Chapter 16 Investment and Personal Financial Planning.

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Chapter 16 Investment and Personal Financial Planning

Business versus Investment Activity  Business activity  Time and talent on regular basis  Profit partially attributable to personal involvement  Income is considered earned income  Losses are fully deductible “above the line”  Hobby losses only deductible to extent of hobby income – personal enjoyment vs. plausible profit motive  Investment activity  Investment of capital rather than time and talent  Income is considered unearned income  Losses are generally deductible only to extent of gains from sale of other investment assets, plus $3,000

Investments in Financial Assets  Common investments in financial securities:  Common and Preferred stock (equity securities)  Savings accounts, CDs, bonds (debt securities)  How do you distinguish between debt vs. equity securities?  Return on / Income from investment includes  Interest (ordinary income)  Dividends  Gains (Losses) on sale of assets.

Gains/Losses on Securities  Realization requires a sale or exchange  Gain/loss = Proceeds - adjusted basis  Character is capital—time period matters  < 1 year holding period → short term capital gain or loss  > 1 year holding period → long-term capital gain or loss  Preferential rates apply to net long-term capital gains  Securities/investment assets: 0-20%  Unrecaptured Section 1250 Recapture: 25%  Collectibles: 28%  Net short-term capital gains taxed as ordinary income  Preferential rates do not apply