©2015, College for Financial Planning, all rights reserved.

Session 7Sales of Business Assets

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning

Session Details

Module 3

Chapter(s)

6 and 7

LOs 3-6 Analyze a situation to calculate the amount of cost recovery recapture, or unrecaptured Section 1250 income.

3-7 Analyze a situation to determine the tax treatment of Section 1231 property transactions.

7-2

Section 1231

• “Best of both worlds” Code Sectiono long-term capital gain, oro ordinary loss

• Section 1231 property is:o property used in a trade or business, or

held for the production of income (rental activities)

o generally eligible for depreciation o held for the long-term holding period

7-3

Cost Recovery Recapture

*Assumes no basis adjustments other than cost recovery deductions. 7-4

Calculating Cost Recovery Recapture on Section 1245 Property*

Section 1245 Recapture

Sale Price $15

Cost Basis $10

Depreciation $(7)

Adjusted Basis $3

Sale Price $1

7-5

§1231Potential LTCG

§1245 Income

Cost RecoveryRecapture

Ordinary Income

§1231Ordinary Loss

Primarily personalty

Unrecaptured Section 1250 Income

7-6

Sale Price $15

Cost Basis $10

S/L Depreciation $(7)

Adjusted Basis $3

Sale Price $1

§1231LTCG

Unrecaptured §1250 Income (Type of §1231 gain)25% LTCG

§1231Ordinary Loss

Realty

Section 1231 Lookback

• Lookback period—5 years• If unrecaptured §1231 losses during

lookback period• Current year net §1231 gains

treated as ordinary income

7-7

Review Question 1

Mary Grey purchased office furniture several years ago at a cost of $4,500 to use in her business. She claimed $3,295 of cost recovery deductions. She sold the furniture for $3,000. What is the amount and character of the gain or loss resulting from this disposition? a. $1,500 ordinary loss b. $1,500 capital loss c. $1,795 of ordinary income, $0 long-term

capital gaind. $1,795 long-term capital gain, $0 of

ordinary income7-8

Review Question 2Julio Gallardo owns and operates a manufacturing plant as a sole proprietor. He purchased a machine used in the manufacturing process at a cost of $12,000 several years ago. Julio sold the machine for $16,000 after claiming $3,184 of cost recovery deductions. Calculate the amount and nature (character) of the gain or loss resulting from this disposition.a. $3,184 of ordinary income, $4,000 long-term

capital gainb. $4,000 of ordinary income, $3,184 long-term

capital gainc. $7,184 of ordinary incomed. $7,184 long-term capital gain

7-9

Review Question 3

Which one of the following statements is correct regarding the tax treatment of Section 1231 and 1245?a. Net Section 1231 gains are treated as

ordinary income. b. Net Section 1231 gains are treated as

long-term capital gains.c. Section 1245 income is treated as

capital gain income.d. Section 1245 losses are treated as

ordinary losses.

7-10

Review Question 4

During the current year, Peter Langley has Section 1231 gains totaling $8,000. He also has $1,000 of Section 1231 losses. Four years ago, Peter reported a net Section 1231 loss of $2,000. These are the only two years in which Peter has had Section 1231 gains or losses. What is the amount and character of the current year’s Section 1231 gains and losses?a. $2,000 of ordinary income, $5,000 long-term

capital gain b. $5,000 of ordinary income, $2,000 long-term

capital gainc. $7,000 of ordinary income d. $7,000 long-term capital gain

7-11

Review Question 5Don Crisp sells his commercial rental property (a

warehouse) in June 2015 for $425,000. Don acquired the warehouse in May 1998 for $190,000 and has been depreciating it using the straight-line method for realty. The amount of depreciation taken is $86,000.

What is the amount and nature of the gain on the sale?

a. $86,000 Section 1250 recapture (ordinary income)b. $235,000 regular long-term capital gain; $86,000

unrecaptured Section 1250 incomec. $235,000 regular long-term capital gain; $86,000

Section 1250 recapture (ordinary income)d. $235,000 long-term capital gain

7-12

©2015, College for Financial Planning, all rights reserved.

Session 7End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning