Section 1239 Gain or Loss

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Nov 7, 2023
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Section 1239 Gain or Loss Section 1239 gives the provisions when depreciable property is sold to a related person. For tax purposes, a related person has a family relationship such as siblings, spouses, ancestors, or lineal descendants, but this would also include any corporations where those family members have at least 50% or more control. If this property is sold at a gain to a related person, this becomes depreciable property to the buyer, and the seller classifies the entire gain as ordinary income. If this property is sold at a loss to a related party, none of this loss can be recognized. However, the related person buyer may deduct the previously disallowed loss to the extent of the gain if later sold to an unrelated party. Nonrecognition Transactions In this section, we'll focus on the special situations when recognition of a gain may be deferred or avoided. Rationales Every government needs revenue to operate, so why would Congress permit the gains from some types of transactions to go untaxed? Let's not go into the political aspects, ok? There usually are two reasons for allowing the deferral or avoidance of recognition of a gain. It's likely that you've heard of both of these previously: substance over form, and wherewithal to pay. Substance over form is a concept that says that the substance of a transaction should take precedence over the legal formalities of the transaction. For example, if A sells an asset to B, who immediately sells it for the same price to C, that's the form of the transaction, but the substance was a sale of an asset from A to C. This concept is used most often to allow the IRS to restructure transactions to better reflect economic reality. In the case of nontaxable transactions, substance over form is used to justify them because, as you'll see shortly, the investment continues for the most part. Wherewithal to pay is the concept that says taxpayers should not be taxed on a transaction until they have the ability to pay those taxes. This does not mean that, if a taxpayer fails to set aside some of the revenue to pay taxes, they should not have to pay them. It means that, if the taxpayer has not yet had the revenue to pay the taxes, the government should wait to get those taxes until the taxpayer does get the revenue to pay.
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