Capital Assets

Everything is a Capital Asset

Except

1. Inventory

2. Property held for sale in a trade or business

3. Real or depreciable property used a trade or business

4. Accounts or notes receivable in a trade or busines

5. Copyrights

6. Certain U.S. government publications

Capital Assets

Dealer property such as real estate agent who sells houses or business that sells machinery are not capital assets and receive ordinary treatment.

Sale of Capital Assets

The taxpayer can recognize either a gain or loss from the sale of a capital asset:

Example 1 _____________sales stock for $10,000 with an adjusted basis of $11,000. the result is a $1,000 loss

Example 2 _________sales stock for $15,000 with an adjusted basis kof $11,000. the reuslt is a $4,000 gain.

Computation of Amount Realized and Gain/Loss Realized

AMOUNT REALIZED GAIN REALIZED

+ money received

+ FMV of other

property received

-money or other

property

-selling expenses

-liabilities assumed Amount Realized

-Adjusted Basis

Gain/Loss Realized

Capital Gain Rates

0% if taxpayer is in the 10-15% bracket

15% if taxpayer is in the 25-35% bracket

20% if taxpayer is in the 39.6% bracket

25% for 1245 and 1250 Property

28% for 1202 assets

Partial Schedule D

Part I Short Term Capital Gains and Losses held one year or less

Line la total for all short term transaction on form 1099B Gain/Loss_______________

Line 7 Net short term capital Gain/Loss_______________

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Part II Long Term Capital Gain/Loss

Assets held more than one year _______________________

Line 8a Total for all long term transactions reported on form 1099B Gain/Loss_______________

Line 11 Gain from 4797 from form 2439 _______________________

Line 13 Capital Gain Distributions _______________________

Line 15 Net long term capital gain or loss Gain/Loss_______________

Let's Look at Terms for Capital Assets

Short Term-Ordinary Income

1. STCG-is short term capital gain

2. STCL-is short term loss

3. Net STCL-is net short term capital loss. Gain offset by short term capital losses. It means that losses exceed gains.

4. Net STCG-is net short term capital gain. Short term gains exceed short term losses.

Long Term-Preferential Rates

1, LTCG-is long term capital gain

2. LTCL-is long term capital loss

3. NCG-net capital gain. It is the excess of net LTCG over the net STCL.

Must remember that: NCG which receives preferential treatment cannot be combined with STCG which is ordinary income taxed at 100%.

Computation of Losses to Offset Capital Gains

* To offset long term capital gains with losses, one must first categorize long term capital gain in the appropriate

percentage bracket.

* Gains and Losses within the same % bracket are netted.

* If there is net loss then apply the loss to the highest percentage gain first and the to the next highest percentage gain

Example 1

The taxpayer in year one has a 15% loss in the amount of $10,000, a 28% gain in the amount of $8,000

and a 25% gain in the amount of $5,000.

The $10,000 Loss is first applied to the highest % up to the amount of gain and any remaining loss is applied to the next highest % as follows:

15 % loss of $10,000

28% Gain $8,000 (8,000) = 0

25% gain 5,000 (2,000) = 3,000

The entire loss of $10,000 is used to offset gain. First eliminating the 28% gain and then eliminating $3,000 of the 25% gain.

Answer: The only gain remaining after the offset of the loss is $3,000 in the 25% basket. The entire $10,000 loss is eliminated.

Example 2

Facts: The taxpayer in year one has long term capital carryover of $1,000, net short term capital loss of $2,000, $1,000 gain in the 28% bracket and $5,000 in the 15% bracket. The losses are applied as follows:

1. L/t C/0 $1,000

2. NSTCL $2,000

3. 28% $1,000 Gain

The L/T C/O offsets the 28% bracket in the amount of $1,000 = 0 in 28% bracket

4. 15% $5,000 Gain The NSTCL offsets the 15% gain in the amount of $2,000 = 3,000 in 15% bracket

Answer: The losses eliminate the 28% gain leaving $3,000 gain in the 15% bracket.

Points to Remember

For corporations, all capital gain ST or LT is taxed at the corporation's regular tax rate. In other words,

corporation do not receive preferential treatment. Only individuals receive this treatment.

However, corporate capital losses may be used to offset capital gains each year. A corporation must carry the excess capital los back 3 years and forward 5 years and characterize all carryovers as short term capital loss regardless of character.

Undistributed Capital Gains

1. Undistributed capital gains come from some Mutual funds and Reits who keep their long term capital gains and pay tax on them.

2. You treat your share of these gains reported to you on form 2439 instead of form 1099 as distributions on line 11 Schedule D, even though you did not actually receive them.

3. You report the tax paid by Mutual Funds or Reits as a credit on line 65 form 1040. the difference between the two increases the basis.

Example: _________ with a basis of $2,000 received undistributed capital gains of $1,000 and the Mutual Fund paid 500 in taxes.

Schedule D line 11 1040 Line 65, Credit

$1,000 Minus $500 = $500

Original basis of $2,000 is increased by $500. New basis is $2,500

Comparison of 1202 and 1244

Small Business Stock

1202 1244 ______________

Deals with Gain Deals with Loss

a. Stock acquired after 8-10-93 and held Sale of 1244 stock allows the taxpayer to

for more than 5 years = 50% exclusion of deduct 100% loss as ordinary income.

gain.

b. Stock acquired after 2-17-2009 and

before 9-28-2010 = 75% exclusion of

gain

c. Stock acquired after 9-27-2010 =

100% exclusion of gain

______________________________________________________________________________________________________________________

1202 Asset Limits:

Must be domestic C corporation Amount of money and other property

with aggregate gross assets not contributed to capital cannot exceed

exceeding 50 million 1 million

___________________________________________________________________________

80% of assets must be for active conduct

of the business N/A

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Annual gain exclusion per year for taxpayer The shareholder must be the original ower of the qualified stock.

is limited to the greater of 10 million or The loss is limited to $50,000 or $100,000 if Married fiing joint.

10 times the adjusted basis of the qualified

stock.

______________________________________________________________________________________________________________________

80% of the assets must be for the active

conduct of the business N/A

______________________________________________________________________________________________________________________

The 50% and 75% exclusions The loss is taken at 100%

are not taxable. However, the

remaining portions of

50% and 25% are taxed at 28%

rate. Investments without stock are not

eligibile

______________________________________________________________________________________________________________________

AMT Preference is 7% of the No AMT

excluded gain and

no credit allowed

______________________________________________________________________________________________________________________

1202 Gain Rollover:

Applies to amounts that are 1244 no rollover. Remember that 1244 applies to loss not gain. No purpose

not excluded. The 50% and 75% gain for rollover when you can exclude 100% of the loss.

excluded, leaves 50% and 25% to be

taxed at the 28% rate which can be

avoided if other small business stock

is purchased within 60 days.

For those who can exclude

100% of the gain there is

No purpose for rollover.

______________________________________________________________________________________________________________________

The shareholders with 100% exclusion N/A

are not concerned with rollover.

________________________________________________________________________________________________________________________

Schedule D 28% rate form 4797 and Schedule D for

loss

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The End