Special Property Tax Transactions - Lesson 1

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• published: 31 Jul 2015
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In this video, 7.06 – Special Property Tax Transactions – Lesson 1, the Internal Revenue Code abounds with complex rules concerning transactions in property. In this lesson, Roger Philipp, CPA, CGMA, teaches the essentials of the wash sale rules and the related party property transaction rules. If you sell property such as shares of stock at a loss, then buy identical property within 30 days of the sale, any loss on the initial sale is not deductible. Instead it is treated as an addition to the tax basis of the identical property you now own. Of course, any gain on sale of the original property would still be taxable. Roger then covers related party sales rules. First, Roger explains what are considered related parties for this purpose, comparing and contrasting them with the individual taxation dependency exemption rules. He answers questions such as: Is an aunt or uncle considered a related party? What about a sibling? When an asset is sold to a related party, any gain is taxable but the loss is not deductible. The loss becomes subject to the dual-basis rules in the hands of the individual it was sold to, similar to the dual-basis rules in gift tax, which Roger reviews. Connect with us: Website: https://www.rogercpareview.com Blog: https://www.rogercpareview.com/blog Facebook: https://www.facebook.com/RogerCPAReview Twitter: https://twitter.com/rogercpareview LinkedIn: https://www.linkedin.com/company/roger-cpa-review Are you accounting faculty looking for FREE CPA Exam resources in the classroom? Visit our Professor Resource Center: https://www.rogercpareview.com/professor-resource-center/ Video Transcript Sneak Peek: All right, let's continue on. Let's talk about Special Property Tax Transactions. So we're still in that property tax section. This is where the government says "Hey, we're going to giveth and taketh." What does that mean? It means you made money. "Oh my gosh, that's great, come here buddy, yeah! Let me have my 39.6 percent or my 20 percent long-term or whatever it is.” Or you lost money, so sorry! Not tax deductible." So this is where certain gains are taxable, and losses you just don't get them. For example, a wash sale. A wash sale is kind of you're playing the stock market and you're like "I'm gonna make it big, I'm gonna make it big!" So you buy some stock. You spent 300 bucks on the stock. The stock has gone down in value, so you sell it for 210. I have a $90 loss. Okay, that's great. Are capital gains, capital losses deductible, and taxable? Yes, they are, however, what happens is it's a stock I really like. I like this company, so what I decide to do is I'm going to sell it, take the loss, but then I'm going to right away buy it back. So I buy it back for 200 because I bought it, it went down, and it's still going down. Instead of taking a 90 dollar loss, and then have a new basis of 200, the government says if you buy this, and you buy it within 30 days of buying or selling, that is called a "wash sale" and you basically, if you had a gain, it's taxable, but if you have a loss it's not deductible. What happens is you just have to add it to the basis of the stock. So instead of 200 you get no loss, basis would be 290. So it says here, "losses from wash sales are not deductible. If an asset that has been sold at a loss is repurchased within 30 days of the sale, the loss may not be deducted, but it is added to the base of the repurchased stock. This also applies to purchases obtained of identical assets in the 30 days either before or after." So someone might say in anticipation of selling this "I'm going to buy some more, and then I'll sell this one." Same thing, so here's 30 days, boom! This way, this way, that's called a "wash sale." Loss is not deductible. What if you have a gain? Of course, gains, they're taxable. Losses from related party sales are not deductible, so if I sell something to a related party. If I make money, it's a gain. If I lose money, they go "sorry, it's not deductible." Now, before we go into this in more detail what is considered a related party? And remember we talked about a dependency exemption, right. I like to do what? "C" the IRS jack you out of your money. How do you know if they're a dependent? They have to be a citizen, can't make much income, related to you or live with you the entire year, support and no joint tax return. As far as the related we said, if they're related they don't have to live with you, but if they are ... I'm sorry if they're related they don't have to live with you. If they are not related they have to live with you the entire year like your cousin.