Ch. 5 Property Transactions

Chapter 5 Property Transactions
1
in 2003 changes were enacted in SS 1(h) that eliminated the 8% and 10& and 20% alternative tax rates for transactions after May 5 2003, and created the 5% and 15 % alternative tax rates for such transactions . as a result for 2004 and later years there are 4 possible alternative tax rates on net long term capital gains: 5%, 15%, 25% and 28%.

II rationale for separate reporting of capital gains and losses a) two reasons 1) first the alternative tax on net capital gain provisions may generate lower tax than the regular income tax, when a non-corporate taxpayer ‘s taxable income includes some net capital gain, the alternative tax computation may yield a lower tax.
2) second, separate reporting is required because capital losses that exceed capital gains are only deducted to the extent of $3000 per year.

III
General scheme of taxation
a) classification of a capital asset determined on 3 items. A) the tax status of the property (capital assets , SS 1231 asset, or ordinary asset)
b) the manner of the property disposition (sale, exchange, casualty, that theft and condemnation)
c) the holding period of the property, ( short term or long term)
IV
Holding period
a) the long term holding period is more than one year
b) the short term holding period is one year or less.
V
Capital assets
a) personal use assets: all personal use assets and most investment assets are capital assets. The gain generated from personal use assets is generally taxable but the losses are not deductible.
b) Definition of capital assets; capital assets are all assets except for the following assets listed in SS 121.
a)inventory or property held for sale in the ordinary cause of business.
b) accounts and notes receivables.
c) depreciable property or real estate used in a business
d) certain copyrights : literary; musical or artistic compositions or letters memoranda or similar property
e) certain government publication
f) supplies of a type regularly used or consumed in the ordinary course of business

VI
Effect of judicial action
a) Judicial interpretation. Because the Code lists only the assets that are not capital assets, courts as often required to interpret whether specific assets fit into any of the categories.
a) The Supreme Court, follows a literal interpretation of the categories.
b) Because of the uncertainty associated with the capital asset definition, congress has enacted several code sections to classify the definition.
c) Asset purpose use
1) For instance if a stamp collector purchases stamps because she/he appreciates their beauty, she/he is probably acquiring them for personal use. Thus, the stamps are automatically capital assets because they are personal use assets.
2) On the other hand, the stamp dealer from whom the collector buys the stamps holds the stamps as inventory. Section 1221 defines inventory as not a capital asset. Thus, by default, the stamp dealer’s inventory is an ordinary asset no statute actually defines the inventory as an ordinary asset directly.
VII
Statutory expansions
a) Dealers in securities generally securities held by dealers are considered inventory and not given capital gain or losses treatment.
b) If a dealer clearly identifies certain securities as being held for investment, the securities are capital assets.
c) The securities must be clearly identified as investment by the close of business on the date of acquisition for gain purposes.
d) If at any time the securities have been clearly identified by the dealer as securities held for investment, the losses are capital losses.
e) Real property subdivided for sale. Generally, owners who substantially develop real property are considered dealers and their property is treated as inventory.
1) Special relief is provided in SS 1237 for investors in limited development activity.
2) Capital gain treatment is allowed under SS 1237 if all the following requirements are met:
1) taxpayer is not a regular C corporation
2) taxpayer us not a real estate dealer
3) No substantial improvements may be made to the real estate. substantial generally means more than a 10% increase in the value of a lot
4) Taxpayer must hold the real estate for 5 years (except for inherited property).