
10-15
Depreciation Recapture
Why?
16
Depreciation Recapture
10-17
Depreciation Recapture
10-18
Depreciation Recapture
1245 Property
Example 10-6/7/8
For a machinery with an original basis
of 510,000 and accumulated
depreciation of 318,827, Teton sold the
machinery for a) $200,000, b) 520,000
and c) 180,000. What is the amount
and character of the gain Teton
recognizes in each scenario?
20
Depreciation Recapture
10-22
Step two: net all remaining 1231 gains and losses from
assets sold in the same year
If this generates net losses, then ordinary loss. Use ordinary loss
to offset other ordinary income if possible.
If this generates net 1231 gains, then apply 1231 look-back
rule.
10-23
10-24
10-25
Example 10-13
Suppose that Teton began business in year 1 and
that it recognized a $7,000 net 1231 loss in year 1.
Assume that the current year is year 6 and that
Teton reports a net 1231 gain of $25,000 for the
year. Teton did not recognize any 1231 gains or
losses in years 25. For year 6, what would be the
ultimate character of the $25,000 net 1231 gain?
Assume the same facts as above, except that Teton
also recognized a $2,000 net 1231 loss in year 5.
For year 6, what would be the ultimate character of
the $25,000 net 1231 gain?
10-27
Example
28
Nonrecognition Transactions
Taxpayers
Like-kind exchanges.
Involuntary conversions.
Installment sales.
Other business-related transactions.
10-29
Nonrecognition Transactions
10-30
Nonrecognition Transactions
Real Property
Personal Property
10-31
Nonrecognition Transactions
Property Use
Nonrecognition Transactions
Tax
10-33
10-34
Nonrecognition Transactions
The problem with like-kind exchanges is that the value of the likekind property transferred may differ from the value of the like-kind
property received.
The party transferring the lesser-valued asset must also transfer
additional non-like-kind property.
Non-like-kind property is known as boot.
When boot is given as part of a like-kind transaction:
Immediately recognize gain as the lesser of (1) gain realized
or (2) boot received.
Defer the rest of realized gain to future
10-35
Nonrecognition Transactions
Calculate
received
FMV of like-kind property received
Less: deferred gain
Add: deferred loss
A/B of like-kind property received
36
Nonrecognition Transactions
Involuntary Conversions
10-38
Nonrecognition Transactions
Involuntary Conversions
No gain recognized.
Adjusted basis from old asset is carried over to new asset.
Example 10-18
If one of Teton's employees was involved in a traffic accident
while driving a delivery van. The employee escaped without
serious injury but the van was totally destroyed. Before the
accident, Teton's delivery van had a fair market value of
$15,000 and an adjusted basis of $11,000 (the cost basis
was $15,000 and accumulated depreciation on the van was
$4,000). Teton received $15,000 of insurance proceeds to
cover the loss. Teton was considering two alternatives for
replacing the van: Alternative 1 was to purchase a new
delivery van for $20,000 and Alternative 2 was to purchase a
used delivery van for $14,000. What gain or loss does Teton
recognize under Alternative 1 and Alternative 2?What is
Teton's basis in the replacement property it acquired under
Alternative 1 and Alternative 2?
10-40
Nonrecognition Transactions
Installment
Sales
10-41
Nonrecognition Transactions
Installment
Sales
Example 10-19
Suppose Teton decides to sell 5 acres of
land adjacent to the warehouse for
$100,000. The cost basis for the land is
$37,500. Teton agrees to sell the property
for four equal payments of $25,000one
now (in year 1) and the other three on
January 1 of the next three yearsplus
interest. What amount of gain does Teton
realize on the sale and what amount of gain
does it recognize in year 1?
10-43
Nonrecognition Transactions
Installment
Sales
Example 10-20
Assume that Teton agrees to sell some of its
machinery for $90,000 for two equal payments
of $45,000 plus interest. Teton's original basis
was $80,000 and accumulated depreciation on
the machinery was $30,000. Teton will receive
one payment in year 1 (the current year) and
the other payment in year 2. What is the
amount and character of the gain Teton
recognizes on the sale in year 1?
45
Nonrecognition Transactions
10-46
Homework
Problems:
32, 34, 41, 50 (part a), 51, 55, 56, 62, 64.
47