1. Income Tax Fundamentals 2017 Student Slides
CHAPTER 8
Capital Gains and Losses
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2. Define a Capital Asset Capital assets are defined by exception
A capital asset is any asset other
than inventory, receivables, copyrights, certain U.S. Government publications and depreciable or real property used in a trade or business.

3. Realized Gains/Losses vs. Recognized Gains/Losses
Realization of gain or loss requires the
“sale or exchange” of an asset
Amount realized*
less: Adjusted basis of property*
Realized gain (loss)
less: Allowed gain deferral*
Recognized gain (loss)

4. Tax Treatment for Net Long-term Capital Gains
Study “Capital Gains & Applicable Tax Rates” chart on p. 8-7
Net long-term capital gain (LTCG) rates depend upon regular tax bracket*
Taxed at 0% for taxpayers in 10% or 15% brackets
Taxed at 15% for taxpayers in 25-35% brackets
Taxed at 20% for taxpayers in 39.6% bracket
Unrecaptured depreciation on real estate is taxed at a maximum rate of 25%
Collectibles held more than 12 months are taxed at a maximum rate of 28%
*Additionally, a 3.8% Medicare tax on net investment income, including qualifying dividends, applies to high-income taxpayers with income over certain thresholds.

5. Section 1231 Assets
§1231 assets are not capital assets, but they are given special tax treatment
Asset must be held > 12 months and used in a trade or business and include:
Depreciable real or personal property used in trade or business
Timber, coal, or domestic iron ore
Livestock (not including poultry) held for certain purposes
Unharvested crops on land used in a trade or business

6. Depreciation Recapture
Prevents taxpayers from receiving the dual benefits of a depreciation deduction and capital gain treatment upon sale of the asset
Depreciation recapture requires gains to be treated as ordinary to the extent of prior depreciation deductions
§1245 recapture
§1250 recapture
“Unrecaptured depreciation” previously taken on real estate

7. §1245 Depreciation Recapture
§ 1245 applies to property such as
Depreciable personal property (such as furniture, machines, computers and autos)
Nonresidential real estate placed in service between with accelerated depreciation
Gains are treated as ordinary income to the extent of any depreciation taken
Any gain in excess of depreciation is netted with §1231 gains/losses and given beneficial tax treatment
Very complex rules, this is an overview only

8. Casualty Gains & Losses: Personal
Deductible casualty loss is the lesser of
Property’s adjusted basis or
Decline in the value of the property (repair cost)
This deductible casualty loss is reduced by
Insurance proceeds received
$100 floor (per event)
10% of AGI per year
Shown as an itemized deduction on Schedule A
Casualty gain occurs when insurance reimbursement exceeds the adjusted basis of property

9. Casualty Gains & Losses: Business
Business casualty and theft losses result from damage caused by a sudden, unexpected and/or unusual event
For property fully destroyed, deduct adjusted basis
For property partially destroyed, deduct the lesser of the property’s adjusted basis or the decline in the value
Any insurance reimbursement reduces loss
May cause gain

10. §1031 Like-Kind Exchanges (1 of 2)
No gain/loss recognized when an exchange of like-kind property occurs (deferred gain/loss)
Like-kind property transactions occur when
Exchanging real property for real property or
Exchanging personal property for personal property of the same asset class
Rules only apply to business or investment property

11. §1031 Like-Kind Exchanges (2 of 2)
May have some recognized gain if “boot” is received
Boot is defined as cash received in an exchange or any property (inventory, stocks, bonds, or other securities) that is not like-kind
Relief from a liability is also treated as boot received

12. Involuntary Conversions
Gain recognition may be deferred if involuntary disposal of property
Due to an act of God, theft, condemnation, etc.
and
Insurance proceeds are reinvested in qualified replacement property within two years after close of tax year in which conversion occurred
Must recognize gain if insurance proceeds exceed adjusted basis of property
Losses are not deferred

13. Sale of Personal Residence
Exclusion on gain of personal home allowed on sale of home
For sales 5/6/97 or later
If owned and used as principal residence for two of the last five years
Gain exclusion is up to $500,000 (MFJ) or $250,000 (S)