REG 3 - Gains and Losses Flashcards
What are examples of capital assets?
Real and personal property held as INVESTMENT:
- Personal automobile of taxpayer
- Personal property of taxpayer NOT used in trade or business
- Real property of taxpayer NOT used in trade or business
- Copyrights that have been PURCHASED
What are examples of noncapital assets?
- Property normally included in inventory
- Accounts and notes receivable in business
- Copyrights held by original artist
- Depreciable personal property (Section 1231, 1245, 1250)
What is the holding period for individual long-term capital gains? What is the tax rate for individual long-term capital gains?
Holding period - More than one year
Tax rates:
20% - Rich
15% - Average
0% - Poor
What is the holding period for individual short-term capital gains? What is the tax rate for individual short-term capital gains?
Holding period - one year or less
Tax rates:
Treated as ordinary income
What is the maximum amount a capital loss can be deducted by individual taxpayer?
$3,000 loss against ordinary income
What happens to excess loss over $3,000 maximum deduction?
- No carryback
- Carryforward forever
What is the holding period for personal (nonbusiness) bad debt?
Holding period - short-term in the year debt becomes totally worthless
How do capital gains for corporations get treated? Is there a special tax rate like individuals?
- There is no special tax rate like individuals
- They are added to ordinary income and taxed at regular rate
How do capital losses for corporations get treated?
- Capital losses for corporations can only be offset by capital gains
- Capital losses can be carried back three years and forward five years
What is the holding period for Section 1231 gains?
Long-term capital gain
How do Section 1231 losses get treated?
Fully deductible against ordinary income
Define the type of property that is Section 1245? Define the type of property that is Section 1250?
Section 1245 - Personal property (in a trade or business for more than 12 months)
Section 1250 - Real property (in a trade or business for more than 12 months)
How are gains treated for Section 1245?
1) Accumulated depreciation is treated as ordinary income.
2) The remaining gain is treated as 1231 gain (long-term capital gain)
E.g. Taxpayer sells machine for $102,000 with an original price of $100,000 and accumulated depreciation of $47,525 (NBV = $52,475).
- The recognized gain is $102,000 - $52,475 = $49,525
1) Of the $49,525, the amount of accumulated depreciation of $47,525 is treated as ordinary income.
2) The $2,000 gain is treated as 1231 long-term gain.
How are gains treated for Section 1250? Corporations
1) The lesser of 20% of recognized OR accumulated depreciation for straight-line is treated as ordinary income
2) The remaining gain is treated as 1231 gain (long-term capital gain)
E.g. Corporation sells building for $95,000 with an original price of $100,000 and accumulated depreciation of $15,000 (NBV = $85,000).
- The recognized gain is $95,000 - $85,000 = $10,000
1) 20% x $10,000 = $2,000 AND accumulated depreciation = $15,000.
The lesser of the above is $2,000 which is treated as ordinary income.
2) The remaining $8,000 is treated as 1231 gain (long-term capital gain)
How are gains treated for Section 1250? Individuals
1) The lesser of recognized gain OR accumulated depreciation for straight-line is treated as ordinary income and taxed at a maximum of 25%.
E.g. Taxpayer sells building for $95,000 with an original price of $100,000 and accumulated depreciation of $15,000 (NBV = $85,000).
- The recognized gain is $95,000 - $85,000 = $10,000
1) The lesser of the above $10,000 recognized gain and accumulated depreciation of $15,000, $10,000 is treated as ordinary income which is taxed at a maximum of 25%.
