Taxation for Decision Makers, 2012 Edition

chapter 7

Property Dispositions

CHAPTER OUTLINE

Setting the Stage—An Introductory Case

Determining Gain or Loss on Dispositions

Disposition of Section 1231 Property

Disposition of Capital Assets

Disposition of Ordinary Income Property

Mixed-Use Property

Special Rules for Small Business Stock

Sale of Principal Residence—Section

Losses on Related Party Sales

Expanded Topics—Individual Capital Gains Tax Rates

Revisiting the Introductory Case

Summary

Key Terms

Test Yourself

Problem Assignments

Answers to Test Yourself

Determining the final treatment of a property disposition requires navigating a complex set of definitions, netting procedures, and potential alternative tax rates. It starts with identifying the three types of gain (income) or loss that can be recognized on property dispositions: ordinary gains and losses, Section 1231 gains and losses, and capital gains and losses, each corresponding to asset classifications as ordinary, Section 1231, and capital. Gains (income) or losses classified as ordinary are included in operating income. Section 1231 gains and losses are first netted against each other. Net losses are deducted directly from ordinary income, but net gains are included in the netting of capital gains and losses. After these gains are netted with all other capital gains and losses, the net capital gains may be included directly in income or taxed at more favorable rates, depending on the taxpayer and the length of time the property had been held prior to disposition. ...