Page 121 - Virtual Currencies

12:10 - 7-Feb-2023
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Fileid: … tions/p544/2022/a/xml/cycle03/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
property was disposed of as a result of the fore- The 36-month test for separate improve- section 1250 property is treated as consisting of
closure proceedings. The property qualifies for ments. A separate improvement is any im- two distinct properties.
a reduced applicable percentage because it provement (qualifying under The 1-year test be-
was held more than 100 full months. The appli- low) added to the capital account of the Unadjusted basis. In figuring the unadjus-
cable percentage reduction is 30% (130 months property, but only if the total of the improve- ted basis as of a certain date, include the actual
minus 100 months) rather than 50% (150 ments during the 36-month period ending on cost of all previous additions to the capital ac-
months minus 100 months) because it does not the last day of any tax year is more than the count plus those that did not qualify as separate
apply after April 3, 2021, the starting date of the greatest of the following amounts. improvements. However, the cost of compo-
foreclosure proceedings. Therefore, 70% of the 1. 25% of the adjusted basis of the property nents retired before that date is not included in
additional depreciation is treated as ordinary in- at the start of the first day of the 36-month the unadjusted basis.
come. period, or the first day of the holding pe- Holding period. Use the following guidelines
Holding period. The holding period used riod of the property, whichever is later. for figuring the applicable percentage for prop-
to figure the applicable percentage for low-in- 2. 10% of the unadjusted basis (adjusted ba- erty with two or more elements.
come housing generally starts on the day after sis plus depreciation and amortization ad- • The holding period of a separate element
you acquired it. For example, if you bought justments) of the property at the start of placed in service before the entire section
low-income housing on January 1, 2006, the the period determined in (1). 1250 property is finished starts on the first
holding period starts on January 2, 2006. If you day of the month that the separate element
sold it on January 2, 2022, the holding period is 3. $5,000. is placed in service.
exactly 192 full months. The applicable percent- • The holding period for each separate im-
The 1-year test. An addition to the capital
age for additional depreciation is 8%, or 100% account for any tax year (including a short tax provement qualifying as a separate ele-
minus 1% for each full month the property was ment starts on the day after the improve-
held over 100 full months. year) is treated as an improvement only if the ment is acquired or, for improvements
sum of all additions for the year is more than the constructed, reconstructed, or erected, the
Holding period for constructed, recon- greater of $2,000 or 1% of the unadjusted basis first day of the month that the improvement
structed, or erected property. The holding of the property. The unadjusted basis is figured is placed in service.
period used to figure the applicable percentage as of the start of that tax year or the holding pe- • The holding period for each improvement
for low-income housing you constructed, recon- riod of the property, whichever is later. In apply- not qualifying as a separate element takes
structed, or erected starts on the first day of the ing the 36-month test, improvements in any one the holding period of the basic property.
month it is placed in service in a trade or busi- of the 3 years are omitted entirely if the total im-
ness, in an activity for the production of income, provements in that year do not qualify under the If an improvement by itself does not meet
or in a personal activity. 1-year test. the 1-year test (greater of $2,000 or 1% of the
unadjusted basis), but it does qualify as a sepa-
Property acquired by gift or received in Example. The unadjusted basis of a calen- rate improvement that is a separate element
a tax-free transfer. For low-income housing dar year taxpayer's property was $300,000 on (when grouped with other improvements made
you acquired by gift or in a tax-free transfer the January 1 of this year. During the year, the tax- during the tax year), determine the start of its
basis of which is figured by reference to the ba- payer made improvements A, B, and C, which holding period as follows. Use the first day of a
sis in the hands of the transferor, the holding cost $1,000, $600, and $700, respectively. The calendar month that is closest to the middle of
period for the applicable percentage includes sum of the improvements, $2,300, is less than the tax year. If there are two first days of a
the holding period of the transferor. 1% of the unadjusted basis ($3,000), so the im- month that are equally close to the middle of the
If the adjusted basis of the property in your provements do not satisfy the 1-year test and year, use the earlier date.
hands just after acquiring it is more than its ad- are not treated as improvements for the
justed basis to the transferor just before trans- 36-month test. However, if improvement C had Figuring ordinary income attributable to
ferring it, the holding period of the difference is cost $1,500, the sum of these improvements each separate element. Figure ordinary in-
figured as if it were a separate improvement. would have been $3,100. Then, it would be come attributable to each separate element as
See Low-Income Housing With Two or More El- necessary to apply the 36-month test to figure if follows.
ements next. the improvements must be treated as separate Step 1. Divide the element's additional de-
improvements. preciation after 1975 by the sum of all the ele-
Low-Income Housing Addition to the capital account. Any ad- ments' additional depreciation after 1975 to de-
With Two or More Elements dition to the capital account made after the ini- termine the percentage used in Step 2.
tial acquisition or completion of the property by Step 2. Multiply the percentage figured in
If you dispose of low-income housing property you or any person who held the property during Step 1 by the lesser of the additional deprecia-
that has two or more separate elements, the ap- a period included in your holding period is to be tion after 1975 for the entire property or the gain
plicable percentage used to figure ordinary in- considered when figuring the total amount of from disposition of the entire property (the dif-
come because of additional depreciation may separate improvements. ference between the fair market value or
be different for each element. The gain to be re- The addition to the capital account of depre- amount realized and the adjusted basis).
ported as ordinary income is the sum of the or- ciable real property is the gross addition not re- Step 3. Multiply the result in Step 2 by the
dinary income figured for each element. duced by amounts attributable to replaced applicable percentage for the element.
property. For example, if a roof with an adjusted
The following are the types of separate ele- basis of $20,000 is replaced by a new roof cost- Example. You sold at a gain of $25,000
ments. ing $50,000, the improvement is the gross addi- low-income housing property subject to the or-
• A separate improvement (defined below). tion to the account, $50,000, and not the net ad- dinary income rules of section 1250. The prop-
• The basic section 1250 property plus im- dition of $30,000. The $20,000 adjusted basis erty consisted of four elements (W, X, Y, and
provements not qualifying as separate im- of the old roof is no longer reflected in the basis Z).
provements. of the property. The status of an addition to the Step 1. The additional depreciation for each
• The units placed in service at different capital account is not affected by whether it is element is: W—$12,000; X—None; Y—$6,000;
times before all of the section 1250 prop- treated as a separate property for determining and Z—$6,000. The sum of the additional de-
erty is finished. For example, this happens depreciation deductions. preciation for all the elements is $24,000.
when a taxpayer builds an apartment build- Whether an expense is treated as an addi- Step 2. The depreciation deducted on ele-
ing of 100 units and places 30 units in tion to the capital account may depend on the fi- ment X was $4,000 less than it would have
service (available for renting) on January nal disposition of the entire property. If the ex- been under the straight-line method. Additional
4, 2019; 50 on July 18, 2019; and the re- pense item property and the basic property are depreciation on the property as a whole is
maining 20 on January 18, 2020. As a re- sold in two separate transactions, the entire $20,000 ($24,000 − $4,000). $20,000 is lower
sult, the apartment house consists of three than the $25,000 gain on the sale, so $20,000 is
separate elements. used in Step 2.
Page 30 Chapter 3 Ordinary or Capital Gain or Loss for Business Property