Gain or loss recognized on Disposition of Assets - used in a trade or business
every asset disposition triggers - a realization event for tax purposes
for disposition of assets, must determine - the amount realized and adjusted basis for
each asset
amount realized - -everything of value received from the buyer less any selling costs
taxpayers selling subject to loans or mortgages must - increase amount realized by
amount of debt relief
amount realized = - cash received + FMV of other property + buyer's assumption of
liabilities - seller's expenses
determination of adjusted basis - -cost basis is the amount subject to cost recovery
-initial basis is generally its cost
=initial basis - cost recovery deductions
realized gain or loss on disposition - gain (loss) realized = amount realized - adjusted
basis
recognized gain or loss on disposition - gains(losses) increase (decrease) the
taxpayers' gross income
-must report on tax returns
in certain ciscumstances - taxpayers may defer permanently exclude gains from taxable
income
character of gain or loss - character recognized affects the taxpayers income tax liability
every gain or loss characterized as - either ordinary or capital(long or short-term)
ordinary assets - -created or used in a trade or business
-held for less than a year
-ex: inventory, AR, machinery, and equipment
capital assets - -assets held for investment purposes for production of income
-held for personal-use purposes
§1231 assets - depreciable assets and land used in a trade or business held for more
than one year
, depreciation recapture - potentially applies to gains (BUT NOT LOSSES) on the sale of
depreciable or amortizable business property
depreciation recapture re characterizes - the gain on the sale of a §1231 asset (all or a
portion of the gain) from §1231 gain into ordinary income
computing the amount of depreciation recapture depends on - the type of §1231 assets
the taxpayer is selling (personal or real property)
§1245 property - the gain from the sale of a §1245 property is characterized as ordinary
income to the extent the gain was created by depreciation or amortization deductions
Under §1245 , the lesser of - of gain recognized or accumulated depreciation is
recaptured as ordinary income
-remaining gain is §1231 gain
there is no depreciation recapture - on assets sold at a loss
when taxpayers sell or dispose of §1245 property, three scenerios - 1. gain created
solely through cost recovery deductions
2. gain due to both cost recovery deductions and asset appreciation
3. assets sold at a loss
most §1231 assets that have wear, tear, or obsolescence - generally do not appreciate
in value
when taxpayer sells these assets at a gain - the gain is created because the taxpayer's
depreciation deductions associated with the asset reduced in adjusted basis faster than
the real decline in the economic value
the entire gain is artificially generated through - depreciation the taxpayer claims before
disposing of the asset
assets subject to cost recovery deductions may actually - appreciate in value over time
when assets are sold - recognized gain must be divided into ordinary gain from
depreciation recapture and §1231 gain
portion of gain created through cost recovery deductions is - recaptured as ordinary
income and remaining gain is §1231 gain
many §1231 assets tend to - decline in value faster than the corresponding depreciation
deductions reduce the asset's adjusted basis
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