 Hello and welcome to this session in which we will discuss property transaction for tax purposes. For income tax purposes, when dealing with any type of property, it's important to determine four things before we know the tax consequences of that property transaction. Now this topic is important whether you are a CPA candidate, enrolled agent or an accounting student. First, we need to know what type of property are we dealing with, the type and we'll have to discuss two, the basis. What are the basis of the property? And we will discuss this and we're going to discuss this much, much more in detail basis of property later on. Three, holding period. How long you had this property? And four, the acquired method. How did you purchase this property? Starting with the basis of the property in general, the basis represent the amount that the taxpayer invested in that property. What do you usually invest? Well, usually you pay cash for the property. Sometime you may pay a property, like you may pay for a property, purchase a property and at the same time, you assume some debt, you take over the debt of that property. That's also part of your investment because you really cannot own the property unless you pay off the debt. Sometime the value of other assets or services provided is the amount of your investment. So when you want to buy something, you don't have the money to pay, you provide a service. Well, the value of that service or you exchange it with an asset, the value of that is your basis. So this is the general rule. Don't worry, we're going to have to work much, much more with basis. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Why do we have to learn about the basis? Well, the basis is important in so many different ways. To compute depreciation for the asset, amortization or depletion, you need to know the basis. So there is no way you can compute those without knowing the basis. Two, if you have any casualty loss, which are losses resulting from unforeseen catastrophic events, you need to determine your basis in order to determine your loss. The amount of gain or loss realized from the sale, exchange, or disposition of the property. So when you sell this property down the road, or when you exchange it, or when you just simply dispose of it, you need to compute whether you have a gain or a loss. You cannot compute the gain or the loss without knowing the basis. So hopefully you understand the importance of the basis. So that's why we emphasize a lot the concept of basis. The holding period is something you need to be familiar with. It goes hand in hand with the basis, goes hand in hand with the property transaction. Simply put, how long you held this property? Now, why is that important? It's important for tax purposes because Uncle Sam, the government, they want you to either pay more or less taxes. Simply put, we have what's called short term and long term treatment. If you hold the property for usually a year or less, it's short term. More, it's long term. So you have to understand the holding period is important because after you determine your gain or your loss, you have to determine whether that gain or loss is short term or whether this gain or loss is long term. So that's why. So basis and holding periods are important, extremely important. And we're going to talk much, much more about the basis because remember, we can be exchanging properties. We can be buying properties. We could be assuming that. So we need to know how to compute the basis. The second important topic, not the second, but the other topic that we need to be familiar with is the type of property, which I believe this is the third. We talked about basis, we talked about holding period, the type of property. We break down the type of properties into two types. So it's two main types, which are real property or realty and personal property or personality. It doesn't matter. I'm going to call it real property and personal property. Now, we need to differentiate between those two. It's important to understand both. What is a real property? Real properties are generally defined as land and building and they are permanently affixed to the, like they cannot be moved. They cannot be moved, affixed to it, to the land. While personal property, any asset that's not real property. So personal properties could include furniture, machinery, equipment, and many other type of assets, which is not real. Real, you cannot move it around. Can you move this desk around? Yes, yes, I can. I can move this desk around. Can you move this building? No, you cannot move this building. This is a real property. Can you move this van? Yes, you can move this van, but you cannot move the building. So the first thing I want you to understand is the idea that we have two types of property, real and personal property. That's the first thing. You also have to understand that personal property is different than another term, personal use property. What is a personal use property? Personal use property is any property, whether it's real or personal, that is held for personal use rather than the use in a trade or business or income producing activity. Let me explain. I have this desk here, right here. This is the desk. Well, this desk is personal use property. I use it in my office. Not in my office. I use it in my home. Let's not even call it. I use it in my office. If I use this desk to browse the internet, send email to friends and relatives, and just for entertainment, play games on this computer, use the desk for my personal use, it's a personal use desk. Or I can take the same desk and use it as my office. It's the same desk. Now it becomes personal property. So this desk could be personal use. This desk could be personal property. I could also have this desk. If I'm selling desks, this desk could be part of my inventory as well. So notice it's the same desk could be a personal use property, or it could be personal property used in a trade or a business or income producing activity. So it's not about the asset itself, it's the usage of it. So make sure you're aware of this. And if we go back to this van, I have this van. I could use this van for personal use, or this van could be used for business, for delivery, which become personal property. Okay, so just make sure you differentiate that you have to understand that the same asset could be used in more than just not just for personal use, it could be personal use and business use. Now, sometimes you might have a property, uses a property for business or investment purpose, and at the same time, for personal use, for example, your vehicle, you can you could be using your vehicle for business purposes, and you could be using the same vehicle for personal use. Under those circumstances, when you have those situation, the basis must be allocated based on the property use. So we'll deal with that later. But the point is you might be asking, what if I have the same asset like a delivery truck, and I'm using for both. Okay, only the basis allocated to the business or investment is the amount that's depreciable. And we'll talk about that much later on. I just want you to know that this is something that we have to be familiar with. The fourth item that we need to be familiar with is how did we acquire the property that matters? Well, how do we acquire property? We buy them, regular purchase or acquisition, we just go into the store, go online, go through the catalog and buy something. Or we can provide a service in exchange for that property. So rather than paying for it, I can provide you a service and in return, you'll give me the property. It could be you could get a property in an inheritance, you know, your, your, your uncle, aunts, grandpa, grandma passed away, and they will give you this property in a form of inheritance. Someone can gift it to you simply put giving you a gift, or it could be a like kind exchange transaction. Basically, you exchange your property for another property. And guess what? We have to be familiar with all sorts of acquisition method. So down the road, I'm going to have a session about a regular purchase, what's included in the basis, what's not in exchange for services and inheritance, a gift, a like kind exchange. So how you compute the basis for different type of property that depend on many things. What should you do now? Go to far hat lectures and look at additional MCQs, multiple choice exercises that's going to help you understand the stopping better. Property transaction is important, whether you are a CPA candidate or an enrolled agent candidate, or of course, if you're an accounting students, invest in yourself, invest in your career. Good luck. Study hard, stay safe.