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Capital Gain/Loss or Wash


Terry D EA

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My client has inherited (real) property from the death of a family member. Located on that property are several pieces of old, worn-out, and rusted pieces of equipment. He is looking into selling this equipment to a scrap dealer. I am aware his basis in this equipment would be FMV at date of death. The scrap company has agreed to remove the equipment for 50% of the value. Other words if the scrap company says a piece of equipment has a scrap value of $100.00, the will remove it at 50% or $50.00. I see this as an expense of the sale and appears to be a potential loss. Correct? I don't see there is any way to assign a value or have this stuff appraised and am assuming (dangerous thing to do) that the scrap price is determined by weight at the current scrap rate. If this is indeed a loss, then report on Sch D correct?

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The category that the equipment falls into in the heir's hands will determine if the losses are deductible or not. Losses on dispositions of personal property aren't deductible, only those attributable to investment property or income-producing property.   If you decide that this is personal property and you are still reporting the transaction that results in a loss, there is a code on Sch D to indicate that it is nondeductible.

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I don't understand the loss portion of it. Let's put names to the items: On the real property, you have an old tractor, a combine and a plow. The scrap company says: If you bring these items to my lot, I will pay $300 for the Tractor, $200 for the combine and $100 for the plow. Since the company comes to your field and grabs these items, you will receive only $300 as full payment for all three items. To me this is the FMV of the items unless you can find someone else who pays more.

It will be nice if you would say if your client received these items 10 years ago when their FMV at the time of death was $10,000, which will create a loss. But since I can only assume that the inheritance took place not long ago, you will have a break even transaction since the selling price will be the FMV of the items and in turn it will be the basis of your client.

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OK. But I still believe that FMV is 50%, which in turn is the basis of the items.  If you don't have any other better offer, that's the FMV, correct?

To me this is exactly the same as what they do in my country.  You have a corn field ready... all the sudden someone shows up and says... I am giving $2,000 for your field and I will bring my people and my people will do all the work and I will take the end product. To the seller, there is no transportation expenses.  The seller cannot say, I got $3,000 for the field but I have $1,000 in transportation expenses, just because if he would take it to the city they will give him $3000.

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29 minutes ago, Pacun said:

Let's put names to the items: On the real property, you have an old tractor, a combine and a plow. The scrap company says: If you bring these items to my lot, I will pay $300 for the Tractor, $200 for the combine and $100 for the plow. Since the company comes to your field and grabs these items, you will receive only $300 as full payment for all three items. To me this is the FMV of the items unless you can find someone else who pays more.

I totally agree

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I cannot put names to these items as I am unclear as to what they are. I merely stated what the transaction was going to be. Are these items personal? I am going out on a limb and saying yes. My client inherited the land and the so called equipment when his father passed approximately 3 months ago. The reason for my confusion is there is a commercial lot involved in the inheritance as well that this so called equipment is on. It is highly possible his father just owned a piece of commercially zoned property and not actually operated any type of business. With all this said, I still feel, and I will clear it up, this equipment was personal and not business use equipment. I know the guy was a farmer, but I think it was his personal property. I guess I was not clear enough in my original post.

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So if it was personal, the basis will be the FMV at the time of death. Since it was recently, whatever the scrap dealer pays for the "equipment" is the basis for your client. If they were equipment used in a business, maybe your client will have a gain and pay taxes on it if all the items were fully depreciated while the farmer was alive.

 

 

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10 hours ago, JohnH said:

Seems to me the FMV is one figure if the equipment is delivered to the scrap metal dealer and FMV is a a lower figure if the dealer picks it up where it sits. (Which I think agrees with Pacun's reasoning) 

Would your answer be different if he paid someone 100 to haul the equipment to the scrapyard and received full price for the goods? Would you take 100 loss or zero gain/loss?

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12 hours ago, Pacun said:

So if it was personal, the basis will be the FMV at the time of death. Since it was recently, whatever the scrap dealer pays for the "equipment" is the basis for your client. If they were equipment used in a business, maybe your client will have a gain and pay taxes on it if all the items were fully depreciated while the farmer was alive.

 

 

If the property is inherited with a step up in basis, I don't think that depreciation prior to the date of death will have any bearing on the calculation of gain or loss. 

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12 hours ago, Abby Normal said:

Would your answer be different if he paid someone 100 to haul the equipment to the scrapyard and received full price for the goods? Would you take 100 loss or zero gain/loss?

FMV is for the area where the item is... if I am not mistaken. If not, the IRS will say... I need appraisals from 3 different areas to come up with FMV. I want an appraisal for the area where the item is, and I want an appraisal of the FMV of that item in England and I want an appraisal of what that item would cost in China.

 

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4 minutes ago, DANRVAN said:

If you are a sole proprietor your business assets go into your estate and get a step up basis.

