Table of Contents

Chapter 1 - Tax Economics - Section 1. 1

Financial Fundamentals. 1

Tax Planning Elements. 2

Assets, Income, & Cash. 2

Income. 3

Taxable. 3

Income Splitting/Matching. 4

Tax-free. 5

Fringe Benefits. 5

Tax-deferred. 6

Section 1034 Sale or Exchange of Residence - Repealed. 6

Section 1031 Like-Kind Exchanges. 6

Options. 7

Deferred Compensation. 7

Qualified Corporate Retirement Plans. 7

Self-employed Plans. 7

Individual Retirement Accounts. 8

Installment Sales. 8

Tax-sheltered. 10

Age 55 Exclusion - Repealed. 10

Home Sale Exclusion - '121. 10

Municipal Bonds. 10

Gifts & Inheritances. 10

Life Insurance. 11

Chapter 1 - Section 1 Review Questions. 12

Chapter 1 - Tax Economics - Section 2. 13

Budgeting. 13

Rule #1: Expenses - 60%... 13

Rule #2: Taxes - 20%... 13

Rule #3: Savings - 10%... 13

Rule #4: Education - 10%... 13

Chapter 1 - Section 2 Review Questions. 15

Chapter 2 - Installment Sales & Time Value of Money - Section 3. 16

Installment Method. 16

Requirements. 16

Formula. 17

Definitions. 17

Imputed Interest & OID.. 20

Complexity. 20

Sale at a Loss. 21

Section 483 - Imputed Interest 21

Exemptions. 21

Imputed Interest Rates. 21

Small Transaction Exception. 22

Intra-family Land Exception. 22

Timing. 22

Sections 1271-1274 & OID.. 22

OID Rates. 22

Timing. 22

Cash Method Debt Instrument Exception. 22

Computation of OID.. 22

Personal Use Property - Buyers Deduction of Imputed Interest 23

Chapter 2 - Section 3 Review Questions. 24

Chapter 2 - Installment Sales & Time Value of Money - Section 4. 26

Payments, Mortgages, Recapture & Repossession. 26

Real Property Sales Payments After Year of Sale. 26

Mortgage in Excess of Basis. 26

Wrap-around Indebtedness. 26

Professional Equities Decision. 26

Recapture. 26

Practical Issues. 27

Section 1038 - Repossession by Seller 27

Repossession of Principal Residence. 27

Related Party Sales. 31

Resale Rule. 31

Related Persons. 31

Exceptions. 31

Depreciable Property. 31

Chapter 2 - Section 4 Review Questions. 32

Chapter 2 - Installment Sales & Time Value of Money - Section 5. 34

Contingent Payments or Price. 34

Installment Sales Revision Act of 1980. 34

Contingent Payment Sale. 34

Maximum Selling Price Transactions. 34

Recomputation. 35

Fixed Payment Term Transactions. 35

Losses. 35

No Maximum Selling Price or Fixed Payment Term... 36

Losses. 36

Income Forecast Method. 36

Repeal of Installment Treatment for Dealer Dispositions. 38

Definition. 38

Residential Lot & Timeshare Exception. 38

Interest Computation. 38

Qualification. 38

Installment Obligations in Excess of $5 Million. 38

Computation of Interest 39

Definitions. 39

Pledging. 39

Disposition of Installment Obligations. 39

Gain or Loss. 39

Exceptions. 39

Substitution. 40

Tax-free Transfers. 40

Chapter 2 - Section 5 Review Questions. 41

Chapter 3 - Mortgage Finance - Section 6. 43

Overview.. 43

Two Major Benefits. 43

Mortgage Costs. 43

Amortization. 44

Lenders Costs. 44

Interest Deduction - ' 163. 44

Personal Interest 44

Phase-In Rules. 45

Investment Interest 45

Prepaid Interest 45

Points. 45

Prepayment Penalty. 45

Lenders Interest Income & Borrowers Interest Paid. 45

Interest-Free & Below-Market Rate loans. 46

Two Imputations. 46

Tax Character 46

Application. 46

Categories of Loans & Timing of Imputations. 46

All Other Loans. 46

Gift & Demand Loans. 46

Exceptions to Gift Loan Rules. 47

$10,000 De Minimis Exception. 47

$100,000 De Minimis Exception. 47

Imputed Interest & OID.. 49

Complexity. 49

Sale at a Loss. 49

Overstated Interest 49

Reporting Mortgage Interest Received From Individuals. 49

