©2013, College for Financial Planning, all rights reserved. Module 4 Income Tax Aspects of the Dispositions of Property CERTIFIED FINANCIAL PLANNER CERTIFICATION.

©2013, College for Financial Planning, all rights reserved. Module 4 Income Tax Aspects of the Dispositions of Property CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

Learning Objectives 4–1: Analyze a situation to identify an exchange of assets that qualifies for like-kind treatment. 4–2: Analyze a situation to calculate the gain or loss realized, the gain or loss recognized, or the substituted basis for a like-kind exchange. 4–3: Identify the rules related to the Section 121 exclusion. 4–4: Analyze a situation involving a disposition of a personal residence to calculate the gain or loss realized and the gain or loss recognized. 4–5: Identify the rules relating to an installment sale. 4–6: Analyze a situation to calculate the taxable portion of an installment sale. 4–7: Identify rules related to casualty and theft losses. 4–8: Analyze a situation involving a casualty loss to calculate the amount of the deductible loss. 4–9: Identify rules relating to an involuntary conversion. 4-2

Questions to Get Us Warmed Up 4-3

Like-Kind Exchange—Section 1031 Property held for productive use in trade or business or property held for investment purposes 4-5 Property that is like-kind Real estate for real estate Personalty for personalty property same general asset class or NAICS code for personalty Excluded property Inventory Livestock of different sexes Stocks and bonds U.S. realty for foreign realty/U.S. personalty for foreign personalty

Video Play Video 1031 Like Kind Exchange 2½ minutes Play video from Video Layout 1-6 Text chat or other questions

Calculations in Like-Kind Exchanges Gain or Loss Realized Fair market value (FMV) of property received +Boot received +Liability assumed by other party (debt relief)  Adjusted basis of property given  Boot given  Liability assumed =Gain or loss realized Gain or Loss Recognized Lesser of realized gain or boot received 4-7

Calculations in Like-Kind Exchanges Gain Realized But Not Recognized (Deferred Gain) Realized gain  Recognized gain =Gain realized but not recognized Substitute Basis Fair market value (FMV) of qualifying property received  Gain realized but not recognized =Substitute basis in property received 4-8

Like-Kind Example Vince Torrel is considering trading a refrigerator that he uses in his tavern for a freezer that Jane Watkins has in her basement. The fair market value of the refrigerator is $850, and Vince’s adjusted basis is $125. The fair market value of the freezer is $850, and Jane’s adjusted basis is $175. Vince plans to use the freezer in his tavern. Calculate Vince’s substitute basis in the freezer. 4-9

Section 121 $250,000/$500,000 Exclusion No Age Limit Principal residence for two of prior five years Once-every-two-years rule Partial exclusion for health, job, unforeseen circumstances Months of use/24 months x maximum exclusion Nonqualified use—partial exclusion 4-11

Nonqualified Use Use other than as a principal residence after 2008 Treatment of nonqualified use after use as a principal residence—not included Gain attributable to nonqualified use not eligible for the exclusion 4-12

Installment Sales Allows recognition of gain over period of time Treatment is automatic, must elect out Not for sales resulting in loss Cannot be used by dealers Publicly traded property not eligible Acceleration of gain if: o sale of note o cancellation of note o pledge of note as collateral Cost recovery recapture taxed in year of sale 4-14

Taxable Portion of Installment Sale Step 1: Calculate Gross Profit Percentage Step 2: GPP x Payments Received in Current Year 4-15

Casualty & Theft Losses Allowed as itemized deduction Casualty—sudden, unusual or unexpected event Not gradual or progressive damage Theft includes larceny, robbery, blackmail, etc. No deduction allowed unless insurance claim filed (if covered loss) 4-17

Casualty & Theft Loss Calculation 4-18 Lesser of Decrease in FMV of property or Adjusted basis of property Reduced by Insurance 10% of AGI $100 floor per occurrence

Involuntary Conversion Rules Defers gain on casualty, theft, or condemnation Replacement property—similar or related in service or use Replacement period: o Casualty—end of second year after gain realization o Condemned Business (or rental) Realty—end of third year after gain realization Can purchase controlling interest in corporation that owns replacement property No calculations on exam 4-20

Review Question 1 In a like-kind exchange, a loss a.may be recognized within certain limitations. b.may be recognized without limitation. c.may be recognized only by the taxpayer who pays boot. d.may not be recognized. 4-21

Review Question 2 The substitute basis of a qualifying asset received in a like-kind exchange is the asset’s a.basis reduced by the gain realized but not recognized. b.basis increased by the gain realized but not recognized. c.fair market value reduced by the gain realized but not recognized. d.fair market value increased by the gain realized but not recognized. 4-22

Review Question 3 In January of 1995, Jim Johnson, then age 57, sold his principal residence in Seattle and took advantage of the once-in-a-lifetime exclusion available under Section 121. At that time, the maximum exclusion was $125,000. He excluded his entire gain on the sale, which was $100,000. Later that year, he purchased a new residence in Denver that he used as his principal residence. Earlier this year, he sold the Denver residence for a realized gain of $300,000. What is the maximum amount of gain, if any, that Jim may exclude under Section 121? a.$0 b.$25,000 c.$250,000 4-23

