Unit 7: Capital Gains and Losses Flashcards
Forms used to report gains or losses on Capital Assets
Schedule D, Capital Gains and Losses
Form 8949, Sales and Other Dispositions of Capital Assets
Rules for reporting capital gains or loss
report gains or losses in the year of the sale
net capital gains with capital losses in the same year
up to $3,000 net losses can be deducted against Ordinary Income in a tax year
Definition of noncapital assets
assets held for business use or created for profit
Form used to to report sale of noncapital assets
Form 4797, Sale of Business Property
What are capital assets?
items owned for personal or investment purposes
How do you tax capital gains resulting from sale or disposition of capital assets?
at capital gains tax rates
tax treatment of losses and gains from personal-use property
losses are not deductible while gains are usually taxable
How costs and losses on noncapital assets treated
costs may be deducted as business expenses when they are sold ; losses are generally deductible
holding period for shares of stock acquired from non-taxable dividend or stock-splits
the same holding period as the original shares acquried
Holding periods for gifts
the donor’s holding period
holding periods for inherited property
automatically treated as long-term
How to determine the gain or loss on sale or trade of stock or property?
compare the amount realized with the adjusted basis of the property
carryover rule
unused losses above $3,000 is carried over to later years indefinitely until the taxpayer’s death. They are combined with gains or losses that occur in the next year and retain their character as ST or LT
Allowable capital loss deductions for 1. MFJ 2. MFS
- $3,000
2. $1,500
Tax rate on capital gain distribution resulting from investments mad eby the mutual fund
LT capital gains rate
What is the definition of a Wash Sale?
when an investor sells a security to claim a capital loss, only to repurchase it again very soon thereafter
Wash sale rule
A TP cannot deduct a loss on the sale of an investment if a substantially identical investment is purchased within 30 days before or after a sale. If the loss is disallowed, the loss must be added to the basis of the new stock or securities. This postpones the loss deduction until later disposition
Items used to determine the basis and figure the gain or loss on the sale of a primary residence
selling price
amount realized
basis
adjusted basis
Form used to report real estate proceeds
Form 1099-S, Proceeds from Real Estate Transactions
What is the definition of “amount realized”
Selling price - selling expenses
What is the basis in a home?
determined by how the taxpayer obtained the home
What is a home’s adjusted basis?
The taxpayer’s basis in the home + additions or improvements to the home that have a useful life of more than a year less deductible casualty losses, credits, and product rebates
What are the rules for losses on sale of a primary residence?
if the amount realized on the sale of a home is less than the adjusted basis, the difference is a loss . a loss on the sale of a primary residence can never be deducted
What are the rules for gains on sale of a primary residence?
amount realized on the sale is more than the adjusted basis and all or part of the gain may be excluded. parts that are not excluded are subject to ST or LT capital gains rates
what is the rule on depreciating personal-use property?
they are never used to reduce the basis
what is a related party transaction ?
these are transactions between 2 parties joined by a special relationship
What is the “more than 50% control” rule?
if a TP controls > 50% of a corporation or partnership, any property transactions between the taxpayer and the business are subject to related party transaction rules
Related-party transaction rules
In general, a loss on the sale of property between related parties is not deductible.
When the property is later sold to an unrelated party by the original party buyer, a gain is recognized only to the extent it is more than the disallowed loss to the original party seller.
If the property is later sold by the original party buyer , the loss that was disallowed to the related party cannot be recognized
Related parties where losses from sale/or trades is not deductible
immediate family such as spouse, siblings, half-siblings, direct ancestors, and lineal descendants
partnership or corporation the TP controls including part ownership by family members
tax-exempt or charity controlled by TP or member of the family
losses on sales between certain closely related trusts or business entities controlled by the same owners
Gain on Installment sales
selling price greater than the adjusted basis
Reporting gains on installment sales
for each received payment, report the interest income and the portion of the payment relating to the gain of the sale
Form 8949
Sales and Other Dispositions of Capital Assets
Uses of Form 8949?
Sale or exchange of capital assets
Gains from Involuntary conversions (except casualty or theft)
nonbusiness bad debts
worthless securities
When can a taxpayer skip filing Form 8949
If he receives Form 1099-B that shows basis was reported to the IRS and doesn’t show a nondeductible was sale in box 1g and he doesn’t need to make any adjustments to the basis or type of gain or loss reported on form 1099-B, or to his gain or loss
Rules for reporting worthless securities
TP is allowed to amend a tax return up to 7 years to claim a loss to offset othe rtaxable income
Report on Form 8949 and write “Worthless” in the applicable column.
