@smp73:
Make sure you know the other corporate topics, like formation basis (351 exchanges), distributions, liquidations, and what I call the overview topics, like tax year, filing date, extension. Per the review providers Becker, Wiley and Gleim, these are probably more heavily tested than like-kind exchanges…
As to your question, Section 1231 property is Depreciable business property held over (that is greater than) 1 year. Section 1231 gains and losses are netted against each other in the same manner as capital gains and losses except that a net section 1231 Gain is a CAPITAL GAIN, while a net section 1231 Loss is an ORDINARY LOSS. Conceptually, think of 1231 property as a pie with subsections of 1245(personal property) and 1250(Real Estate). Now this is very corny, but if you can remember the following mnemonics I made up, it should help you with calculation questions. For 1245 property ‘RD’ and ‘P2M1/2’ except when 40% of more of the property is put in service in the last quarter of the year then use mid-quarter convention; For 1250 Property ‘DUA’ and ‘RSLMM’. Also remember Land is not 1250 property since it’s not depreciable.
Section 1245(Personal Property) ‘RD’ means Recapture Depreciation as Ordinary Income and ‘P2M1/2’ means Personal Property, use Double Declining Balance Depreciation method(for 3, 5, 7, and 10 year property, remember NOT to take salvage value out!) mid-year or ½ year convention used. (Note, mid-quarter convention is used when 40% or more of the personal property is acquired during the last quarter of the year. The first year depreciation is calculated by multiplying the full year amount by the following percentages when mid-quarter convention applies: 87.5% for 1st qtr; 62.5% for 2nd qtr, 37.5% for 3rd qtr; 12.5% for 4th qtr)
Section 1250 (Real Estate) ‘DUA’ means Depreciation taken minus straight line depreciation recapture as Ordinary Income; Un-recaptured depreciation taxed at 25%, Any remaining gain is LTCG. And ‘RSLMM’ means Real Estate depreciate using Straight Line Depreciation, Mid-Month Convention.
There is a lot more on this topic, but the above are the basics. Hope this is helpful, even if the mnemonics are silly.
AUD 8/04/11: 78
BEC 1/9/12: 73, 4/04/12: 80
FAR 10/25/12: 80
REG 02/25/13: 79
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