CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 4
Income Tax Aspects of the
Dispositions of Property
©2013, College for Financial Planning, all rights reserved.
Learning Objectives
4–1: Analyze a situation to identify an exchange of assets that
qualifies for like-kind treatment.
4–2: Analyze a situation to calculate the gain or loss realized,
the gain or loss recognized, or the substituted basis for a
like-kind exchange.
4–3: Identify the rules related to the Section 121 exclusion.
4–4: Analyze a situation involving a disposition of a personal
residence to calculate the gain or loss realized and the
gain or loss recognized.
4–5: Identify the rules relating to an installment sale.
4–6: Analyze a situation to calculate the taxable portion of an
installment sale.
4–7: Identify rules related to casualty and theft losses.
4–8: Analyze a situation involving a casualty loss to calculate
the amount of the deductible loss.
4–9: Identify rules relating to an involuntary conversion.
4-2
Questions to Get Us Warmed Up
4-3
Learning Objectives
4–1: Analyze a situation to identify an exchange of assets that
qualifies for like-kind treatment.
4–2: Analyze a situation to calculate the gain or loss realized,
the gain or loss recognized, or the substituted basis for a
like-kind exchange.
4–3: Identify the rules related to the Section 121 exclusion.
4–4: Analyze a situation involving a disposition of a personal
residence to calculate the gain or loss realized and the
gain or loss recognized.
4–5: Identify the rules relating to an installment sale.
4–6: Analyze a situation to calculate the taxable portion of an
installment sale.
4–7: Identify rules related to casualty and theft losses.
4–8: Analyze a situation involving a casualty loss to calculate
the amount of the deductible loss.
4–9: Identify rules relating to an involuntary conversion.
4-4
Like-Kind Exchange—Section 1031
Property held for productive use in trade or
business or property held for investment purposes
Property that is like-kind
• Real estate for real estate
• Personalty for personalty property
• same general asset class or NAICS code for personalty
Excluded property
• Inventory
• Livestock of different sexes
• Stocks and bonds
• U.S. realty for foreign realty/U.S. personalty for foreign
personalty
4-5
Video
Play Video
• 1031 Like Kind Exchange
• 2½ minutes
• Play video from
Video Layout
Text chat or
other questions
1-6
Calculations in Like-Kind Exchanges
Gain or Loss Realized
+
+



=
Fair market value (FMV) of property received
Boot received
Liability assumed by other party (debt relief)
Adjusted basis of property given
Boot given
Liability assumed
Gain or loss realized
Gain or Loss Recognized
Lesser of realized gain or boot received
4-7
Calculations in Like-Kind Exchanges
Gain Realized But Not Recognized
(Deferred Gain)
Realized gain
 Recognized gain
= Gain realized but not recognized
Substitute Basis
Fair market value (FMV) of qualifying property
received
 Gain realized but not recognized
= Substitute basis in property received
4-8
Like-Kind Example
Vince Torrel is considering trading a refrigerator that he
uses in his tavern for a freezer that Jane Watkins has in her
basement.
• The fair market value of the refrigerator is $850,
and Vince’s adjusted basis is $125.
• The fair market value of the freezer is $850,
and Jane’s adjusted basis is $175.
• Vince plans to use the freezer in his tavern.
Calculate Vince’s substitute basis in the freezer.
4-9
Learning Objectives
4–1: Analyze a situation to identify an exchange of assets that
qualifies for like-kind treatment.
4–2: Analyze a situation to calculate the gain or loss realized,
the gain or loss recognized, or the substituted basis for a
like-kind exchange.
4–3: Identify the rules related to the Section 121 exclusion.
4–4: Analyze a situation involving a disposition of a personal
residence to calculate the gain or loss realized and the
gain or loss recognized.
4–5: Identify the rules relating to an installment sale.
4–6: Analyze a situation to calculate the taxable portion of an
installment sale.
4–7: Identify rules related to casualty and theft losses.
4–8: Analyze a situation involving a casualty loss to calculate
the amount of the deductible loss.
4–9: Identify rules relating to an involuntary conversion.
4-10
Section 121
•
•
•
•
•
•
•
$250,000/$500,000 Exclusion
No Age Limit
Principal residence for two of prior five years
Once-every-two-years rule
Partial exclusion for health, job, unforeseen
circumstances
Months of use/24 months x maximum exclusion
Nonqualified use—partial exclusion
4-11
Nonqualified Use
• Use other than as a principal residence after
•
•
2008
Treatment of nonqualified use after use as a
principal residence—not included
Gain attributable to nonqualified use not eligible
for the exclusion
4-12
Learning Objectives
4–1: Analyze a situation to identify an exchange of assets that
qualifies for like-kind treatment.
