1. Chapter 12 Property Transactions

2. Issues: Realization, recognition, ordinary v. capital (character), basis, cap gains rate Determination of Gain –Amount realized - Adjusted Basis= Gain or Loss –Amount realized = money + FMV of property + liabilities (assumed or subject to)

3. Amount Realized = selling price – selling expenses Adjusted Basis = cost + capital additions - capital recoveries

4. Basis Usually cost Allocations of purchase price Basis of gift Basis of inherited property Conversion from personal use (lesser FMV/AB) Disallowed Losses - Tax 2 –related taxpayers –wash sales

5. Nontaxables Exchanges - Like Kind Exchanges 1031 –Exchange, use, like-kind –boot = non like kind prop. –Basis = basis (given up) - $(boot rec’d) + gain recog’d - loss recog’d (+ basis boot given up) –FMV (new prop) - postp’d gain + postp’d loss

6. liabilities timing exchanger

7. Involuntary Conversion -1033 –definition –replacement property (similar or related in service or use) (t/p use v. functional use) –time limit –basis

8. Other Nonrecognition –Transfers between spouses incident to divorce 1041

9. Sale of Residence - New Section121 –loss v. gain –calculation of gain: Amt realized - basis = gain: AR = selling price - selling costs –principal personal residence –basis of new property (cost now) –Section 121 modified 1997, 1998; 1034 repealed –form 2119 - Discontinued

10. Sale of Residence Taxpayer Relief Act of 1997 Code Sec 1034 - rollover of principal personal residence gain-repealed Code 121 - exclusion (modified) 250000 exclusion 500000 exclusion if MFJ

11. Effective Sales after 5/6/97: 5/7/97-8/14/97: election to apply new After 8/4/97: new applies unless elect out Owned by TP 2 of 5 yrs preceding Used by TP at least 2 of 5 (principal pers res)

12. (Plus generally not use exclusion more frequently every 2 yrs) 2 yr Waiver:  Ownership - changes in empl, health (proration)  Use - Includes invol conversions If own <2 yrs, proportion of exclusion (98 law) (below)

13. Joint return: Both must meet use, 1 ownership (for 500000) Neither used exclusion w/i 2 yrs prec (for 500000) If both spouses each sell 1 or 2 resids: 1 or 2 250000 in joint return (meet 2 and 5 yr tests)

14. OR 250000 on each MFS

15. Sale of prin residence Relief Provision 97 law (new section 121) - Gen Reqs - Recap: prop owned and used 2 years (as prin resid) in 5 year period 5 yr window - prop need not be prin resid date of sale only exclude once every 2 years

16. Relief Provision (IRS R&R Act 1998) Once every 2 years waived - special circs change in employment or health reasons or unforeseen circs (regs) fraction # qualifying months (owned & used) 24 mos Times the exclusion (250,000 or 500,000) (5/6/97)

17. Sale of Prin Resid - Exclusion - Married Couples (97 & 98 Law) 97 law - MFJ can use 500, 000 exclusion if 1) either spouse own resid 2 of last 5 2) both spouses use 2 of last 5 3) neither spouse has used exclusion within last 2 yrs

18. 97 law - spouses can separately qualify for 250,000 each on own residences MFJ or MFS

19. 98 law (clarification) Can separately qualify 250,000 each on joint residence if 1 spouse fails any of 3 conditions, 250,000 applies for each (as if unmarried) (joint) and, in this situation each spouse is treated as owning during the 2 yr period that either owned (interesting)

20. Basis of Property from a Decedent EGTRRA ‘01 Because of Estate Tax repeal in 2010 2010: modified carryover (instead of step up to FMV Lesser of AB of decedent or FMV DOD No 6 month alter note valuation

21. Basis of Property from a Decedent EGTTRA ’01 ( cont) Executor can step basis 1.3 m (plus certain unused capital, net op, built-in losses And step up an additional 3 m for property passing to the surviving spouse