gain (loss) on sale irc sec(s). 1231, 1245 and 1250 (loss...9/19/2016 4 capital assets •generally,...

9/19/2016

1

CHECKPOINT LEARNING® WEBINARS

Gain (Loss) on Sale – IRC Sec(s). 1231, 1245 and 1250

Gain (Loss) on Sale – IRC Sec(s). 1231, 1245 and 1250

Presented by: Laurie A. Stillwell, CPA

Copyright 2016 Thomson Reuters/Tax & Accounting

All Rights Reserved.

CHECKPOINT LEARNING® WEBINARS

9/19/2016

2

Copyright 2016 Thomson Reuters All Rights Reserved

This course, or parts thereof, may not be reproduced in another

document or manuscript in any form without the permission of the

publisher.

This material is designed to provide accurate and authoritative

information in regard to the subject matter covered. It is sold with the

understanding that the publisher is not engaged in rendering legal,

accounting or other professional service. If legal advice or other expert

assistance is required, the services of a competent professional person

should be sought – From a Declaration of Principles jointly adopted by a

Committee of the American Bar Association and a Committee of

Publishers and Associations.

“The Thomson Reuters content in this webinar is copyright protected.

If your certificate of attendance has been issued by anyone other than

Thomson Reuters, this material has been obtained in violation of

copyright law.”

Laurie A. Stillwell, CPA Laurie A. Stillwell runs her own firm based in Saratoga Springs.

She specializes in working with small businesses, professional

practices, and their owners.

In addition to her practice, Ms. Stillwell teaches webinars and live

continuing professional education seminars nationally on ethics,

and business and individual income tax issues for Thomson Tax

& Accounting. She is the author and editor of several continuing

professional education texts, as well as published articles on

budgeting, financial literacy, cash-flow management, and the tax

and accounting issues faced by professionals and small business

owners.

Prior to forming her own firm in 2001, Ms. Stillwell spent more

than a decade with local and regional accounting firms and

specialized in providing tax and accounting services to closely-

held businesses.

She began her public accounting career with the international firm

of Price Waterhouse, in Boston, Massachusetts. Ms. Stillwell

graduated summa cum laude from SUNY Albany’s School of

Business with a B.S. in Accounting.

9/19/2016

3

Learning Objectives

By the end of this webinar, you should be able to:

• Explain the differences between IRC Sec(s). 1231,

1245 and 1250 property.

• Summarize what gain (loss) is reported on Form

4797.

• Identify planning opportunities and traps of selling

property on the installment method.

Introduction

• Capital gain (loss) on capital assets.

• Section 1231 transactions and gain (loss).

• Section 1245 property.

• Section 1250 property.

9/19/2016

4

Capital Assets

• Generally, taxpayers will have a capital gain or loss

if they sell or exchange a capital asset.

• A taxpayer also may have a capital gain if their IRC

Sec. 1231 transactions result in a net gain. *

* Potential trap here…more on this later.

Capital Assets

• Personal-use property. Generally, property held

for personal use is a capital asset.

• Gain from a sale or exchange of that property is a

capital gain.

• Loss from the sale or exchange of that property is

not deductible (note that there exceptions, such as

when the loss is a result of a casualty or theft).

9/19/2016

5

Capital Assets

• Investment property. Investment property (such

as stocks and bonds) is a capital asset, and a gain

or loss from its sale or exchange is a capital gain

or loss.

• This treatment does not apply to property used for

the production of income.

Capital Assets

• Capital assets may include (not exhaustive):

– Stocks and bonds.

– Taxpayer’s principal residence or second home.

– Timber grown on the taxpayer’s home property

or investment property, even if they make

casual sales of the timber.

– Household furnishings.

– A car used for pleasure or commuting.

– Coin or stamp collections, gems, jewelry, gold,

silver, and other metals.

9/19/2016

6

Polling Question #1

A capital asset may include:

A. Stock or bond

B. Coin or stamp collection

C. Gems, jewelry, gold or silver

D. Any or all of the above

Noncapital Assets

• A noncapital asset is property that is not a capital

asset. These may include:

– Stock in trade, inventory, and other property

held mainly for sale to customers in a trade or

business.

– Depreciable property used in a trade or

business or as rental property even if the

property is fully depreciated (or amortized).

9/19/2016

7

Noncapital Assets

• A noncapital asset is property that is not a capital

asset. These may include:

– Real property used in your trade or business or

as rental property, even if the property is fully

depreciated.