Chapter 3 - Section 6 Review Questions. 50

Chapter 3 - Mortgage Finance - Section 7. 52

Equity Participation Debt 52

The Shared Appreciation Mortgage - SAM... 52

Characteristics of a SAM... 52

Tax Treatment Overview.. 53

Unsettled Treatment 53

Revenue Ruling 83-51. 53

Types of Equity Participation Debt 53

Contingent Interest 53

Option or Conversion Right 53

Does Equity Participation Debt Constitute Interest?. 54

Basic Tests to Establish Interest 54

Farley Realty Corp. 55

Kena, Inc. 55

Caselaw Factors. 56

Revenue Ruling 83-51. 56

Significance of R.R. 83-51. 57

Limitations of R.R. 83-51. 57

Partnership Recharacterization - Culbertson Rule. 57

Tax Consequences of Debt Recharacterization. 58

Option & Conversion Rights. 59

Original Issue Discount - A Special Issue for Conversion & Option Rights. 59

Convertible Indebtedness. 59

Tax Consequences of Conversion. 60

Chapter 3 - Section 7 Review Questions. 61

Chapter 4 - Home Sales & Like-Kind Exchanges - Section 8. 63

Home Sales - '121. 63

Ownership & Use Requirements. 63

Special Rules. 64

Occasional Absences. 65

Tacking of Prior Holding Period. 65

Rental of Personal Residence. 65

Depreciation. 65

Vacant Land. 66

Mixed Personal & Business Use of Home. 66

Depreciation after May 6, 1997. 66

Divorce. 67

Prorata Exception. 67

Safe Harbor Regulations. 68

Change in Place of Employment 68

Health. 68

Unforeseen Circumstances. 69

Use of Old '1034 & '121. 69

Limitations on Exclusion. 70

Remainder Interests. 70

Chapter 4 - Section 8 Review Questions. 71

Chapter 4 - Home Sales & Like-Kind Exchanges - Section 9. 72

Section 1031 Like Kind Exchanges. 72

Exchange Advantage. 72

Importance of Deferral 72

Three Elements. 73

Exchange Requirement 73

Two-party Exchanges. 73

Multi-party Exchanges. 74

Alderson. 74

Baird. 75

Delayed Exchanges. 76

Qualified Property Requirement 77

Like-Kind Requirement 78

Rules of Boot 78

Related Party Exchanges. 82

Definition of Related Party. 82

Exceptions to the Two Year Rule. 83

Contractual Protection. 83

Transactions Between A Partner & Partnership. 83

Foreign Real Property Exchanges. 84

Qualified '1031 Exchange of Personal Property Repealed. 84

Requirements for Personal Property - Prior to 2018. 84

Like-Kind or Like-Class. 85

Like-Kind Personal Property - Identical 85

Like Class Personal Property - General Asset or Product Class. 85

Five, Four, Then Six Digit Product Classes. 86

Other Personal Property. 86

Multiple Asset Exchanges. 86

Exchange Groups. 87

Aggregation & Allocation. 87

Delayed (Deferred) Exchange Regulations. 90

Deferred (Delayed) Exchange Definition. 90

Identification Requirements. 90

Identification & Exchange Periods. 90

Application of '7503. 90

Method of Identification. 90

Property Description. 91

Incidental Property - 15% Rule. 91

Revocation. 91

Substantial Receipt 92

Multiple Replacement Properties. 92

Actual & Constructive Receipt Rule. 95

Four Safe Harbors. 95

Safe Harbor #1 - Security. 95

Safe Harbor #2 - Escrow Accounts & Trusts. 96

Disqualified Person. 96

Who Is An Agent?. 96

Safe Harbor #3 - Qualified Intermediary. 96

Who Is A Qualified Intermediary?. 97

Direct Deeding. 97

Assignment 98

Simultaneous Exchanges. 98

Safe Harbor #4 - Interest 98

Interest Reporting - '468B(g) 98

Restrictions On Rights to Money & Other Property - g(6) Limitations. 99

Outside Transfers of Money or Other Property. 100

Exchanges of Partnership Interests. 101

Effective Date of Partnership Provisions. 102

Reverse Exchanges - R.P. 2000-37. 102

Chapter 4 - Section 9 Review Questions. 103

Chapter 5 - Involuntary Conversions - Section 10. 105

Condemnations. 105

Threat of Condemnation. 106

