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©2003 South-Western College Publishing, Cincinnati, Ohio Chapter 8 Capital Gains and Losses.

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Presentation on theme: "©2003 South-Western College Publishing, Cincinnati, Ohio Chapter 8 Capital Gains and Losses."— Presentation transcript:

1 ©2003 South-Western College Publishing, Cincinnati, Ohio Chapter 8 Capital Gains and Losses

2 © 2003 South-Western College PublishingTransparency 8-2 Objective Know the definition of the term capital asset

3 © 2003 South-Western College PublishingTransparency 8-3 Capital Gains and Losses A capital asset is any asset other than inventory, receivables, and depreciable or real property used in a trade or business.

4 © 2003 South-Western College PublishingTransparency 8-4 Capital Gains and Losses rA sale or other disposition of capital assets results in a capital gain or loss { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_4.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-4 Capital Gains and Losses rA sale or other disposition of capital assets results in a capital gain or loss

5 © 2003 South-Western College PublishingTransparency 8-5 Objective Know the holding periods and tax rates applied to sales of capital assets

6 © 2003 South-Western College PublishingTransparency 8-6 Capital Gains and Losses Holding Period rThe holding period for capital assets is how long the taxpayer owned the asset. 12 months. { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_6.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-6 Capital Gains and Losses Holding Period rThe holding period for capital assets is how long the taxpayer owned the asset.", "description": "12 months.

7 © 2003 South-Western College PublishingTransparency 8-7 Property Disposition Amount realized from disposition less:Adjusted basis of property Realized gain (loss) less:Allowed deferral Recognized gain (loss)

8 © 2003 South-Western College PublishingTransparency 8-8 Amount Realized rAmount realized = gross sales price less selling expenses { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_8.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-8 Amount Realized rAmount realized = gross sales price less selling expenses

9 © 2003 South-Western College PublishingTransparency 8-9 Adjusted Basis Original cost plus: Capital improvements less: Accumulated depreciation Adjusted basis

10 © 2003 South-Western College PublishingTransparency 8-10 Juliana sold stock in Arco she had purchased in 1997. The stock had cost her $10,000 and she sold it for $19,000 with a commission of $1,300. What is amount realized and gain realized? Answer Amount realized = $19,000 - $1,300 = $17,700 Gain realized = $17,700 - $10,000 = $7,700 LT Examples of Calculating Gain/Loss

11 © 2003 South-Western College PublishingTransparency 8-11 Long-term gains netted against Long-term losses Net Long-term Gain or Loss Short-term gains netted against Short-term losses Net Short-term Gain or Loss = = Capital Gains and Losses: Netting Procedures

12 © 2003 South-Western College PublishingTransparency 8-12 Capital Gains and Losses Netting Procedures rThe following are treated as long-term gains and losses for the netting procedure { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_12.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-12 Capital Gains and Losses Netting Procedures rThe following are treated as long-term gains and losses for the netting procedure

13 © 2003 South-Western College PublishingTransparency 8-13 If net short-term & long-term are opposite signs: Net Short-term Gain or Loss netted against Net Long-term Gain or Loss Net Capital Gain or Loss = Capital Gains and Losses: Netting Procedures If short-term & long-term net results are same sign: Do not net. You will have a net STC and LTC gain or loss

14 © 2003 South-Western College PublishingTransparency 8-14 Tax Treatment for Net Long-term Gain: Individual Taxpayers rNet long-term gain (minus net collectibles gain, gain on qualified small business stock, and unrecaptured Section 1250 gain) is taxed at a maximum rate of 20% (10% for taxpayers in <20% bracket) rCollectibles held more than 12 months are taxed at a maximum rate of 28%. r50% of the gain on qualified small business stock is excluded, the remainder taxed at a maximum rate of 28%. rUnrecaptured Section 1250 gain is taxed at a maximum rate of 25%.

15 © 2003 South-Western College PublishingTransparency 8-15 rSpecial rate for assets held > 5 years <20% become 18% (in 2006) <10% becomes 8% (currently) Tax Treatment for Net Long-term Gain: Individual Taxpayers

16 © 2003 South-Western College PublishingTransparency 8-16 Tax Treatment for Net Short-term Gain: Individual Taxpayers rNet short-term capital gain is taxed as ordinary income (i.e., taxpayers marginal tax rate).

17 © 2003 South-Western College PublishingTransparency 8-17 Gain Treatment for Corporations rCorporations do not receive special treatment for capital gains.