– And some other examples…

IRC Sec. 1231

• Code Section titled “Property used in

the trade or business and involuntary

conversions.”

• IRC Sec. 1231 gains and losses are

the taxable gains and losses from Sec.

1231 transactions.

9/19/2016

8

IRC Sec. 1231

• IRC Sec. 1231 transactions. The following

transactions result in gain or loss subject to IRC

Sec. 1231 treatment:

– Sales or exchanges of real property or

depreciable personal property.

• This property must be used in a trade or

business and held longer than one year.

• Generally, includes property held for the

production of rents or royalties.

IRC Sec. 1231




– Sales or exchanges of real property or

depreciable personal property.

• Property must be either real property or

subject to depreciation (IRC Sec. 167).

• Depreciable personal property includes

amortizable IRC Sec. 197 intangibles.

9/19/2016

9

IRC Sec. 1231




– Sales or exchanges of leaseholds.

– Sales or exchanges of cattle and horses.

– Sales or exchanges of other livestock (not

including poultry).

– Sales or exchanges of unharvested crops.

IRC Sec. 1231




– Cutting of timber or disposal of timber, coal, or

iron ore.

– Condemnations.

– Casualties and thefts.

9/19/2016

10

IRC Sec. 1231

• However, a sale, exchange, or involuntary

conversion of property held mainly for sale to

customers is NOT an IRC Sec. 1231 transaction.

Polling Question #2

IRC Sec. ____ gains and losses are the taxable

gains and losses from Sec. 1231 transactions.

A. 167

B. 1202

C. 1231

D. 179

9/19/2016

11

IRC Sec. 1231

• Real or depreciable property used in a trade or

business or for the production of rental income

and held more than one year is IRC Sec. 1231

property.

• If a taxpayer disposes of depreciable or

amortizable property at a gain, they may have to

treat all or part of the gain as ordinary income

(depreciation recapture).

• Any remaining gain is IRC Sec. 1231 gain.

IRC Sec. 1231

• Net gains (IRC Sec. 1231 gains > 1231 losses)

from IRC Sec.1231 property are treated as long-

term capital gains. *

• Net losses (IRC Sec. 1231 losses > 1231 gains)

from IRC Sec. 1231 property are treated as

ordinary losses.

* Potential trap here.

9/19/2016

12

IRC Sec. 1231

• However, if there are nonrecaptured prior-year

IRC Sec. 1231 losses, IRC Sec. 1231 net gains in

subsequent years are taxed as ordinary income

to the extent of those unexpired prior-year

nonrecaptured IRC Sec. 1231 losses (IRC Sec.

1231(c)).

• Why the lookback rule?

IRC Sec. 1231

• Nonrecaptured IRC Sec. 1231 losses are the

aggregate net IRC Sec. 1231 losses deducted in

the five preceding tax years that have not offset

IRC Sec. 1231 gains.

• These losses are considered recaptured in

chronological order (i.e., FIFO) and expire if they

have not been recaptured after five years.

9/19/2016

13

IRC Sec. 1231

EXAMPLE:

• In 2016, Ben has a $2,000 net IRC Sec. 1231 gain.

• To figure how much he has to report as ordinary

income and long-term capital gain, he must first

determine his IRC Sec. 1231 gains and losses from

the previous 5-year period.

IRC Sec. 1231

• EXAMPLE (continued):

• From 2011 through 2015 he had the following IRC

Sec. 1231 gains and losses:

TAX YEAR AMOUNT

2011 $ -

2012 $ -

2013 $(2,500)

2014 $ -

2015 $ 1,800

9/19/2016

14

IRC Sec. 1231

EXAMPLE (continued):

• Ben uses this information to figure how to report his

net IRC Sec. 1231 gain for 2016.

– Step #1 – Net Sec. 1231 gain (2016) - $2,000

– Step #2 – Net Sec. 1231 loss (2013) - $(2,500)

– Step #3 – Net Sec. 1231 gain (2015) - $1,800

IRC Sec. 1231


• Ben uses this information to figure how to report his

net IRC Sec. 1231 gain for 2016.

– Step #4 – Remaining IRC Sec. 1231 loss from

prior (5) years - $700 ($2,500 less $1,800)

– Step #5 – Gain (2016) treated as ordinary -

$700

– Step #6 – Gain (2016) treated as long-term

capital gain - $1,300

9/19/2016

15

Polling Question #3

Nonrecaptured IRC Sec. 1231 losses are the

aggregate net IRC Sec. 1231 losses deducted in the

_____ preceding tax years that have not offset IRC

Sec. 1231 gains.

