#11519 - Property Transactions - U.S. Income Tax Law

PROPERTY TRANSACTIONS

§61 income§1001 gain/loss§1011 adjusted basis

1. Intro

   1. When I sell property, §61(a)(3) says income includes gains from sale of property.

      1. Except no losses allowed for property sold between covered family members (including companies owned by the family members) (§267)

   2. Gain/Loss (§1001(a)): The gain or loss upon selling of property is the difference between the amount realized and the adjusted basis in the property under §1011 adjusted basis in the property

      1. Amount Realized (§1001(b)): The sum of any money received plus FMV of property received, excluding reimbursement for property taxes paid.

      2. Recognition (§1001(c)): As a general rule, the entire amount of gain or loss shall be recognized, except as otherwise provided (and you invoke this except as otherwise provided” in §1031 like-kind exchanges).

         • This is the general rule. Like-kind exchanges is just a narrow exception.

      3. Installments (§1001(d)): If paid in installment, the amounts are recognized as they are received.

   3. Academic Concept of Basis

      1. Basis is history. Idea is I already at some point paid tax on the amount I’m reporting for basis. So if I buy stock for $100, and sell for $120, shouldn’t treat the whole $120 as income for tax purposes b/c I already paid tax on the $100 of income that I used to buy the stock back when I first earned it.

   4. Calculating Basis (§1012): In general, the basis is the cost at which the TP acquired the property, unless otherwise provided.

   5. Calculating Adjusted Basis (§1011)

      1. §1012 basis accounting for any adjustments made under 1016.

2. Basis when using other than cash

   1. Assume FMV transaction: Philadelphia Park Amusement Co v US (US 1954, Unit VI supp);

      1. TP had 50-year license to operate park; built bridge to get people to it. At expiration, asked city for license extension. Instead of paying cash for new license, they gave the city the bridge in exchange. At the time, didn’t report any of this as a realization event. When it later goes bankrupt, wants to deduct the take a loss on the remaining years of the extended license. Question is what is its basis?

      2. Idea is we assume efficient market, so we say the FMV of thing received is the FMV of thing given up. So the cost of the bridge is the FMV of the license. The cost of the bridge is TP’s basis in the park license, and he deducts that from amount received to calculate gain.

   2. Where impossible to know the FMV of either thing being exchanged. Here, TP basically defers the gain or loss to some point in the future. So if TP paid $200K for bridge 50 years ago, and then exchanges it for license and we have no idea what FMV of bridge or license is today, then we just keep the basis as $200K in the bridge, and if he later sells the license, he’d just have a huge gain to report b/c little basis.

   3. Gifts (§1015): Basis in property received as gifts (remember, no tax on gifts received)

      1. If later sold for gain: The recipient’s basis is the same as it would be for the donor or the last preceding owner who did not receive it as a gift. (1015(a))

      2. If later sold for loss: If basis at time of gift was greater then FMV, use FMV at time of gift. (1015(a)).

      3. Depreciated Loss situation (never-never land, still §1015(a)). No gain or loss reported on these. Hypo: Mary gives Steve GM stock with FMV of $90. Her basis is $100. Steve sells for $95. He can’t take either a gain (basis would be $100), or a loss (basis would be $90). So Blank says he would probably just omit it from his return and attach some kind of explanatory note.

      4. Bargain Sales to Charity (§1011(b)): If a deduction is allowable under §170 (relating to charitable contributions), then the adjusted basis for determining the gain from such sale shall be that proportionate to the amount realized over the fair market value of the property. So if Fred sales property worth $400K to charity for $100K, and his basis is $100K, the charity gets a basis of $15K.

      5. Gifts between spouses: no gain or loss reported at time of transfer. Basis is the same as the basis of the previous owner.

      6. Part sale/part gift:

         • Transferor has a gain to the extent that amount realized exceeds his adjusted basis, but no loss if the amount is less than basis (Reg §1.1001-1((e)). So if A has $30K basis in property with $90K FMV, and sells to son for $30K, he has no gain or loss and is treated as making $60K gift. If his...