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Resident Status

In: Other Topics

Submitted By humashehnaz
Words 641
Pages 3
Q1. Please explain the distinction between a "realized" gain and a "recognized" gain.
Ans. IRS has made a distinction between "realized gain" and "recognized gain".
Realized gain computes the profit taxable and the tax to be paid on it. It is the profit from sale of an asset at higher price then the original purchase price of that asset. It is a gain created from a transaction.
Whereas, recognized gain creates a liability of tax. It is the same as realized gain less any exclusion from gain, if any. Therefore, it is a part of realized gain that is recognized for tax purpose. Any loss from the same can be set off with the loss of another business of the assesee.
A property is brought for $150,000 and registering that property costs $2,000. i.e. Total price paid = $152,000.
Selling price of the property is $200,000 and legal expenses paid are $500. The net selling price will be $ 199,500.
Now, the realized gain is Net selling price less price paid for the property. i.e. $199,500 - $152,000 = $47,500.
But if there is any exclusion from the gain, i.e. If there is an exclusion of gain from primary residence of upto $200,000, then the realized gain $47,500 will be reduced to recognized gain of $0.
Q2. Are there any limits to the deductibility of losses on sales and exchanges between related parties? What code section defines this limitation?
Ans. IRC section 267 defines the limitation to the deductibty of losses on sales and exchanges between related parties.
Related parties means:-
1. A Fiduciary or grantor of a trust.
2. Members of a family.
3. A beneficiary and a fiduciary of any trust.
4. A grantor of two trusts who is also the fiduciary of both the trusts.
5. A beneficiary of one trust and fiduciary of another trust, and grantor of both the trusts.
6. Corporations being members of a same controlled group.
It says that loss from the sale of property or exchange between related parties is not allowed as deduction.
Q3. 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?
Ans. As per the "Treasury Regulation § 1.1031(a)-1(b)", like-kind exchange involves the same nature of property exchanged.
Basis of the property received, i.e. The new property received, is on the basis of the old property exchanged plus the boot received on it, i.e. any other property or cash received (non like kind property). Any deferred gain is added and any deferred loss is subtracted.
Holding period for the new Asset includes the holding period of the earlier asset exchanged.
Properties not treated as like kind exchange are:-
1. Interest in a partnership.
2. Trade in stock.
3. Other evidences of indebtness or interest.
4. Bonds or notes.
5. Beneficial interests.
Q4. 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?
Ans. Selling price of the stock sold by Susan = $252,000 The period of the stock held by David will be included in Susan's holding period. Therefore, Holding period of the stock = from year 1985 to 2013 i.e. more than 1 year. Nature of capital is Long term capital gain as it is held for more than 1 year. Susan's gain = Selling price of the stock - Cost of acquisition of the stock. = $252,000 - $6000 = $246,000.

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