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Transcript of 5-1 ©2008 Prentice Hall, Inc.. 5-2 ©2008 Prentice Hall, Inc. PROPERTY TRANSACTIONS: CAPITAL GAINS...
5-1©2008 Prentice Hall, Inc.
©2008 Prentice Hall, Inc. 5-2
PROPERTY PROPERTY TRANSACTIONS: CAPITAL TRANSACTIONS: CAPITAL
GAINS & LOSSESGAINS & LOSSES (1 of 2) (1 of 2)
Determination of gain or lossBasis considerationsDefinition of a capital assetTax treatment for capital gains and
losses of noncorporate taxpayersTax treatment for capital gains and
losses of corporate taxpayers
©2008 Prentice Hall, Inc. 5-3
PROPERTY PROPERTY TRANSACTIONS: CAPITAL TRANSACTIONS: CAPITAL
GAINS & LOSSESGAINS & LOSSES (2 of 2) (2 of 2)
Sale or exchangeHolding periodJustification for preferential
treatment of net capital gainsTax planning considerationsCompliance and procedural
considerations
©2008 Prentice Hall, Inc. 5-4
Determination of Gain or Determination of Gain or LossLoss
Gain/Loss Realized (1 of 2)Gain/Loss Realized (1 of 2)
Realized gain or lossAmount realized less the assets’
adjusted basisAmount realized
Money+ FMV of property received + Taxpayer’s debt assumed by buyer- Costs of sale
Amount Realized
©2008 Prentice Hall, Inc. 5-5
Determination of Gain or Determination of Gain or LossLoss
Gain/Loss Realized (2 of 2)Gain/Loss Realized (2 of 2)
Determination of basis Original basis (cost)
+ Additions (e.g., capital improvements)
- Reductions (e.g., depreciation, depletion) Adjusted basis
©2008 Prentice Hall, Inc. 5-6
Determination of Gain or Determination of Gain or LossLoss
Gain/Loss RecognizedGain/Loss Recognized
Recognized gain or loss may be less than realized gain or loss due to special statutory provisionsE.g., like-kind exchanges,
involuntary conversions
©2008 Prentice Hall, Inc. 5-7
Basis ConsiderationsBasis Considerations
Cost of acquired propertyProperty received as a giftProperty received from a
decedentProperty converted from personal
use to business useAllocation of basis
©2008 Prentice Hall, Inc. 5-8
Cost of Acquired Property(1 of 2)
Generally the beginning basis of an asset
Uniform capitalization rulesRequires 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
©2008 Prentice Hall, Inc. 5-9
Cost of Acquired Property(2 of 2)
Capitalization of interestConstruction period debt capitalized
Applies to real estate and assets with class life ≥ 20 years
Identification problemsSpecific identification may not be
possibleTax law requires a FIFO approach
©2008 Prentice Hall, Inc. 5-10
Property Received as a Gift(1 of 2)
Gain basisDonor’s basis plus a gift tax adjustmentGift tax paid X (FMV at gift time – donor’s basis)
Amount of gift
Loss basisLesser of
Gain basis or FMV at date of gift
©2008 Prentice Hall, Inc. 5-11
Property Received as a Gift(2 of 2)
Gain basis used to calculate depreciationDepreciation subtracted from both
gain and loss basis upon disposition
©2008 Prentice Hall, Inc. 5-12
Property Received from a Decedent
Basis of inherited propertyFMV at date of death, orAlternate valuation date (AVD)
Six months from date of death or disposition date if not held for six months
©2008 Prentice Hall, Inc. 5-13
Property Converted from Personal Use to Business
Use
Basis is lower of personal use adjusted basis or property’s FMV at conversion
©2008 Prentice Hall, Inc. 5-14
Allocation of Basis(1 of 2)
Basket purchaseAcquisition cost must be allocated
to individual assets on basis of relative FMV
Common costsCapitalized and allocated based
on relative FMV
©2008 Prentice Hall, Inc. 5-15
Allocation of Basis(2 of 2)
Nontaxable stock dividends receivedAllocate basis of old shares to basis of old
shares plus new sharesNontaxable stock rights received
If FMV of stock rights < 15% of FMV of stock, basis is $0 unless elect to allocateMust allocate if value ≥ 15% of stock’s FMV
©2008 Prentice Hall, Inc. 5-16
Definition of a Capital Definition of a Capital AssetAsset
Capital asset defined by §1221Definition is other than what is listed
as NOT a capital asset, includingInventory, depreciable property, real
property used in a trade or business
Influence of the courtsOther IRC provisions relevant to
capital gains and losses
©2008 Prentice Hall, Inc. 5-17
Influence of the Courts
Corn Products Refining CO doctrineCreated nonstatutory exception to
definition of capital asset when asset purchased for business purposes
Arkansas Best CorporationLimited Corn Products doctrine
Stock is outside definition of capital assetMotivation for acquiring assets is irrelevant