  

You are right, when the transfer is from the dead to the Estate. But when the State passes the property, when the beneficiary sells the property, the basis for gain is the lower of cost or FMV. You still need the records from the deceased to calculate the gain.  Again... this is from the top of my head.

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37 minutes ago, Pacun said:

You are right, when the transfer is from the dead to the Estate. But when the State passes the property, when the beneficiary sells the property, the basis for gain is the lower of cost or FMV. You still need the records from the deceased to calculate the gain.  Again... this is from the top of my head.

When the estate passes the property to the heir you follow uniformity of basis rule (treas. reg 1.1014-4). FMV and basis of decedent  are not factors.

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41 minutes ago, DANRVAN said:

When the estate passes the property to the heir you follow uniformity of basis rule (treas. reg 1.1014-4). FMV and basis of decedent  are not factors.

You are right. I was thinking about gifts. I have seen examples of stock and houses that get step-up basis. I have not seen income-producing items that get step-up basis. Which is interesting if I inherit the McDonalds corporation, will I inherit a bunch of restaurants or a bunch of stocks?

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I believe for estate valuation purposes, IRS ignores commissions or other "selling" cost.  If consistent with this precept, the FMV of the equipment discussed would be $600, and the selling expense $300.  This is a $300 loss.  If this rusted out stuff is classified as personal, there is no capital loss.  If it can be classified as "income-producing" (no doubt at one time there was no question), then the loss should be allowed.

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2 hours ago, Edsel said:

I believe for estate valuation purposes, IRS ignores commissions or other "selling" cost.  If consistent with this precept, the FMV of the equipment discussed would be $600, and the selling expense $300.  This is a $300 loss.  If this rusted out stuff is classified as personal, there is no capital loss.  If it can be classified as "income-producing" (no doubt at one time there was no question), then the loss should be allowed.

It seems to me that this is like saying that there is no difference between  the valuation of standing timber and the value of the same timber delivered as logs

to the log deck of a lumber mill.

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Disagree, on the foundation that "freight in" is value-addition, whereas "freight out" is selling expense.

I should add that there is more involved than just freight - as "handling" implies other activities such as logging, scrap handling, etc.  I'm relying on GAAP somewhat in the presumption that "freight-in" is inventoriable and adds to the value, whereas "freight out" simply charges against the amount of the sale.

 

 

 

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On 8/24/2018 at 10:12 AM, Abby Normal said:

Would your answer be different if he paid someone 100 to haul the equipment to the scrapyard and received full price for the goods? Would you take 100 loss or zero gain/loss?

The answer is the same, but the FMV would be different.  Why?  Because facts and circumstances are different.  In one, we have a situation where the scrap dealer is willing to fetch but at a lower price/FMV.  In the other, the situation is that the seller is willing to haul.  That means the value is different - the scrap dealer then has to contend with the chance the seller goes elsewhere, and the dealer has no costs associated with his purchase.  So the FMV goes up.  But in this second circumstance, we have a $600 sale with $100 expense of sale.  Basis TBD depending on if it was income-producing, or personal, property inherited.  

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On 8/24/2018 at 10:12 AM, Abby Normal said:

Would your answer be different if he paid someone 100 to haul the equipment to the scrapyard and received full price for the goods? Would you take 100 loss or zero gain/loss?

Good question. I'm still rolling this around in my mind, but I'm sticking to the concept that FMV is fluid.  It is always the intersection of what a willing buyer will actually pay and what a willing seller will actually accept.  So the FMV of the equipment sitting at the scrap yard is $100 and the FMV of the equipment sitting "where is/as is" is $50.  Unless there is another wiling buyer (not likely in this case), those two facts are established.

These are the only facts we have to work with.  I suppose we could speculate endlessly about other scenarios. 

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4 minutes ago, JohnH said:

Good question. I'm still rolling this around in my mind, but I'm sticking to the concept that FMV is fluid.  It is always the intersection of what a willing buyer will actually pay and what a willing seller will actually accept.  So the FMV of the equipment sitting at the scrap yard is $100 and the FMV of the equipment sitting "where is/as is" is $50.  Unless there is another wiling buyer (not likely in this case), those two facts are established.

These are the only facts we have to work with.  I suppose we could speculate endlessly about other scenarios. 

I agree with your explanation and analogy.

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On 8/25/2018 at 11:12 AM, cbslee said:

It seems to me that this is like saying that there is no difference between  the valuation of standing timber and the value of the same timber delivered as logs

to the log deck of a lumber mill.

I have dealt with that situation.  The cost of logging can take a out a huge chunk of change when timber is in rugged terrain and a long haul from the mill.  In reality, the heir has no economic loss for netting less than the standing value on date of death due to logging cost.

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