Download presentation
Presentation is loading. Please wait.
Published byRandolph Sutton Modified over 9 years ago
1
5-1 ©2008 Prentice Hall, Inc.
2
5-2 ©2008 Prentice Hall, Inc. PROPERTY TRANSACTIONS: CAPITAL GAINS & LOSSES (1 of 2) Determination of gain or loss Basis considerations Definition of a capital asset Tax treatment for capital gains and losses of noncorporate taxpayers Tax treatment for capital gains and losses of corporate taxpayers
3
5-3 ©2008 Prentice Hall, Inc. PROPERTY TRANSACTIONS: CAPITAL GAINS & LOSSES (2 of 2) Sale or exchange Holding period Justification for preferential treatment of net capital gains Tax planning considerations Compliance and procedural considerations
4
5-4 ©2008 Prentice Hall, Inc. Determination of Gain or Loss Gain/Loss Realized (1 of 2) Realized gain or loss Amount realized less the assets’ adjusted basis Amount realized Money + FMV of property received + Taxpayer’s debt assumed by buyer - Costs of sale Amount Realized
5
5-5 ©2008 Prentice Hall, Inc. Determination of Gain or Loss Gain/Loss Realized (2 of 2) Determination of basis Original basis (cost) + Additions (e.g., capital improvements) - Reductions (e.g., depreciation, depletion) Adjusted basis
6
5-6 ©2008 Prentice Hall, Inc. Determination of Gain or Loss Gain/Loss Recognized Recognized gain or loss may be less than realized gain or loss due to special statutory provisions E.g., like-kind exchanges, involuntary conversions
7
5-7 ©2008 Prentice Hall, Inc. Basis Considerations Cost of acquired property Property received as a gift Property received from a decedent Property converted from personal use to business use Allocation of basis
8
5-8 ©2008 Prentice Hall, Inc. Cost of Acquired Property (1 of 2) Generally the beginning basis of an asset Uniform capitalization rules Requires certain period costs to be capitalized that are not capitalized for financial accounting purposes Affect inventory and other property used in a taxpayer’s business
9
5-9 ©2008 Prentice Hall, Inc. Cost of Acquired Property (2 of 2) Capitalization of interest Construction period debt capitalized Applies to real estate and assets with class life ≥ 20 years Identification problems Specific identification may not be possible Tax law requires a FIFO approach
10
5-10 ©2008 Prentice Hall, Inc. Property Received as a Gift (1 of 2) Gain basis Donor’s basis plus a gift tax adjustment Gift tax paid X (FMV at gift time – donor’s basis) Amount of gift Loss basis Lesser of Gain basis or FMV at date of gift
11
5-11 ©2008 Prentice Hall, Inc. Property Received as a Gift (2 of 2) Gain basis used to calculate depreciation Depreciation subtracted from both gain and loss basis upon disposition
12
5-12 ©2008 Prentice Hall, Inc. Property Received from a Decedent Basis of inherited property FMV at date of death, or Alternate valuation date (AVD) Six months from date of death or disposition date if not held for six months
13
5-13 ©2008 Prentice Hall, Inc. Property Converted from Personal Use to Business Use Basis is lower of personal use adjusted basis or property’s FMV at conversion
14
5-14 ©2008 Prentice Hall, Inc. Allocation of Basis (1 of 2) Basket purchase Acquisition cost must be allocated to individual assets on basis of relative FMV Common costs Capitalized and allocated based on relative FMV
15
5-15 ©2008 Prentice Hall, Inc. Allocation of Basis (2 of 2) Nontaxable stock dividends received Allocate basis of old shares to basis of old shares plus new shares Nontaxable stock rights received If FMV of stock rights < 15% of FMV of stock, basis is $0 unless elect to allocate Must allocate if value ≥ 15% of stock’s FMV
16
5-16 ©2008 Prentice Hall, Inc. Definition of a Capital Asset Capital asset defined by §1221 Definition is other than what is listed as NOT a capital asset, including Inventory, depreciable property, real property used in a trade or business Influence of the courts Other IRC provisions relevant to capital gains and losses
17
5-17 ©2008 Prentice Hall, Inc. Influence of the Courts Corn Products Refining CO doctrine Created nonstatutory exception to definition of capital asset when asset purchased for business purposes Arkansas Best Corporation Limited Corn Products doctrine Stock is outside definition of capital asset Motivation for acquiring assets is irrelevant
18
5-18 ©2008 Prentice Hall, Inc. Other IRC Provisions Relevant to Capital Gains and Losses Dealers in securities Securities treated as inventory Real property subdivided for sale Non-dealers in real estate can treat as capital asset Dealers treat as inventory Nonbusiness bad debt Deductible as short-term capital loss
19
5-19 ©2008 Prentice Hall, Inc. Tax Treatment for Capital Gains & Losses of Noncorp Taxpayers Capital gains Adjusted net capital gains (ANCG) Capital losses