4–2: Analyze a situation to calculate the gain or loss realized,
the gain or loss recognized, or the substituted basis for a
like-kind exchange.
4–3: Identify the rules related to the Section 121 exclusion.
4–4: Analyze a situation involving a disposition of a personal
residence to calculate the gain or loss realized and the
gain or loss recognized.
4–5: Identify the rules relating to an installment sale.
4–6: Analyze a situation to calculate the taxable portion of an
installment sale.
4–7: Identify rules related to casualty and theft losses.
4–8: Analyze a situation involving a casualty loss to calculate
the amount of the deductible loss.
4–9: Identify rules relating to an involuntary conversion.
4-13
Installment Sales
•
•
•
•
•
•
Allows recognition of gain over period of time
Treatment is automatic, must elect out
Not for sales resulting in loss
Cannot be used by dealers
Publicly traded property not eligible
Acceleration of gain if:
o sale of note
o cancellation of note
o pledge of note as collateral
• Cost recovery recapture taxed in year of sale
4-14
Taxable Portion of Installment Sale
Step 1: Calculate Gross Profit Percentage
Prof it
 Gross prof it percentage
Total contract price
Step 2: GPP x Payments Received in Current Year
4-15
Learning Objectives
4–1: Analyze a situation to identify an exchange of assets that
qualifies for like-kind treatment.
4–2: Analyze a situation to calculate the gain or loss realized,
the gain or loss recognized, or the substituted basis for a
like-kind exchange.
4–3: Identify the rules related to the Section 121 exclusion.
4–4: Analyze a situation involving a disposition of a personal
residence to calculate the gain or loss realized and the
gain or loss recognized.
4–5: Identify the rules relating to an installment sale.
4–6: Analyze a situation to calculate the taxable portion of an
installment sale.
4–7: Identify rules related to casualty and theft losses.
4–8: Analyze a situation involving a casualty loss to calculate
the amount of the deductible loss.
4–9: Identify rules relating to an involuntary conversion.
4-16
Casualty & Theft Losses
•
•
•
•
•
Allowed as itemized deduction
Casualty—sudden, unusual or unexpected event
Not gradual or progressive damage
Theft includes larceny, robbery, blackmail, etc.
No deduction allowed unless insurance claim
filed (if covered loss)
4-17
Casualty & Theft Loss Calculation
Lesser of
• Decrease in
FMV of property
or
• Adjusted basis
of property
Reduced by
• Insurance
• 10% of AGI
• $100 floor per
occurrence
4-18
Learning Objectives
4–1: Analyze a situation to identify an exchange of assets that
qualifies for like-kind treatment.
4–2: Analyze a situation to calculate the gain or loss realized,
the gain or loss recognized, or the substituted basis for a
like-kind exchange.
4–3: Identify the rules related to the Section 121 exclusion.
4–4: Analyze a situation involving a disposition of a personal
residence to calculate the gain or loss realized and the
gain or loss recognized.
4–5: Identify the rules relating to an installment sale.
4–6: Analyze a situation to calculate the taxable portion of an
installment sale.
4–7: Identify rules related to casualty and theft losses.
4–8: Analyze a situation involving a casualty loss to calculate
the amount of the deductible loss.
4–9: Identify rules relating to an involuntary conversion.
4-19
Involuntary Conversion Rules
• Defers gain on casualty, theft, or condemnation
• Replacement property—similar or related in
•
•
•
service or use
Replacement period:
o Casualty—end of second year after gain
realization
o Condemned Business (or rental) Realty—end
of third year after gain realization
Can purchase controlling interest in corporation
that owns replacement property
No calculations on exam
4-20
Review Question 1
In
a.
b.
c.
a like-kind exchange, a loss
may be recognized within certain limitations.
may be recognized without limitation.
may be recognized only by the taxpayer who
pays boot.
d. may not be recognized.
4-21
Review Question 2
The substitute basis of a qualifying asset
received in a like-kind exchange is the asset’s
a. basis reduced by the gain realized but not
recognized.
b. basis increased by the gain realized but not
recognized.
c. fair market value reduced by the gain
realized but not recognized.
d. fair market value increased by the gain
realized but not recognized.
4-22
Review Question 3
In January of 1995, Jim Johnson, then age 57, sold his
principal residence in Seattle and took advantage of the
once-in-a-lifetime exclusion available under Section 121.
At that time, the maximum exclusion was $125,000. He
excluded his entire gain on the sale, which was
$100,000. Later that year, he purchased a new
residence in Denver that he used as his principal
residence. Earlier this year, he sold the Denver
residence for a realized gain of $300,000.