18 © 2003 South-Western College PublishingTransparency 8-18 Tax Treatment for Net Loss rIndividuals may use only $3,000 to offset other income { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_18.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-18 Tax Treatment for Net Loss rIndividuals may use only $3,000 to offset other income

19 © 2003 South-Western College PublishingTransparency 8-19 Juan has the following capital gains and losses in the current year: Short-term capital loss$ (2,000) Long-term capital gain 12,000 Long-term capital loss carryover (7,000) Example

20 © 2003 South-Western College PublishingTransparency 8-20 Short-term: Short-term capital loss $ (2,000) Long-term: Long-term capital gain $12,000 Long-term capital loss carryover ( 7,000) Long-term capital gain $ 5,000 Net long-term capital gain $ 3,000 Tax on adjusted net capital gain: $3,000 x 20% = $ 600 Example

21 © 2003 South-Western College PublishingTransparency 8-21 Qualified Small Business Stock rQualified stock is stock that { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_21.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-21 Qualified Small Business Stock rQualified stock is stock that

22 © 2003 South-Western College PublishingTransparency 8-22 Amount realized from disposition less:Adjusted basis of property Realized gain (loss) less:Allowed deferral Recognized gain (loss) Ordinary §1231 (Form 4797) Capital (Schedule D) Personal Use Character of gain (loss) Character of Gain or Loss

23 © 2003 South-Western College PublishingTransparency 8-23 Section 1231 Assets rAsset must be held > 12 months and used in a trade or business { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_23.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-23 Section 1231 Assets rAsset must be held > 12 months and used in a trade or business 12 months and used in a trade or business

24 © 2003 South-Western College PublishingTransparency 8-24 Net Section 1231 gains may be allowed capital gain treatment even though they arise from ordinary assets. Section 1231

25 © 2003 South-Western College PublishingTransparency 8-25 Section 1231 Netting Results rNet Section 1231 gain is classified as long- term capital gain rNet Section 1231 loss is classified as ordinary loss

26 © 2003 South-Western College PublishingTransparency 8-26 Objective Understand what depreciation recapture is and how it is calculated

27 © 2003 South-Western College PublishingTransparency 8-27 Prevents taxpayers from receiving the dual benefits of a depreciation deduction and special §1231 capital gain treatment Depreciation Recapture

28 © 2003 South-Western College PublishingTransparency 8-28 Depreciation Recapture rApplies to Section 1231 gain property only rRequires gains to be treated as ordinary to the extent of prior depreciation deductions

29 © 2003 South-Western College PublishingTransparency 8-29 Depreciation Recapture rSection 1245 { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_29.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-29 Depreciation Recapture rSection 1245

30 © 2003 South-Western College PublishingTransparency 8-30 Depreciation Recapture rSection 1250 { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_30.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-30 Depreciation Recapture rSection 1250

31 © 2003 South-Western College PublishingTransparency 8-31 Unrecaptured Section 1250 Gain rRequires that the portion of the gain attributable to depreciation that is not §1250 recapture is taxed at a rate of 25%. rApplies to depreciable real property sold after 5/7/97. rAny gain not attributable to depreciation (in excess of original cost) is a §1231 gain.

32 © 2003 South-Western College PublishingTransparency 8-32 Ella purchases an apartment complex for $7,000,000 on 1/1/85. The property is depreciated on an accelerated basis and her accumulated depreciation is $4,000,000. She sells the property on 1/1/02 for $8,500,000. What is the realized gain and how is it split between §1231 gain (taxed as capital) and §1250 recap (taxed as ordinary income)? [straight line depreciation would have totaled $2,692,000.] Answer Realized gain = $8,500,000 - ($7,000,000 - $4,000,000) = $5,500,000. Excess depreciation taken = $4,000,000 - $2,692,000 = $1,308,000. §1250 recaptures the $1,308,000 as ordinary income. The remainder of the gain, $4,192,000, is taxed as §1231 gain. §1250 Recapture Example

33 © 2003 South-Western College PublishingTransparency 8-33 Objective Know how casualty losses are treated for both personal and business purposes

34 © 2003 South-Western College PublishingTransparency 8-34 Casualty Gains & Losses: Personal rLoss is the lesser of { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_34.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-34 Casualty Gains & Losses: Personal rLoss is the lesser of

35 © 2003 South-Western College PublishingTransparency 8-35 rBusiness casualty and theft losses result from damage caused by a sudden, unexpected and/or unusual event { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_35.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-35 rBusiness casualty and theft losses result from damage caused by a sudden, unexpected and/or unusual event

36 © 2003 South-Western College PublishingTransparency 8-36 rTreatment of gains and losses depends on holding period { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_36.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-36 rTreatment of gains and losses depends on holding period

