MGMT 127A Lecture Notes - Lecture 16: Gross Profit, Ordinary Income, Automobilclub Von Deutschland

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31 Dec 2016
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Lecture 16: Section 10 Property transactions
Stage 1: Realized gain/loss
Realized gain/loss= amount realized - adjusted basis
Amount realized= cash received + property received (FMV) +/- net debt relief - selling expenses
o Net debt relief is the exchange of mortgaged properties- if you are accepting a mortgage
greater than the one on the property you are selling, this will be a negative number
Adjusted basis= cost + improvements - depreciation - partial disposition
o Partial disposition- selling off part of a property or part of it being destroyed
There are 3 exceptions to cost:
o Transferring an asset from personal use to business use
o An asset received via gift
These are loophole plugs
Deciding whether to use FMV at date of the gift vs donor's basis
Example:
A mom buys stock for 50 and now the FMV is worth 100 (so it appreciated in the
mom's hands)
She now gifts it to her son- it does’t ake sese for the so's asis to just e
100 because no one would ever sell anything again they would just gift it and
the person they gifted it to would sell it for no gain
In this case, the son's basis would be the same as the mom's basis- 50
The holding period from the mom is carried over so if she held it for 5 years and
you sell it one day after she gives it to you, it is still a long term asset
Example 2:
Same situation but now the mom originally bought it for 100 (basis) and the
FMV is now 50
If the son later sells it for less than 50 (FMV at date of gift), his basis is the FMV
at the date of gift so there will be a loss and the holding period begins at the
date of the gift
If the son sells it for more than 100 (the basis) then your basis is the donor's
basis and you attach the donor's holding period- this is the same as if it had
appreciated in the donor's hands
Note that there are two relevant points in time here: one when you receive the asset
as a gift and another when you sell it
If the asset appreciated in the donor's hands:
The basis is the donor's basis and you attach the donor's holding period at the
time of receiving it (1)
It does not matter at all what you sell it for
If the asset declined in the donor's hands, then you need to look at time 2 to know
what its cost is at time 1
If you sell it for more than the donor's basis, your basis is now the donor's basis
and you attach the donor's holding period (same as if it had appreciated in the
donor's hands)
If you sell it for less than the FMV at the date of the gift, your basis is the FMV at
the date of the gift and your holding period begins at the date of the gift
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2
If you sell it for a value in between the donor's basis and FMV at date of gift,
there is no gain and no loss allowed
o An asset received via inheritance
This information is always for the aggregate of the entire estate
These assets are always considered long term, no matter what
You can choose to either value assets at FMV of the date of death or at the alternate
valuation date (AVD) which is 6 months later
If AVD is selected by the executor of the estate, then assets are valued at the earlier of
the date of distribution or the AVD
The AVD, however, can only be selected if the aggregate FMV of the estate is lower at
the AVD than it is at the date of death
In reality, it is always valued at the date of death and then once you get to the AVD
and if the value has gone down, you can choose to switch over to the AVD method
Stage II: recognized gain/loss
Generally, recognized gain/loss = realized gain/loss (stage I= stage II)
Seven exceptions
1. Like kind exchange (1031)
To qualify as a like kind exchange, three things must be present:
There must be an exchange
It must be an exchange of productive use property
This is defined as business or investment property other than inventory or
securities
This includes business for investment, business for business, investment for
business, or investment for investment
And of like kinds
This is defined as realty for realty (has to both be income producing realty) or
personalty for personalty
You cannot exchange stock with a 1031
Scenario 1:
Basis is $50, FMV is $100
He trades the farm for a $100 apartment building
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