Tax accounting

5 May 2017

Describe the current tax law for sale of residence. Married taxpayers may exclude up to $500,000 of gain upon the sale of their residence and single taxpayers may exclude up to $250,000 of their gain. Taxpayers must own and occupied the residence for two out of the last five years prior to the sale. The exclusion applies to only one sale or exchange every two years. 2. Why might a taxpayer wish to elect out of the new exclusion on the sale of residence?

Taxpayers who plan to sell within two years two properties that meet the exclusion eligibility requirements and who first ell the property with the lesser gain may choose to elect out of the exclusion to reserve its use for the second sale where the gain is larger. 3. Is it possible to differed gain through the purchase of a new residence? No, the exclusion is [permanent, there for no reinvestment is required. 4. Why would the exclusion on sale of resident be prorated?

Tax accounting Essay Example

It can be prorated if the sale id due to a change in place of employment, a change in health, or unforeseen circumstances, even if a taxpayer does not meet the ownership usage, or sale within two years requirement. 5. What special rules ffect three types of taxpayers? a. Widowed taxpayers the mortgage forgiveness debt relief act of 2007 allows a surviving spouse to exclude from gross income up to $500,000 of the gain from the sale of a principal residence owned Jointly with a deceased spouse if the sale occurs within two years of the death of the spouse and other ownership and use requirement have been met. . Divorce taxpayers the time during which the taxpayers spouse or former spouse owned the residence is added to the taxpayers period of ownership c. Incapacitated taxpayers if a taxpayer becomes physically or entally incapable of self-care, the taxpayer is deemed to use a residence as a principal residence during the time in which the taxpayer owns the residence and resides in a care facility licensed by a state or political subdivision such as in a nursing home. 6. What residence-related matter did the Housing Assistance Tax Act of 2008 address?

It provides that gain from the sale of a principal residence that is allocable to periods of “nonqualified use” is not excluded from the taxpayer’s income. 7. When might a taxpayer prefer a sale over a like-kind exchange that would result in onrecognition of gain under Section 1031? Exchanges involving like-kind property held for investment or business purposes can qualify for non recognition of gain or loss. The reason for on recognition is that the taxpayer is considered to be in the same economic position after the exchange has occurred and so is continuing the old investment. 8.

What are the two acceptable methods of calculation the basis of new property acquired in a like-kind exchange? a. One method starts with the adjusted basis of the property given up: Adjusted basis of the like-kind property given + Boot given gain recognized + Liability assumed by the transferor -boot received -loss recognize -liability assumed by the transferee ”Basis of the property acquired b. The second method start with the fair market value of the property received: Fair market value of the like-kind property received -deferred gain *deferred loss ”basis of the acquired property 9.

What are the four brad types of like-kind exchanges? a. Office furniture, fixtures, and equipment b. Information systems such as computers and their peripheral equipment. c. Airplanes d. Automobiles 10. Define the following: a. Boot: then a property that is not like-kind (cash or other property known as “boot”) is received, then any realized gain is recognized to the extent of the boot received but not to exceed realized gain. b. Postponed gain or loss: gain is subtracted from the cost of the replacement property while a deferred or postponed loss is added to the cost to determine the basis of the new property. . Gain or loss realized: is the excess, if any, of the amount realized over the adjusted basis of the residence. d. Gain or loss recognized: the realized gain or loss upon a sale or other disposition of property is ecognized unless there is a provision for non recognition. Chapter 10 1 . Distinguish between realized gains and losses and recognized gains and losses. a. Realized gain & losses: is the difference between the amount realized from the sale of the disposition of property and adjusted basis at the time of sale or disposition. . Recognized gain & loss: recognition means that the result of a particular transaction is considered to be taxable income or a deductible loss. There are situations where a realized gain may be recognized but realized losses are not recognized i. e. : sale of ersonal use asset (a car) results in gain recognition but not loss recognition. 2. Why is allocation of basis necessary? Some of the property may be depreciable (buildings) and other property not depreciable (land).

Different treatment may be necessary for the assets such as Section1231 assets compared to capital asset treatment. 3. When is fair market value of an asset used as the basis for an asset? If a single transaction involves a number of properties, in treated to establish their basis, the total cost must be allocated among the separate properties according to their relative fair arket value. 4. What is the basis of an asset acquired from a decedent? The fair market value of the property at the date of the decedent’s death. . When is the sale or exchange of stock or securities considered a wash sale? How is any loss treated? Wash sales occur when substantially identical stock is bought within 30 days before or after the sale.

No deduction for losses is allowed on the sale of stock or securities if, within a period beginning 30 days before the date of the sale and ending 30 after the date of sale, substantially identical stock or securities are acquired. Chapter 9 1. How does an individual qualify for the credit for the elderly? a. he individual must have reached age 65 before the end of the tax year. b. have retired on disability betore the close ot the tax year and must nave been permanently and totally disable when he/she retired. 2. What is the amount of the child tax credit for 2013? Qualifying children are allowed a credit of $1,000 per child. The child must be: son/ daughter for whom the taxpayer may claim a dependency exemption and less than 17 yrs. old at the close of the tax year. 3. What is the purpose of the foreign tax redit?

It’s a method developed to deal with the problem of double taxation that arises whenever two taxing Jurisdictions have a reasonable claim to impose a tax on the same income. 4. Earned Income credit: a refundable tax credit is provided for low-income workers. The earned income credit may be characterized as a form of negative income tax since the credit is refundable to the taxpayer even if no liability exists. 5. What is the purpose of the alternative minimum tax? To recapture tax reductions resulting from the use of special tax relief or “tax shelter” provisions of the tax law.

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