Review Question 4 Mary Falcon is a single taxpayer. On January 1, 2012, she received a gift from her mother of a house that immediately became her principal residence. On January 1, 2013, she sold this home for a realized gain of $133,000. She sold the home because she received a job promotion and was transferred to a new location out of state. What is the maximum amount of gain, if any, that may be excluded under Section 121? a.$0 b.$66,500 c.$125,000 d.$133,000 4-24

Review Question 5 Which one of the following statements is correct regarding the use of the installment sale method of accounting for income tax purposes? a.It may be used only if the payments are to be received over at least a two-year period. b.A taxpayer may not avoid the use of the installment sale method if there is an installment sale. c.The installment sale method is available for use by most dealers. d.Any cost recovery recapture is recognized in the year of the installment sale. 4-25

Review Question 6 The gross profit percentage in an installment sale is calculated by a.dividing the gross profit by the contract price. b.multiplying the payments received by the contract price. c.dividing the sale price by the number of payments required to be made under the contract. d.multiplying the marginal income tax bracket by the payments received. 4-26

Review Question 7 Barney Herman had an adjusted basis of $1,500 in an antique automobile that he had purchased as an investment. He sold the auto for $4,500. This year, the buyer made a down payment of $1,500 and completed the first of three annual installments of $1,000. What amount, if any, of installment sale income must Barney recognize in the current year? a.$0 b.$1,000 c.$1,667 d.$2,833 4-27

Review Question 8 Which one of the following may qualify as a like-kind exchange? a.a heifer exchanged for a bull b.an apartment building located in Miami exchanged for an apartment building located in Mexico City c.farming equipment exchanged for farmland d.a shopping center exchanged for farmland 4-28

Review Question 9 In the computation of the realized gain in a like- kind exchange, it is necessary to compare the a.fair market value of the assets received with the adjusted basis of the assets given up. b.fair market value of the assets received with the fair market value of the assets given up. c.adjusted basis of the assets received with the adjusted basis of the assets given up. d.adjusted basis of the assets received with the fair market value of the assets given up. 4-29

Review Question 10 Bob is involved in a like-kind exchange. In the exchange, he assumes a mortgage of $15,000, is relieved of a mortgage of $26,000, and receives $7,000 in cash. How much boot did Bob receive in the transaction? a.$7,000 b.$11,000 c.$18,000 d.$33,000 4-30

Review Question 11 Which one of the following statements is correct regarding a deductible casualty or theft loss incurred by an individual taxpayer? a.A loss resulting from a gradual or progressive event may be deducted. b.A loss resulting from a fire intentionally set by the taxpayer may be deducted. c.A loss arising from blackmail may not be deducted. d.A $100 floor per occurrence must reduce a deductible loss. 4-31

Review Question 12 In May of 2013, Jeff King’s office was burglarized. Jeff figures that approximately $21,000 of equipment was missing. In September of 2013, he received a reimbursement check from the insurance company. If there were a realized gain in this situation, when would the replacement period end? a.December 31, 2013 b.December 31, 2014 c.September 30, 2014 d.December 31, 2015 4-32

Review Question 13 Judy Langer’s rental real estate was condemned by the state to make way for a freeway off- ramp in June of 2012, and she received the check from the state later that month. If there were a gain on the involuntary conversion, when would the replacement period end? a.June 30, 2014 b.December 31, 2014 c.June 30, 2015 d.December 31, 2015 4-33

Review Question 14 Robert McCallum has a truck that he uses to make deliveries for his business. The truck has a fair market value of $21,000 and an adjusted basis of $10,000. Robert still owes $9,000 on the truck. Pasqual Mendez has offered to trade his truck for Robert’s truck in an even trade, taking over payments on Robert’s truck. Pasqual’s truck has a fair market value of $12,000 and an adjusted basis of $10,000. What is the amount of Robert’s basis in the acquired property? a.$9,000 b.$10,000 c.$11,000 d.$21,000 4-34

Review Question 15 An earthquake damaged Irwin Smith's home in California. The cost of the home was $400,000. The fair market value of his home prior to the earthquake was $375,000. The fair market value of the home after the earthquake was $300,000. Irwin's AGI for the current year is $260,000. There was no insurance coverage for earthquake damage on the property. What is the amount, if any, of the deductible casualty loss resulting from the earthquake? a.$0 b.$48,900 c.$49,000 d.$75,000 4-35

©2013, College for Financial Planning, all rights reserved. Module 4 Income Tax Aspects of the Dispositions of Property CERTIFIED FINANCIAL PLANNER CERTIFICATION.

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©2013, College for Financial Planning, all rights reserved. Module 4 Income Tax Aspects of the Dispositions of Property CERTIFIED FINANCIAL PLANNER CERTIFICATION.

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