10/22/2015NJ Training TY Capital Gains & Losses (Including Sale of Home) Pub 17 Chapters Pub 4012 Tab 2 Module NJ 1.10

10/22/2015 NJ Training TY Stock Sales – Schedule D Key elements of stock sale When was it bought? When was it sold? What was the sales price? What was the cost basis? Note: Use Tax Wise Capital Gain Worksheet for entering data for each transaction

10/22/2015 NJ Training TY Stock Sales – Capital Gains TaxWise Determines whether long/short term Calculates taxable gain/loss Calculates tax liability on worksheet Calculates capital loss carryover

10/22/2015 NJ Training TY Cost Basis Cost basis is usually cost plus commissions (buy and sell) FIFO unless specified before sale Original basis is adjusted by Stock split or non-taxable stock dividend Cost basis of taxable stock dividends and Dividends Reinvestments (DRIP) is the price of the stock on the distribution date

10/22/2015 NJ Training TY Cost Basis (cont) The cost basis is not reported on the 1099-B Typical sources of the cost basis Year end broker activity statement may provide information as a result of the sale Taxpayer records Average of stock price during approximate period of purchase, if no other records are available Out of scope – determining basis for employee stock options

10/22/2015 NJ Training TY Sales Price Reported on 1099 B - Proceeds From Broker and Barter Exchange Transactions 1099 Consolidated Statement

10/22/2015 NJ Training TY Sales Commissions Commission paid will affect the basis If 1099B reports sale as gross, commission will be added to basis. If 1099B reports sale as net, no adjustment to basis is needed.

10/22/2015 NJ Training TY Gross / Net Proceeds 2007 Gross proceeds – Add fees to cost to get basis Net proceeds – Use original cost basis

10/22/2015 NJ Training TY Consolidated Statement

10/22/2015 NJ Training TY Cost Basis – Question #1 The taxpayer paid $1,000 for 100 shares of XYZ stock. What is his basis per share in XYZ? Answer - $10 per share

10/22/2015 NJ Training TY Cost Basis – Question #2 The taxpayer who paid $1,000 for 100 shares of XYZ stock received a 2 for 1 stock split. What is his adjusted basis per share in XYZ? Answer - $5 per share

10/22/2015 NJ Training TY Commissions – Question #3 The taxpayer sells all 200 shares of XYZ stock receiving $7 per share minus a total commission of $15. If the 1099B reports gross proceeds, what will be the sales price and the basis? Answer: $1,400 selling price minus $1,015 cost basis (gain=$385)

10/22/2015 NJ Training TY Commissions – Question #4 The taxpayer sells all 200 shares of XYZ stock receiving $7 per share less a total commission of $15. If the 1099B reports net proceeds, what will be the sales price and the basis? Answer: $1,385 selling price $1,000 basis (gain is still $385)

10/22/2015 NJ Training TY Long vs Short Term Stock held one year or less is short-term – begin counting the day after the trade date If sale of all shares bought on various dates at different prices (multiple blocks) and all were long term Enter “Various” in Tax Wise Purchase Date column This type of transaction will automatically be reported as Long Term Enter actual transaction date(s) if short term

10/22/2015 NJ Training TY Long vs Short Term (cont) Shares acquired in tax-free stock dividend or stock split have same holding period as original shares Holding period for taxable stock dividends and Dividend Reinvestments (DRIP) are the date of declaration. They do not revert to the holding period of the original stock

10/22/2015 NJ Training TY Problem #1 – Stock Split 6/01/08: 100 shares of XYZ bought at $100 per share Cost basis is $100 x 100 shares = $10,000 6/01/09: 2 for 1 (2:1) Stock Split All 200 shares have the $10,000 basis and all have the same purchase date If sold on 6/01/09, is the transaction a short or long term transaction. ANSWER: Short term i.e. 6/02/08 to 06/01/09 is less than a year

10/22/2015 NJ Training TY Problem #2 – Reinvested Taxable Dividend 9/20/07: 200 shares of XYZ bought at $40 per share. Basis is $8,000 6/20/09: 20 shares worth $30/share are received as DRIP (20 at $30=$600) The cost basis of the original 200 share remains at $8,000 with an acquisition date of 9/20/07 The cost basis of the 20 shares received as a DRIP is $600 and has the acquisition date of 6/20/09