20
5-20 ©2008 Prentice Hall, Inc. Capital Gains (1 of 2) Assets held ≤ 1 year are short-term Assets held > 1 year are long-term Net capital gain (NCG) Excess of net LTCG over net STCL NCG may receive favorable tax treatment Must first determine STCG, STCL, LTCG, and LTCL
21
5-21 ©2008 Prentice Hall, Inc. Capital Gains (2 of 2) Net short-term capital gain (NSTCG) Excess of STCGs over STCLs Net short-term capital loss (NSTCL) Excess of STCLs over STCGs Net long-term capital gain (NLTCG) Excess of LTCGs over LTCLs Net long-term capital loss (NLTCL) Excess of LTCLs over LTCGs
22
5-22 ©2008 Prentice Hall, Inc. Adjusted Net Capital Gains (ANCG) Four types of net capital gains 1. Collectibles gain 2. 50% of gain from sale of §1202 stock 3. Unrecaptured §1250 gain 4. All other LTCGs Group 4 gets 5% or 15% rate Groups 1 & 2 taxed at max of 28% Group 3 taxed at max of 25%
23
5-23 ©2008 Prentice Hall, Inc. Capital Losses Net capital losses (NSTCL or NLTCL) offset ordinary income to a $3,000 maximum, with an unlimited carryover to future years Net capital losses applied to net capital gains by groups described previously from highest (28%) to lowest (5% or 15%)
24
5-24 ©2008 Prentice Hall, Inc. Tax Treatment for Capital Gains & Losses of Corp Taxpayers Corporations do not receive preferential tax rates on NCGs Corps cannot deduct net capital losses Corps carryback NCLs 3 years and then carryforward 5 years Capital loss carryovers are treated as STCLs
25
5-25 ©2008 Prentice Hall, Inc. Sale or Exchange Worthless securities Retirement of debt instruments Options Patents Franchises, trademarks, and trade names
26
5-26 ©2008 Prentice Hall, Inc. Worthless Securities Securities that become totally worthless in a tax year are treated as a capital loss on the last day of the year Securities in affiliated corporations Not considered a capital asset
27
5-27 ©2008 Prentice Hall, Inc. Retirement Of Debt Instruments Original issue discount Not treated as capital gain upon retirement Amortized over the life of the bond Applies to cash and accrual taxpayers Market discount bonds Acquired on secondary market Discount treated as ordinary income
28
5-28 ©2008 Prentice Hall, Inc. Options Exercised Basis in option added to basis stock purchased Sold or allowed to expire Treated as sale or exchange
29
5-29 ©2008 Prentice Hall, Inc. Patents Gain may be treated as LTCG Requirements for LTCG treatment Must be transfer of substantially all rights LTCG treatment only applies to holder Individual whose efforts created patent or one who purchases rights from creator
30
5-30 ©2008 Prentice Hall, Inc. Franchises, Trademarks, and Trade Names §1253 treats exchanges of franchises, trademarks, and trade names as exchanges of capital assets Includes renewals
31
5-31 ©2008 Prentice Hall, Inc. Holding Period Property received as a gift Property received from a decedent Always long term Nontaxable exchanges Receipt of nontaxable stock dividends and stock rights
32
5-32 ©2008 Prentice Hall, Inc. Property Received as a Gift If donee’s adjusted basis determined by reference to donor’s adjusted basis Donor’s holding period added to donee’s holding period If donee’s adjusted basis is FMV at date of gift Holding period begins on day after the date of gift
33
5-33 ©2008 Prentice Hall, Inc. Nontaxable Exchanges Holding period of qualified property received generally includes holding period of qualified property given up
34
5-34 ©2008 Prentice Hall, Inc. Receipt of Nontaxable Stock Dividends and Stock Rights Generally includes the holding period of the underlying stock If stock rights are exercised, holding period for stock purchased begins with date of exercise
35
5-35 ©2008 Prentice Hall, Inc. Justification for Preferential Treatment of Net Capital Gains Mobility of capital Mitigation of the effects of inflation and the progressive tax system Lowers the cost of capital
36
5-36 ©2008 Prentice Hall, Inc. Tax Planning Considerations Selection of property to transfer by gift Consider annual exclusion Unwise to gift depreciated property Selection of property to transfer at time of death Retain highly appreciated property until death Sell loss property before death
37
5-37 ©2008 Prentice Hall, Inc. Compliance and Procedural Considerations Capital gains and losses reported by individuals on Schedule D To improve compliance, brokers required to furnish IRS with info pertaining to each customer Reported to taxpayer on Form 1099-B Use Schedule D to reconcile amounts shown on Form 1099-B
38
Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 5-38 ©2008 Prentice Hall, Inc.
Similar presentations
© 2025 SlidePlayer.com. Inc.
All rights reserved.