Week 7 Homework – Tanushant Sharma
Please provide your answer to each question in the space provided below.
When finished, submit to the DropBox.
1. Please explain the distinction between a "realized" gain and a "recognized" gain. (5 pts)
Profit from sale of asset, which is reported for income tax purpose. It is the difference between basis of asset and the sale price.
Realized gain is the amount which is actually received from the sale of asset. Cost, which is associated with the sale of asset, is deducted while calculating realized gain. All realized gains are recognized gains ...view middle of the document...
Exception to this is distribution of assets in case of complete liquidation. The limits are mentioned in Sec 267 of U.S. Code. As per this code if partnership, corporation, estate or trust is holding interest directly or indirectly then it will be treated as the partners, beneficiaries etc. are holding proportionate interest. Any loss by exchange between these will not be allowed deduction.
3. What is the basis of property received (i.e. new property) in a like-kind exchange? What is the holding period for the new asset? (5 pts.)
Like kind exchange is exchange of one real property with other real property. Both the real property should be qualifying property for the exchange to be like-kind exchange. In this kind of exchange replacement property basis is same as the basis of the Exchange property. It is reported in IRS form 8824. The like-kind exchange is not taxable. Any gain realized from the exchange of Like-kind exchange, which is taxable because unlike property is received, is to be disclosed separately. The holding period of the Replacement asset includes the holding period of the asset transferred.
4. David purchased stock in Zoll Corporation in 1985 for $6,000. On April 16, 2013 he gifted the stock to his daughter Susan; at the time of the gift, the Zoll stock was valued at $250,000. Susan sold the stock the next month for $ 252,000. What is Susan's gain or loss and what is the character of the gain or loss? ( 5 pts.)
The basis of Donor will be taken for the purpose of tax as the fair value of stock at the time of giving gift i.e. $2,50,000 is more than the donor’s basis i.e. $ 6,000. Therefore the capital gain for Susan will be $ 2,52,000 less $ 6,000 = $ 2,46,000. This treatment is as per Code 550 of U.S. Tax Code.