Gains & Losses

Question 1

Capital Assets

Answer 1

GAAP not equal to TAX - Section 1231

Capital asset: for tax purposes

• personal property of taxpayer not used in trade or biz
• Real property not used in trade or biz
• copyrights, literary, musical or artistic composition that have been Purchased

………………………………………….
Non-capital asset: Ordinary treatment except where noted
- inventory
- depreciable personal property and real estate used in trade or biz (e.g section 1231 ) - Business used PP&E
- copyrights, literary, musical or artistic composition by Original artist (its inventory to them)

Question 2

Capital gain n loss rule for Individual taxpayers

Answer 2

net capital gain rules

1) long term: more than one year
tax rate 0%,15%, 20%

2) short term = taxed at (higher) ordinary tax rates
3) unrecaptured section 1250 gain = 25% rate
4) collectibles and qualified small business stock (28%)

………………………………….

Net capital loss
- 3k max deduction ( per year/individuals only)
- excess net capital loss
no carryback, carry forward forever

1) personal (nonbiz) bad debt
- short term when worthless (-0-)

2) worthless stock and securities = when totally worthless (-0-)

3) short sales
- results in capital gain/loss
- holding period based on the date the short sale is executed, not the closing date

…………………………………………………….

Netting process for individuals

• short term against net long term, starting 28% group, then 25% group then 0/15/20% group
• net long term form 0/15/20 against starting 28% group, then 25% group then 0/15/20% group
• net long-term 28% against 25% then 0/15/10. remaining 28%
• 25% group can only have LTCGS, not losses

Question 3

C Corporation Capital gains n losses

Answer 3

1) net capital gains: no special /lower rates

2) net capital losses: only allowed to offset/use against capital gains
- net capital losses are carried back 3 years and forward 5 years

Question 4

Long term trade or business use assets (section 1231)

Answer 4

Section 1231

1) net 1231 loss = ordinary loss treatment
- fully deductible against ordinary income
- didn’t take enough depreciation

2) net 1231 gain = capital gain treatment
Corporation = still taxed at 21%
+ve
For C corp - capital gain can be used to offset capital losses
For individuals - preferential tax rates 0/15/20

3) section 1231 five-year-look-back rule
- payback or recapture
- current year net section 1231 gain as ordinary income to the extent of those prior net section 1231 losses.

Question 5

Section 1245 ( personal property) gains only 
= machinery  & equipment

Answer 5

• Recapture accumulated depreciation as ordinary income

lesser of depreciation taken O R
gain recognized

Question 6

Section 1250 (real property) gains only = land and buildings  
for CORP

Answer 6

Section 1250 and section 291 depreciation recapture for C corporations
- 1250 recapture rules no longer apply to real property

FOR C corp , section 291 applies

• recapture as ordinary income equal to 20% of lessor of
  1) recognized gain OR
  2) accumulated straight-line depreciation

291 only applied to C corp

Question 7

Section 1250 recapture for individuals

Answer 7

gain
- overall net section 1231 gain for the year
at 25% (max)

"unrecaptured section 1250 gain"
which is lesser of 
1) recognized gain OR 
2) accumulated depreciation 
taxed at max 25%

Question 8

Summary

Answer 8

look at r3 m3 page 10

Question 9

Installment Sale

HIDE IT
I

Answer 9

recognize when cash is received : even when accural basis

reportable installment sale gain/income

gross profit = sales price - adjusted basis
gross profit % - gross profit / sales price

gain recognized (taxable income) = cash collections ( excluding interest) * gross profit %