Unit 7: Capital Gains and Losses

Question 1

Forms used to report gains or losses on Capital Assets

Answer 1

Schedule D, Capital Gains and Losses

Form 8949, Sales and Other Dispositions of Capital Assets

Question 2

Rules for reporting capital gains or loss

Answer 2

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

Question 3

Definition of noncapital assets

Answer 3

assets held for business use or created for profit

Question 4

Form used to to report sale of noncapital assets

Answer 4

Form 4797, Sale of Business Property

Question 5

What are capital assets?

Answer 5

items owned for personal or investment purposes

Question 6

How do you tax capital gains resulting from sale or disposition of capital assets?

Answer 6

at capital gains tax rates

Question 7

tax treatment of losses and gains from personal-use property

Answer 7

losses are not deductible while gains are usually taxable

Question 8

How costs and losses on noncapital assets treated

Answer 8

costs may be deducted as business expenses when they are sold ; losses are generally deductible

Question 9

holding period for shares of stock acquired from non-taxable dividend or stock-splits

Answer 9

the same holding period as the original shares acquried

Question 10

Holding periods for gifts

Answer 10

the donor’s holding period

Question 11

holding periods for inherited property

Answer 11

automatically treated as long-term

Question 12

How to determine the gain or loss on sale or trade of stock or property?

Answer 12

compare the amount realized with the adjusted basis of the property

Question 13

carryover rule

Answer 13

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

Question 14

Allowable capital loss deductions for 1. MFJ 2. MFS

Answer 14

1. $3,000

2. $1,500

Question 15

Tax rate on capital gain distribution resulting from investments mad eby the mutual fund

Answer 15

LT capital gains rate

Question 16

What is the definition of a Wash Sale?

Answer 16

when an investor sells a security to claim a capital loss, only to repurchase it again very soon thereafter

Question 17

Wash sale rule

Answer 17

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

Question 18

Items used to determine the basis and figure the gain or loss on the sale of a primary residence

Answer 18

selling price

amount realized

basis

adjusted basis

Question 19

Form used to report real estate proceeds

Answer 19

Form 1099-S, Proceeds from Real Estate Transactions

Question 20

What is the definition of “amount realized”

Answer 20

Selling price - selling expenses

Question 21

What is the basis in a home?

Answer 21

determined by how the taxpayer obtained the home

Question 22

What is a home’s adjusted basis?

Answer 22

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

Question 23

What are the rules for losses on sale of a primary residence?

Answer 23

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

Question 24

What are the rules for gains on sale of a primary residence?

Answer 24

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

Question 25

what is the rule on depreciating personal-use property?

Answer 25

they are never used to reduce the basis

Question 26

what is a related party transaction ?

Answer 26

these are transactions between 2 parties joined by a special relationship

Question 27

What is the “more than 50% control” rule?

Answer 27

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

Question 28

Related-party transaction rules

Answer 28

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

Question 29

Related parties where losses from sale/or trades is not deductible

Answer 29

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

Question 30

Gain on Installment sales

Answer 30

selling price greater than the adjusted basis

Question 31

Reporting gains on installment sales

Answer 31

for each received payment, report the interest income and the portion of the payment relating to the gain of the sale

Question 32

Form 8949

Answer 32

Sales and Other Dispositions of Capital Assets

Question 33

Uses of Form 8949?

Answer 33

Sale or exchange of capital assets

Gains from Involuntary conversions (except casualty or theft)

nonbusiness bad debts

worthless securities

Question 34

When can a taxpayer skip filing Form 8949

Answer 34

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

Question 35

Rules for reporting worthless securities

Answer 35

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.