Reports of Condemnation. 106

Property Voluntarily Sold. 106

Easements. 107

Condemnation Award. 107

Amounts Withheld From Award. 107

Net Condemnation Award. 107

Interest on Award. 107

Payments to Relocate. 108

Chapter 5 - Section 10 Review Questions. 109

Chapter 5 - Involuntary Conversions - Section 11. 110

Severance Damages. 110

Treatment of Severance Damages. 110

Expenses of Obtaining an Award. 111

Special Assessment Withheld from Award. 111

Severance Damages Included in Award. 112

Gain or Loss from Condemnations. 112

How to Figure Gain or Loss. 112

Part Business or Part Rental 112

Postponement of Gain. 112

Choosing to Postpone Gain. 112

Cost Test 113

Replacement Period. 113

Condemnation. 113

Replacement Property Acquired Before the Condemnation. 113

Extension. 114

Time for Assessing a Deficiency. 114

Related Party Rule. 115

Chapter 5 - Section 11 Review Questions. 116

Chapter 6 - Passive Loss & At-Risk Rules - Section 12. 118

Passive Loss Rules. 118

Application. 119

Active Losses. 119

Credits. 119

Calculating Passive Loss - The Fish Rules. 119

Categories of Income & Loss. 119

Passive. 119

Portfolio. 120

Material Participation. 120

Suspension of Disallowed Losses. 123

Fully Taxable Disposition. 123

Abandonment & Worthlessness. 123

Related Party Transactions. 123

Credits. 123

Disallowance. 123

Increase Basis Election. 124

Other Transfers. 124

Transfer By Reason Of Death - '469(g)(2) 124

Transfer By Gift - '469(j)(6) 124

Installment Sale - '469(g)(3) 124

Activity No Longer Treated As Passive Activity - '469(f)(1) 124

Closely Held To Nonclosely Held Corporation - '469(f)(2) 125

Nontaxable Transfer 125

Ordering of Losses. 126

Capital Loss Limitation - '1211. 126

Carryforwards. 127

Allocation of Suspended Losses. 127

Chapter 6 - Section 12 Review Questions. 128

Chapter 6 - Passive Loss & At-Risk Rules - Section 13. 130

Taxpayers Affected. 130

Noncorporate Taxpayers. 130

Regular Corporations. 130

Personal Service Corporations. 130

Definition - Temp. Reg. '1.469-1T(g)(2)(i) 130

Personal Services. 130

Principal Activity - 50% Test 131

Substantially Performed by Employee-Owners - 20% Test 131

Material Participation. 133

Trade or Business Definition. 133

February 19, 1988 Regulations. 133

General Rule for Individuals. 133

Record keeping. 135

Meaning of Participation. 135

Exceptions to Definition - The Unwork Rules. 135

Husband & Wife Counted as One. 136

Annual Test 136

Pre-87 Participation - 500 Hours. 136

Special Rules for Entities. 138

Limited Partnership Interests Presumption. 138

Exceptions to Presumption. 138

Trusts and Estates. 138

Retired & Disabled Farmers. 139

Corporations. 139

Activity Definition. 141

Final Regulations. 141

Relevant Factors. 141

Rental Activities. 142

Limited Partnership Activities. 142

Partnership & S Corporation Activities. 142

Consistency. 142

Regrouping. 143

Partial Dispositions. 143

Passive & Nonpassive Activities. 145

Trade or Business. 145

Characterization Based on Participation. 145

Rental Activity. 145

Exceptions. 145

Chapter 6 - Section 13 Review Questions. 147

Chapter 6 - Passive Loss & At-Risk Rules - Section 14. 149

Non-Passive Activities. 149

Rental Activities of Real Estate Professionals. 149

Eligibility Standards. 149

Working Interests in Oil & Gas. 149

Entities That Limit Liability. 150

Activities within Activities. 150

Passive Activity Loss. 152

Husband & Wife. 152

Special Rule for Closely Held Corporations. 152

Net Active Income. 152

Carryover of Disallowed Losses. 153

Treatment of Carryover Losses. 153

Allocation Process. 153

Significant Participation Activities. 154