37 © 2003 South-Western College PublishingTransparency 8-37 Hurricane results in a casualty gain = $8,000 - $15,000 = $7,000. Windstorm results in a casualty loss = ($44,000 - $10,000) + ($8,000 - $0) = $42,000 - $100 - $41,900. The total net casualty loss of $34,900 is further reduced by 10% of AGI. Casualty Gains and Losses: Example Sherry incurred the following casualty gains/losses and insurance reimbursements in one year (all personal assets). The fence was destroyed by a hurricane & the boat and trailer by a windstorm:

38 © 2003 South-Western College PublishingTransparency 8-38 Objective Be able to calculate income from installment sales

39 © 2003 South-Western College PublishingTransparency 8-39 Installment Sales - Form 6252 rInstallment sale treatment is utilized when real or personal property or business/rental property is sold and payment is collected over time rAllows taxable gain to be reported as cash is received, not when transaction completed { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_39.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-39 Installment Sales - Form 6252 rInstallment sale treatment is utilized when real or personal property or business/rental property is sold and payment is collected over time rAllows taxable gain to be reported as cash is received, not when transaction completed

40 © 2003 South-Western College PublishingTransparency 8-40 Taxable Gain = Realized Gain Contract price where, Realized Gain = Sales Price less: Selling Expense less: §1245 or §1250 Recapture less: Adjusted Basis and, Contract Price = Sales Price – Assumed Liabilities Installment Sales Computations x Cash

41 © 2003 South-Western College PublishingTransparency 8-41 Installment Sales Example Baker sold his prize bulls to Larry for $10,000 down and $25,000/year for 4 years (plus interest). Baker had purchased the bulls for $95,000 and had depreciated them $15,000. Realized gain: $110,000 - $0 - $15,000 (§1245 recap) - $80,000 = $15,000 Gross profit percentage: $15,000/$110,000 = 13.64% Taxable gain in year of sale: Capital gain: $10,000 x.1364 = $1,364 Ordinary income (§1245 recap) = $15,000 Taxable gain in subsequent years: $25,000 x.1364 = $3,410 Interest Income would be reported on each years Schedule B

42 © 2003 South-Western College PublishingTransparency 8-42 Objective Have a basic understanding of several provisions allowing deferral or non-recognition of gain or loss on disposition of an asset

43 © 2003 South-Western College PublishingTransparency 8-43 §1031 Like-Kind Exchanges rNo gain/loss is recognized when an exchange of like-kind property occurs, { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_43.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-43 §1031 Like-Kind Exchanges rNo gain/loss is recognized when an exchange of like-kind property occurs,

44 © 2003 South-Western College PublishingTransparency 8-44 Like Kind Exchanges (models) rRealized Gain = FMV of property received – adjusted basis of property given up rRecognized Gain = Lesser of (1) gain realized, or (2) boot received rBasis of new property = Adjusted basis of property given up + boot paid – boot received + gain recognized

45 © 2003 South-Western College PublishingTransparency 8-45 Barry exchanges his apartments for Adolphs land. The apartments have a FMV $250,000 and an adjusted basis of $175,000. The land has a FMV of $305,000. Barry also gives $25,000 cash. What is Barrys realized gain, recognized gain, and new basis in the land? Realized gain: $305,000 – ($175,000 + $25,000) = $105,000 Recognized gain: $0 since no boot was received Basis for land: ($175,000 + $25,000) +$0 – $0 + $0 = $200,000 Like Kind Exchange Example

46 © 2003 South-Western College PublishingTransparency 8-46 Involuntary Conversions rWhen a taxpayer involuntarily disposes of property due to an act of God, theft, condemnation, etc., gain does not need to be recognized if: { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_46.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-46 Involuntary Conversions rWhen a taxpayer involuntarily disposes of property due to an act of God, theft, condemnation, etc., gain does not need to be recognized if:

47 © 2003 South-Western College PublishingTransparency 8-47 Sale of Personal Residence Post-5/6/97 rNo gain need be recognized on sale of home, as long as taxpayer has used it as a personal residence for two of the last five years rGain exclusion is up to $500,000 (MFJ) or $250,000 (S) { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1591390/slides/slide_47.jpg", "name": "© 2003 South-Western College PublishingTransparency 8-47 Sale of Personal Residence Post-5/6/97 rNo gain need be recognized on sale of home, as long as taxpayer has used it as a personal residence for two of the last five years rGain exclusion is up to $500,000 (MFJ) or $250,000 (S)

48 © 2003 South-Western College PublishingTransparency 8-48 Done!


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