Session 7 Sales of Business Assets CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning Session 7 Sales of Business Assets

Session Details Module 3 Chapter(s) 6 and 7 LOs 3-6 3-7 Analyze a situation to calculate the amount of cost recovery recapture, or unrecaptured Section 1250 income. 3-7 Analyze a situation to determine the tax treatment of Section 1231 property transactions. Let’s talk about the steps in the financial planning process…

Section 1231 “Best of both worlds” Code Section long-term capital gain, or ordinary loss Section 1231 property is: property used in a trade or business, or held for the production of income (rental activities) generally eligible for depreciation held for the long-term holding period

Cost Recovery Recapture Calculating Cost Recovery Recapture on Section 1245 Property* Calculate gain realized and recognized. Calculate Section 1245 gain Lesser of: cost recovery deductions taken or gain realized. Calculate Section 1231 gain Gain recognized less Section 1245 gain. *Assumes no basis adjustments other than cost recovery deductions.

Section 1245 Recapture Primarily personalty Sale Price $15 Cost Basis $10 Depreciation $(7) Adjusted Basis $3 $1 §1231 Potential LTCG §1245 Income Cost Recovery Recapture Ordinary Income Ordinary Loss

Unrecaptured Section 1250 Income Realty §1231 LTCG Unrecaptured §1250 Income (Type of §1231 gain) 25% LTCG Ordinary Loss Sale Price $15 Cost Basis $10 S/L Depreciation $(7) Adjusted Basis $3 $1

Section 1231 Lookback Lookback period—5 years If unrecaptured §1231 losses during lookback period Current year net §1231 gains treated as ordinary income

Review Question 1 Mary Grey purchased office furniture several years ago at a cost of $4,500 to use in her business. She claimed $3,295 of cost recovery deductions. She sold the furniture for $3,000.  What is the amount and character of the gain or loss resulting from this disposition?  $1,500 ordinary loss  $1,500 capital loss  $1,795 of ordinary income, $0 long-term capital gain $1,795 long-term capital gain, $0 of ordinary income

Review Question 2 Julio Gallardo owns and operates a manufacturing plant as a sole proprietor. He purchased a machine used in the manufacturing process at a cost of $12,000 several years ago. Julio sold the machine for $16,000 after claiming $3,184 of cost recovery deductions.  Calculate the amount and nature (character) of the gain or loss resulting from this disposition. $3,184 of ordinary income, $4,000 long-term capital gain $4,000 of ordinary income, $3,184 long-term capital gain $7,184 of ordinary income $7,184 long-term capital gain

Review Question 3 Which one of the following statements is correct regarding the tax treatment of Section 1231 and 1245? Net Section 1231 gains are treated as ordinary income. Net Section 1231 gains are treated as long-term capital gains. Section 1245 income is treated as capital gain income. Section 1245 losses are treated as ordinary losses.

Review Question 4 During the current year, Peter Langley has Section 1231 gains totaling $8,000. He also has $1,000 of Section 1231 losses. Four years ago, Peter reported a net Section 1231 loss of $2,000. These are the only two years in which Peter has had Section 1231 gains or losses. What is the amount and character of the current year’s Section 1231 gains and losses? $2,000 of ordinary income, $5,000 long-term capital gain $5,000 of ordinary income, $2,000 long-term capital gain $7,000 of ordinary income $7,000 long-term capital gain

Review Question 5 Don Crisp sells his commercial rental property (a warehouse) in June 2015 for $425,000. Don acquired the warehouse in May 1998 for $190,000 and has been depreciating it using the straight-line method for realty. The amount of depreciation taken is $86,000. What is the amount and nature of the gain on the sale? $86,000 Section 1250 recapture (ordinary income) $235,000 regular long-term capital gain; $86,000 unrecaptured Section 1250 income $235,000 regular long-term capital gain; $86,000 Section 1250 recapture (ordinary income) $235,000 long-term capital gain

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning Session 7 End of Slides