Income from Dispositions of Property Used in Passive Activities. 154

Mixed Use Property. 155

Alternating Use. 155

De Minimis Use Rule - 10/10 Test 155

Disposition of Appreciated Property Formerly Used in a Nonpassive Activity. 155

Rental Activities. 156

Special Rule for Rental Real Estate. 156

Five Conditions. 156

Active Participation. 157

Change in Participation. 157

Application of $25,000 Allowance Rule. 157

Aggregation & Ordering: 157

Net Operating Loss. 157

Net Leases. 158

Definition. 158

Recharacterization of Passive Income. 160

Active Business Recharacterization. 160

Significant Participation Income Rules. 160

Ratable Portion of Income. 160

Formula. 160

Significant Participation Losses. 160

Rental of Property Developed by Taxpayer 161

Self-Rented Property. 161

Portfolio Income Recharacterization Rules. 161

Rental of Nondepreciable Property. 161

Equity Financed Lending Activities. 161

Limitation on Recharacterization. 161

Passive Activity Credits. 162

Regular Tax Liability Allocable to Passive Activities. 162

Formula. 162

Exception for Real Estate Rental Activity Credits. 162

Application. 163

Credits Subject to Passive Activity Limits. 163

Allocation of Disallowed Credits. 163

Treatment of Carryover Credits. 164

Passive Activity Audit Guide. 164

Indicators of Audit Issues. 164

Investment Interest 165

Material Participation. 165

Significant Participation Activities. 165

Active Participation. 165

Net Lease Properties. 166

Vacation Rentals. 166

Self-Charged Expenses. 166

Rental & Nonrental Activity Grouping. 166

Divorce. 167

At-Risk Limits. 167

Amount At Risk. 167

Taxpayers Affected. 167

Closely Held Corporation. 167

Qualified Corporation Exception. 168

Qualifying Business Requirements. 168

Loss Defined. 169

Disallowed Losses. 169

Form 6198. 169

Partnership & S Corporation Limits. 169

Activities Covered by the At-Risk Rules. 169

Equipment Leasing. 170

Real Property. 171

Grouping of Activities. 173

Partners & S Corporation Shareholders. 173

At-Risk Amounts. 173

Borrowed Amounts. 173

Related Persons. 174

Subsequent Years. 175

Amounts Not At Risk. 175

Nonrecourse Financing. 175

Other Loss Limiting Arrangements. 176

Reductions of Amounts At Risk. 176

Chapter 6 - Section 14 Review Questions. 178

Chapter 7 - Sales by Foreign Investors Section 15. 180

FIRPTA.. 180

United States Real Property Interests. 180

U.S. Property Holding Corporations. 181

Definition. 181

Exceptions. 181

Foreign Corporations. 181

Distributions. 181

Withholding & Reporting Requirements. 181

Non-foreign Affidavit 182

Chapter 7 - Section 15 Review Questions. 183

Chapter 8 - Reits - Section 16. 184

REIT Pools. 184

Benefits. 184

Advantages Over Limited Partnerships. 184

Organizing a REIT.. 185

Management 185

Income & Growth. 185

Self-Liquidating REITs. 186

Taxation. 186

Organization & Operation. 186

Assets & Income. 187

Tax Reform Act of 1986. 187

Taxpayer Relief Act of 1997. 187

Penalties for Failure to Request Information. 188

De Minimis Rule For Tenant Service Income. 188

Attribution Rules. 188

Credit for Tax Paid By REIT on Retained Capital Gains. 188

Repeal Of 30% Gross Income Requirement 188

REIT Earnings & Profits from Non-REIT Year 188

Treatment of Foreclosure Property. 188

Payments under Hedging Instruments. 189

Excess Noncash Income. 189

Prohibited Transaction Safe Harbor 189

Shared Appreciation Mortgages. 189

Wholly-Owned REIT Subsidiaries. 189

Repeal of 30% Requirement of RICs. 189

Chapter 8 - Section 16 Review Questions. 190

Answers & Explanations. 191

Index of Keywords & Phrases. a

CPE Exam Answer Sheet e

Final Examination. g