A. Five

B. Seven

C. Ten

D. Twenty-five

IRC Sec. 1245

• IRC Sec. 1245 property includes any property that is

or has been subject to an allowance for

depreciation or amortization and that is any of the

following types of property:

– Personal property (either tangible or intangible).

– Other tangible property (except buildings and their

structural components) used in particular

industries.

9/19/2016

16

IRC Sec. 1245





– Certain real property with an adjusted basis

reduced by IRC Sec. 179, the deduction for

qualified energy efficient commercial building

property, etc.

IRC Sec. 1245





– Single purpose agricultural (livestock) or

horticultural structures.

– Storage facilities (except buildings and their

structural components) used in distributing

petroleum or any primary product of petroleum.

– Any railroad grading or tunnel bore.

9/19/2016

17

IRC Sec. 1245

• Note that IRC Sec. 1245 property does not include

buildings and structural components.

• The term building includes a house, barn,

warehouse, or garage.

• The term structural component includes walls,

floors, windows, doors, central air conditioning

systems, light fixtures, etc.

IRC Sec. 1245

• IRC Sec. 1245 depreciation recapture converts

IRC Sec. 1231 gains into ordinary income to the

extent of depreciation claimed on the property.

• To the extent IRC Sec. 1231 gain is converted into

ordinary income, it is taxed at the taxpayer's

ordinary income rate and is not eligible for

installment reporting.

9/19/2016

18

IRC Sec. 1245

• The gain treated as ordinary income on the sale

of IRC Sec. 1245 property is the lesser of the

following amounts:

– The depreciation and amortization allowed or

allowable on the property.

– The gain realized on the disposition (the amount

realized from the disposition minus the adjusted

basis of the property).

IRC Sec. 1245

• To the extent of gain, depreciation and

amortization must be recaptured as ordinary

income.

• Deductions including (but not limited to):

– Ordinary depreciation deductions.

– Amortization deductions for IRC Sec. 197

intangible assets.

– Sec. 179 deduction.

– Basis reduction for credits (e.g. disabled access

credit).

9/19/2016

19

Polling Question #4

IRC Sec. 1245 property does not include buildings

and structural components.

A. True

B. False

IRC Sec. 1245

EXAMPLE:

• Joan files her personal income tax returns returns

on a calendar year basis.

• In February 2014, she bought and placed in service

for 100% use in her business a used light-duty

truck (5-year property) that cost $10,000.

9/19/2016

20

IRC Sec. 1245


• Assuming the half-year convention, the MACRS

deductions for the truck were $2,000 (no IRC Sec.

179 claimed) in 2014 and $3,200 in 2015.

• Joan sold the truck in May 2016 for $7,000.

• The MACRS deduction in 2016, the year of sale, is

$960 (½ of $1,920).

IRC Sec. 1245


• Calculate the gain treated as ordinary income as

follows:

Amount realized $ 7,000

Cost (2014) (10,000)

LTD depreciation 6,160

= Adjusted basis $ 3,840

Gain realized on sale $ 3,160

9/19/2016

21

IRC Sec. 1245

EXAMPLE:

• On September 1, 2014, Jane acquired substantially

all the assets of a trade or business and allocated

the purchase price of those assets in accordance

with IRC Sec. 1060.

• Under this purchase price allocation, $27,000 was

allocated to a copyright.

IRC Sec. 1245


• She sold the copyright on August 1, 2016, for

$32,000.

• Jane realizes and recognizes a gain of $8,450

[$32,000 sales price − $23,550 adjusted basis]. ^

^ Calculation - $27,000 cost − $3,450 LTD

accumulated amortization = $23,550

9/19/2016

22

IRC Sec. 1245


• The amount of the gain equal to prior amortization

($3,450) is subject to recapture under IRC Sec.

1245, and is taxed as ordinary income.

• The remaining $5,000 of gain is taxed as capital

gain under IRC Sec. 1231, assuming Jane has no

IRC Sec. 1231 nonrecaptured losses.

IRC Sec. 1250

• IRC Sec. 1250 property includes all real property

that is subject to an allowance for depreciation

and that is not and never has been IRS Sec. 1245

property.

9/19/2016

23

IRC Sec. 1250

• Gain on the disposition of IRC Sec. 1250 property

is treated as ordinary income to the extent of

additional depreciation allowed or allowable on the

property.

Polling Question #5

If a taxpayer’s IRC Sec. 1250 property becomes IRC

Sec. 1245 property because he changed its use,

he can never again treat it as IRC Sec. 1250

property.