©2008 Prentice Hall, Inc. 5-18
Other IRC Provisions Relevant to Capital Gains
and Losses
Dealers in securitiesSecurities treated as inventory
Real property subdivided for saleNon-dealers in real estate can treat
as capital assetDealers treat as inventory
Nonbusiness bad debtDeductible as short-term capital loss
©2008 Prentice Hall, Inc. 5-19
Tax Treatment for Capital Tax Treatment for Capital Gains & Losses of Gains & Losses of
Noncorp TaxpayersNoncorp Taxpayers
Capital gainsAdjusted net capital gains
(ANCG)Capital losses
©2008 Prentice Hall, Inc. 5-20
Capital Gains(1 of 2)
Assets held ≤ 1 year are short-termAssets held > 1 year are long-termNet capital gain (NCG)
Excess of net LTCG over net STCLNCG may receive favorable tax
treatmentMust first determine STCG, STCL,
LTCG, and LTCL
©2008 Prentice Hall, Inc. 5-21
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
©2008 Prentice Hall, Inc. 5-22
Adjusted Net Capital Gains (ANCG)
Four types of net capital gains1. Collectibles gain2. 50% of gain from sale of §1202 stock3. Unrecaptured §1250 gain4. 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%
©2008 Prentice Hall, Inc. 5-23
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%)
©2008 Prentice Hall, Inc. 5-24
Tax Treatment for Capital Tax Treatment for Capital Gains & Losses of Corp Gains & Losses of Corp
TaxpayersTaxpayers
Corporations do not receive preferential tax rates on NCGs
Corps cannot deduct net capital losses
Corps carryback NCLs 3 years and then carryforward 5 yearsCapital loss carryovers are treated as
STCLs
©2008 Prentice Hall, Inc. 5-25
Sale or ExchangeSale or Exchange
Worthless securitiesRetirement of debt instrumentsOptionsPatentsFranchises, trademarks, and
trade names
©2008 Prentice Hall, Inc. 5-26
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 corporationsNot considered a capital asset
©2008 Prentice Hall, Inc. 5-27
Retirement Of Debt Instruments
Original issue discountNot treated as capital gain upon
retirementAmortized over the life of the bond
Applies to cash and accrual taxpayers
Market discount bondsAcquired on secondary marketDiscount treated as ordinary income
©2008 Prentice Hall, Inc. 5-28
Options
ExercisedBasis in option added to basis
stock purchasedSold or allowed to expire
Treated as sale or exchange
©2008 Prentice Hall, Inc. 5-29
Patents
Gain may be treated as LTCGRequirements 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
©2008 Prentice Hall, Inc. 5-30
Franchises, Trademarks, and Trade Names
§1253 treats exchanges of franchises, trademarks, and trade names as exchanges of capital assetsIncludes renewals
©2008 Prentice Hall, Inc. 5-31
Holding PeriodHolding Period
Property received as a giftProperty received from a
decedentAlways long term
Nontaxable exchangesReceipt of nontaxable stock
dividends and stock rights
©2008 Prentice Hall, Inc. 5-32
Property Received as a Gift
If donee’s adjusted basis determined by reference to donor’s adjusted basisDonor’s holding period added to donee’s
holding period If donee’s adjusted basis is FMV at date
of giftHolding period begins on day after the date
of gift
©2008 Prentice Hall, Inc. 5-33
Nontaxable Exchanges
Holding period of qualified property received generally includes holding period of qualified property given up
©2008 Prentice Hall, Inc. 5-34
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
©2008 Prentice Hall, Inc. 5-35
Justification for Justification for Preferential Treatment of Preferential Treatment of
Net Capital GainsNet Capital Gains
Mobility of capitalMitigation of the effects of
inflation and the progressive tax system
Lowers the cost of capital
©2008 Prentice Hall, Inc. 5-36
Tax Planning Tax Planning ConsiderationsConsiderations
Selection of property to transfer by giftConsider annual exclusionUnwise to gift depreciated property
Selection of property to transfer at time of deathRetain highly appreciated property until
deathSell loss property before death
©2008 Prentice Hall, Inc. 5-37
Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations
Capital gains and losses reported by individuals on Schedule D
To improve compliance, brokers required to furnish IRS with info pertaining to each customerReported to taxpayer on Form 1099-BUse Schedule D to reconcile amounts
shown on Form 1099-B
Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s
Kenneth W. Monfort College of [email protected]
5-38©2008 Prentice Hall, Inc.