10/22/2015 NJ Training TY Capital Gains Tax Rates (0% new in 2008, extended thru 2010) NOTES: WHEN USING VA/RI/OUS OR IN/HE/RIT AS PURCHASE DATE, TAXWISE ASSUMES THAT THE TRANSACTION IS LONG TERM (MORE THAN ONE YEAR) 15%0% in 2009 QUALIFIED DIVIDENDS 15%0% in 2009 LONG TERM (Greater than 12 months) ORDINARY RATE SHORT TERM (12 months or less) Other Brackets10% or 15% Brackets TAXPAYER IN: CAPITAL GAINS RATES FOR 2009

10/22/2015 NJ Training TY Tax Liability Net Loss Net loss can offset all gains, plus Up to $3,000 can be used to reduce other taxable income in the current year ($1,500 if MFS) The amount in excess of $3,000 (or $1,500 if MFS) is carried forward to the next year Note: Loss not allowed on NJ return

10/22/2015 NJ Training TY Capital Loss Carry Forward Check prior year Schedule D or related worksheet to determine carryover loss Carryover losses keep their short-term or long-term classification Carryover losses are combined with the gains and losses that actually occur in the subsequent year There is no limit to how many times a loss can be carried forward but the maximum loss (i.e. $3,000) must be used each year even if no there is no tax liability to offset. If not used, the $3,000 deduction is lost

10/22/2015 NJ Training TY Capital Loss Carry Forward Schedule D – Worksheet 2 Required For Next Years Returns 2008 Short Term Carry Forward Long Term Carry Forward

10/22/2015 NJ Training TY Capital Gain Distributions These distributions result when mutual funds that sold stock pass resulting gains to TP each year Treated as long-term capital gain If these are the only capital gains, no Schedule D required Reported on 1099-DIV or broker’s Consolidated Statement

10/22/2015 NJ Training TY DIV Dividends and Distributions 2008

10/22/2015 NJ Training TY Consolidated Statement

10/22/2015 NJ Training TY Demutualization Demutualization occurs when insurance company is changed from a “mutual company” to a “stock company” and issues stock to policy holders in the new company Basis of stock issued is always $0.00 When sold, stock is always long term

SCHEDULE K-1 CAPITAL GAINS AND LOSSES Schedule K-1 Net short-term capital gain (loss) Net long-term capital gain (loss) Use Schedule D Enter short-term on line 5 Enter long-term on line 12 Sample K-1s (may vary)

SAMPLE SCHEDULE K-1

10/22/2015 NJ Training TY Wash Sales – Out Of Scope Wash sales – Occurs when stock is sold at a loss, and then within 30 days, (either before or after) substantially equivalent stock is purchased Loss is not deductible

10/22/2015 NJ Training TY Capital Gain/Loss Problem #3 Jim sold a mutual fund he purchased 8/15/1983. The records show he reinvested capital gains totaling $8,640, interest totaling $6,940 and dividends of $3,298. All reinvestments qualify for LTCG. His purchase price was $20,000. He sold this fund for $39,201 on 11/15/2009 What is his capital gain?

10/22/2015 NJ Training TY Capital Gain/Loss Problem #3 Answer

10/22/2015 NJ Training TY Sale Of Home Define Main Home Determine if taxpayer who sold a main home this year qualifies to exclude all or part of any gain from income

10/22/2015 NJ Training TY Main Home Determined by facts – not by choice Where TP resides most of the time If TP is living in a rental, the rental might be considered the main home Other places may qualify (house, boat, mobile home, apt, condo, etc) Land sale does not qualify

10/22/2015 NJ Training TY Sale Of Business/Rental Property - OUT OF SCOPE

10/22/2015 NJ Training TY Calculate Gain Selling price includes all monies received plus any mortgages or other debts taken over by the buyer Amount Realized is the sale price minus selling expenses Adjusted Basis is the original cost plus any increase or decrease to original basis Gain or loss is the amount realized compared to the adjusted basis Loss on sale of home can not be deducted A lot of useful information can be gleaned from the HUD-1 form given to all buyers and sellers

10/22/2015 NJ Training TY S May Not Be Provided If Can Exclude Total Gain 2008

10/22/2015 NJ Training TY Calculate Exclusion Single homeowner can exclude up to $250,000 of gain from sale of main home Married couple can exclude up to $500,000 of gain, if: Filed a joint return Either or both meet the ownership test Both individuals meet the use test Neither individual excluded gain in the 2 years before the current sale New: Sale of home within 2 years of spousal death

10/22/2015 NJ Training TY Ownership And Use Tests Ownership Test: Owned by the taxpayer for a combined period of at least 2 years out of the last 5 years, ending on the date of sale AND Use Test: Lived in home as the taxpayer’s main home for at least 2 years of that 5 year period