A. True

B. False

9/19/2016

24

IRC Sec. 1250

• For a taxpayer holding IRC Sec. 1250 property

longer than one year, the additional depreciation is

the actual depreciation adjustments that are more

than the depreciation figured using the straight-

line method.

• For a taxpayer holding IRC Sec. 1250 property one

year or less, all the depreciation is additional

depreciation.

IRC Sec. 1250

• Taxpayers will not have additional depreciation

if any of the following conditions apply to the

property disposed of:

– Depreciation for the property reflects the

straight-line method or any other method that

does not result in depreciation that is more than

the amount figured by the straight-line

method; the taxpayer held the property longer

than one year; and, if the property was qualified

property, a timely election not to claim any

special depreciation allowance was made.

9/19/2016

25

IRC Sec. 1250




– The property was residential low-income rental

property held for 16 2/3 years or longer.

– Taxpayer chose the alternate ACRS method for

the property, which was a type of 15-, 18-, or 19-

year real property covered by the IRC Sec. 1250

rules.

IRC Sec. 1250




– The property was residential rental property

or nonresidential real property placed in

service after 1986; property was held longer

than one year; and, if the property was qualified

property, a timely election not to claim any

special depreciation allowance was made.

9/19/2016

26

IRC Sec. 1250

• Unrecaptured IRC Sec. 1250 gain is the excess

of gain to the extent of depreciation claimed on the

property, other than gain treated as ordinary

income because of IRC Sec. 1250 recapture or

nonrecaptured IRC Sec. 1231 loss carryovers. *

* For purposes of today’s discussion, we will ignore any impact

from 28% collectibles gain (loss), other net short- or long-term

capital gain (loss) or the gain exclusion under IRC Sec. 1202.

IRC Sec. 1250

• A maximum 25% rate applies to the unrecaptured

IRC Sec. 1250 gain if the real property has been

held more than 12 months.

• Any remaining gain in excess of the amount

subject to IRC Sec. 1250 recapture and the

unrecaptured IRC Sec. 1250 provisions is

classified as IRC Sec. 1231 gain, subject to the

regular capital gains rate.

9/19/2016

27

IRC Sec. 1250

HOLDING PERIOD GAIN CHARACTER MAX TAX RATE

12 months or less Ordinary gain 39.6%

> 12 months IRC Sec. 1250

recapture

39.6%

Unrecaptured IRC

Sec. 1250 gain

25%

IRC Sec. 1231 gain 20%

Polling Question #6

A maximum ____ rate applies to the unrecaptured

IRC Sec. 1250 gain if the real property has been

held more than 12 months.

A. 0%

B. 15%

C. 25%

D. 39.6%

9/19/2016

28

IRC Sec. 1250

EXAMPLE:

• On December 1, 2016, Donald sold a rental

building that he has owned since 2003.

• His original cost basis in the building was $500,000

and he has taken straight-line depreciation

deductions of $200,000, leaving an adjusted basis

of $300,000.

• His basis in the land is $100,000.

IRC Sec. 1250


• The sales price of the property was $750,000, of

which $550,000 was allocable to the building and

$200,000 to the land.

• He has no unrecaptured Section 1231 loss

carryovers.

9/19/2016

29

IRC Sec. 1250


• Donald's gain from the sale of the building is

computed as follows:

Building Land Total

Proceeds $550,000 $200,000 $750,000

Adjusted basis:

Cost 500,000 100,000 600,000

A/D 200,000 0 200,000

Gain on sale $250,000 $100,000 $350,000

IRC Sec. 1250


• There is no IRC Sec. 1250 ordinary income

recapture because the building was always

depreciated using the straight-line method.

9/19/2016

30

IRC Sec. 1250


• The $250,000 gain attributable to the building is

taxed as follows:

1. $200,000 (the amount of depreciation claimed)

of the gain is unrecaptured IRC Sec. 1250 gain

taxed at a maximum rate of 25%, and

2. The remaining $50,000 of gain is an IRC Sec.

1231 gain eligible for the 20% maximum

capital gain rate.

IRC Sec. 1250


• The $100,000 gain attributable to the land is a IRC

Sec. 1231 gain eligible for the 20% maximum

capital gain rate.

9/19/2016

31

Installment Sales and Recapture

• In the case of any

installment sale of

property reported under

the installment method

any recapture income is

recognized in the year of

the disposition (IRC Sec.

453(i)(1)(A)).