What is the maximum amount of gain, if any, that Jim
may exclude under Section 121?
a. $0
b. $25,000
c. $250,000
4-23
Review Question 4
Mary Falcon is a single taxpayer. On January 1, 2012,
she received a gift from her mother of a house that
immediately became her principal residence. On
January 1, 2013, she sold this home for a realized gain
of $133,000. She sold the home because she received a
job promotion and was transferred to a new location
out of state.
What is the maximum amount of gain, if any, that may
be excluded under Section 121?
a. $0
b. $66,500
c. $125,000
d. $133,000
4-24
Review Question 5
Which one of the following statements is correct
regarding the use of the installment sale
method of accounting for income tax purposes?
a. It may be used only if the payments are to
be received over at least a two-year period.
b. A taxpayer may not avoid the use of the
installment sale method if there is an
installment sale.
c. The installment sale method is available for
use by most dealers.
d. Any cost recovery recapture is recognized in
the year of the installment sale.
4-25
Review Question 6
The gross profit percentage in an installment
sale is calculated by
a. dividing the gross profit by the contract
price.
b. multiplying the payments received by the
contract price.
c. dividing the sale price by the number of
payments required to be made under the
contract.
d. multiplying the marginal income tax bracket
by the payments received.
4-26
Review Question 7
Barney Herman had an adjusted basis of $1,500 in
an antique automobile that he had purchased as an
investment. He sold the auto for $4,500. This year,
the buyer made a down payment of $1,500 and
completed the first of three annual installments of
$1,000.
What amount, if any, of installment sale income
must Barney recognize in the current year?
a. $0
b. $1,000
c. $1,667
d. $2,833
4-27
Review Question 8
Which one of the following may qualify as a
like-kind exchange?
a. a heifer exchanged for a bull
b. an apartment building located in Miami
exchanged for an apartment building located
in Mexico City
c. farming equipment exchanged for farmland
d. a shopping center exchanged for farmland
4-28
Review Question 9
In the computation of the realized gain in a likekind exchange, it is necessary to compare the
a. fair market value of the assets received with
the adjusted basis of the assets given up.
b. fair market value of the assets received with
the fair market value of the assets given up.
c. adjusted basis of the assets received with
the adjusted basis of the assets given up.
d. adjusted basis of the assets received with
the fair market value of the assets given up.
4-29
Review Question 10
Bob is involved in a like-kind exchange. In the
exchange, he assumes a mortgage of $15,000,
is relieved of a mortgage of $26,000, and
receives $7,000 in cash.
How much boot did Bob receive in the
transaction?
a. $7,000
b. $11,000
c. $18,000
d. $33,000
4-30
Review Question 11
Which one of the following statements is correct
regarding a deductible casualty or theft loss
incurred by an individual taxpayer?
a. A loss resulting from a gradual or
progressive event may be deducted.
b. A loss resulting from a fire intentionally set
by the taxpayer may be deducted.
c. A loss arising from blackmail may not be
deducted.
d. A $100 floor per occurrence must reduce a
deductible loss.
4-31
Review Question 12
In May of 2013, Jeff King’s office was
burglarized. Jeff figures that approximately
$21,000 of equipment was missing. In
September of 2013, he received a
reimbursement check from the insurance
company.
If there were a realized gain in this situation,
when would the replacement period end?
a. December 31, 2013
b. December 31, 2014
c. September 30, 2014
d. December 31, 2015
4-32
Review Question 13
Judy Langer’s rental real estate was condemned
by the state to make way for a freeway offramp in June of 2012, and she received the
check from the state later that month.
If there were a gain on the involuntary
conversion, when would the replacement period
end?
a. June 30, 2014
b. December 31, 2014
c. June 30, 2015
d. December 31, 2015
4-33
Review Question 14
Robert McCallum has a truck that he uses to make
deliveries for his business. The truck has a fair market
value of $21,000 and an adjusted basis of $10,000.
Robert still owes $9,000 on the truck. Pasqual Mendez
has offered to trade his truck for Robert’s truck in an
even trade, taking over payments on Robert’s truck.
Pasqual’s truck has a fair market value of $12,000 and
an adjusted basis of $10,000.
What is the amount of Robert’s basis in the acquired
property?
a. $9,000
b. $10,000
c. $11,000
d. $21,000
4-34
Review Question 15
An earthquake damaged Irwin Smith's home in
California. The cost of the home was $400,000. The fair
market value of his home prior to the earthquake was
$375,000. The fair market value of the home after the
earthquake was $300,000. Irwin's AGI for the current
year is $260,000. There was no insurance coverage for
earthquake damage on the property.
What is the amount, if any, of the deductible casualty
loss resulting from the earthquake?
a. $0
b. $48,900
c. $49,000
d. $75,000
4-35
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 4
End of Slides
©2013, College for Financial Planning, all rights reserved.