• Accordingly, in the case of a sale or other

disposition on the installment method, the amount

of the gain that is recapturable under IRC Sec.

1245 or IRC Sec. 1250 (including the gain

attributable to the expense election of Code Sec.

179), referred to as recapture income, is fully

taxed as ordinary income in the year of sale.

9/19/2016

32

Polling Question #7

When is the gain that is recapturable under IRC Sec.

1245 or IRC Sec. 1250 (including the gain

attributable to the expense election of Code Sec.

179) fully taxed as ordinary income?

A. When the final $$ of installment sale receipts are

received

B. In the year of sale

C. When the first $$ of installment sale receipts are

received

D. Never


• Only the gain, if any, that is not recapture income

is taken into account under the installment

method.

9/19/2016

33


EXAMPLE:

• On July 1, 2016, Adam, a calendar year taxpayer,

sells a heavy-duty truck (5-year MACRS class

property) at a $18,052 gain.

• The contract of sale provided for payment as

follows:

– $1,000 on July 1, 2016

– $7,500 on July 1, 2017

– $18,000 balance on July 1, 2018


EXAMPLE:

• Adam has properly taken the following depreciation

deductions with respect to the truck (original cost

$25,000 in 2014):

– $3,000 under the expense election of IRC Sec.

179, and

– $13,552 as MACRS deductions ($4,400 in 2014,

$7,040 in 2015, and half-year allowed of $2,112

in 2016).

9/19/2016

34


EXAMPLE:

• Under the above installment method rule, $16,552

(i.e., the $3,000 expensed amount under Code

Sec. 179 plus the $13,552 of MACRS deductions)

of the $18,052 gain is recapture income and is

therefore taxed as ordinary income in 2016.

• The balance of the gain, here $1,500 ($18,052 −

$16,552), is reported (and taxed) under the

installment method.


• Reg. 1.453-12 takes a front-loaded approach to the

installment recognition of unrecaptured IRC Sec.

1250 gain.

• Therefore, if gain from an installment sale includes

both unrecaptured IRC Sec. 1250 gain (25% gain)

and adjusted net capital gain (20% gain), the

unrecaptured IRC Sec. 1250 gain is reported

before the adjusted net capital gain.

• The regulation applies to installment payments

received after August 23, 1999.

9/19/2016

35

IRS Form 4797

IRS Form 4797

9/19/2016

36

Polling Question #8

What is the title of IRS Form 4797?

A. Depreciation and Amortization

B. Entity Classification Election

C. Election by a Small Business Corporation

D. Sales of Business Property

IRS Form 4797

9/19/2016

37

IRS Form 4797

IRS Form 4797

9/19/2016

38

Conclusion

Thank you for your

participation in today’s

webinar!

75

Upcoming Webinars 09/27/16 Accounting & Auditing Update 8hr

09/27/16 Schedule E Rental Activities – Everybody should own a rental

09/27/16 Monthly Tax Alert

09/28/16 S-Corporations– From Formation to Liquidation

09/28/16 Group Health Plan Eligibility: Design Decisions and Compliance Audits

09/29/16 Introduction to Audits of Nonprofit and Governmental Entities

09/29/16 Medical Costs – Making Medical Care Less Painful by Maximizing the Tax

Benefits

09/29/16 Key Issue Relating to Forms 1099 and 1098

09/30/16 Audit Sampling: A Comprehensive Guide to Effective and Efficient Sampling in

Tests of Details and Tests of Controls

09/30/16 Farm Tax Update

CHECKPOINT LEARNING

®

WEBINARS

360+ ANNUAL

EVENTS FROM

1 – 8 HOURS

All Free with Premier Plus!

9/19/2016

39

CHECKPOINT LEARNING

®

PREMIER PLUS CPE PACKAGE

The Checkpoint Learning Premier Plus CPE Package provides more

learning options than ever before for a single low annual price!

• Unlimited access to 450+ online and downloadable self-study courses

• Unlimited access to 500+ scheduled webinars including all full-day webinars

• 40 annual hours of discounts on Gear Up and AuditWatch self-sponsored

seminars and conferences

• Competency model tool

• Online CPE tracking and compliance monitoring

This annual subscription package is available for just $469 for new users.

For more information and to sign up, please visit

https://checkpointlearning.thomsonreuters.com/CPESolutions/PLSW.

https://checkpointlearning.thomsonreuters.com/CPESolutions/PLSW

gain (loss) on sale irc sec(s). 1231, 1245 and 1250 (loss...9/19/2016 4 capital assets •generally,...

Documents