CCH Federal Taxation Comprehensive Topics Chapter 12 Property Transactions: Treatment of Capital and...
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Transcript of CCH Federal Taxation Comprehensive Topics Chapter 12 Property Transactions: Treatment of Capital and...
CCH Federal TaxationComprehensive Topics
Chapter 12Property Transactions:
Treatment of Capital and Section 1231 Assets
©2006, CCH, a Wolters Kluwer business4025 W. Peterson Ave.Chicago, IL 60646-6085800 248 3248www.CCHGroup.com
CCH Federal Taxation Comprehensive Topics 2 of 91
Chapter 12 Exhibits
1. Capital Assets—Definition of “Capital” 2. Capital Assets—Other Definitions 3. Determining the Capital/1231 Gains Rate “Basket” 4. Computing Capital Gain Tax—10% Rate 5. Computing Capital Gain Tax—15% Rate 6. Tax Treatment for Ordinary Income Property and Capital Assets 7. Patents 8. Franchises, Trademarks, and Trade Names 9. Lease Cancellation Payments10. Options—General Rules11. Options—Example12. Subdivided Real Estate Sold by Investors13. Worthless Securities14. Depreciation Recapture—Example 115. Depreciation Recapture—Example 2
Chapter 12, Exhibit Contents A
CCH Federal Taxation Comprehensive Topics 3 of 91
16. Business Asset Dispositions—Template for Problem Solving17. Business Asset Dispositions—Example 118. Business Asset Dispositions—Example 219. The First Netting—Capital Gains and Losses20. The First Netting—Example 121. The First Netting—Example 222. The First Netting—Personal-Use Casualty/Theft Gains/Losses 23. The First Netting—Business/Investment Use Casualty/Theft
Gains/Losses 24. The First Netting—Personal-Use Condemnation Gains/Losses25. The First Netting—Business/Investment-Use Condemnation
Gains/Losses26. The First Netting—Long-Term Business Assets 27. The First Netting—Recap28. The Second Netting—Examples29. The Second Netting—Recap of the Rules30. Applying the $3,000 Capital Loss Limitation
Chapter 12 Exhibits
Chapter 12, Exhibit Contents B
CCH Federal Taxation Comprehensive Topics 4 of 91
Capital Assets—Definition of “Capital”
The term “capital” has different meanings among different professions. Here are some examples:
Profession Definition of Capital
Financial Accountant “Capital stock” generally refers to the owners equity of a corporation less its retained earnings.
Banker “Capital” generally refers to the total assets of a company at book value.
Investor A “cap” is a quick way of placing an approximate price tag on a company. “Cap” refers to the capitalization of a firm, which can be calculated by multiplying the stock price by the number of shares outstanding. For example, if DEF, Inc. has 10 million shares outstanding priced at $60 each, its capitalization is $600 million.
Chapter 12, Exhibit 1a
CCH Federal Taxation Comprehensive Topics 5 of 91
Some general terms applied by investment brokers to companies with varying capitalization levels are listed below.
Terms Capitalization Level
Large Cap $5 billion or higher
Mid Cap Between $500 million and $5 billion
Small Cap $150 million to $500 million
Micro Cap Less than $150 million
Chapter 12, Exhibit 1b
Capital Assets—Definition of “Capital”
CCH Federal Taxation Comprehensive Topics 6 of 91
“Capital assets” generally refer to any property other than:
1. Ordinary income property (e.g., inventory, receivables,
creative works created by the taxpayer)
2. Depreciable business property (e.g., buildings,
equipment)
3. Non-depreciable business property (e.g., land)
Thus, capital assets would include land held for investment, cars used for personal travel, principal residences, household furnishings, stock, and jewelry. Paintings, manuscripts, and other creative works are capital assets if created by someone other than the taxpayer.
Tax Accountant
Chapter 12, Exhibit 1c
Capital Assets—Definition of “Capital”
CCH Federal Taxation Comprehensive Topics 7 of 91
Capital Assets—Other Definitions
Collectibles Collectibles are defined by the Internal Revenue Code as any of the following investments: works of art, rugs, antiques, gems, metals (e.g., gold, silver), stamps, coins, or alcoholic beverages (e.g., older vintages of wines held for investment). [Code Sec. 408(m)(2)] (Note that works of art, rugs, antiques, and the other items listed above, if held by dealers, are ordinary income property, not collectible investments. Why? Because dealers hold these assets as inventory, not as investments.)
Chapter 12, Exhibit 2a
CCH Federal Taxation Comprehensive Topics 8 of 91
Collectibles
The following rates apply to the sale of collectibles:
1. Ordinary rates for taxpayers in the 10%, 15%, or 25%ordinary income tax brackets;
2. 28% long-term capital gain rate (not the new 15% rate) for
taxpayers above the 25% ordinary income tax bracket.
Capital Assets—Other Definitions
Chapter 12, Exhibit 2b
CCH Federal Taxation Comprehensive Topics 9 of 91
Ordinary Income Property
Ordinary income property includes any property that would result in the recognition of income taxed at the ordinary income rates if the property were sold. Thus, ordinary income property includes inventory, receivables, works of art or manuscripts created by the taxpayer, and capital assets that have been held for one year or less.
Chapter 12, Exhibit 2c
Capital Assets—Other Definitions
CCH Federal Taxation Comprehensive Topics 10 of 91
Code Sec. 1231 Assets. Generally, business assets held over 12 months fall under the category “Section 1231.” These assets include personal and real property, both depreciable and nondepreciable, that are used in a business. Examples include a fleet of delivery trucks, the portion of a car’s basis allocable to business transportation, the portion of a principal residence used for a home office, factory machinery, office computers, land held for future business expansion, warehouses, office buildings, apartment buildings, and rental houses.
Chapter 12, Exhibit 2d
Capital Assets—Other Definitions
CCH Federal Taxation Comprehensive Topics 11 of 91
Long-Term Holding Period
Capital assets held for more than one year are long-term.
Chapter 12, Exhibit 2e
Capital Assets—Other Definitions
CCH Federal Taxation Comprehensive Topics 12 of 91
More than 12 Months. If a capital asset (other than a collectible) or a Code Sec. 1231 asset sold after May 5, 2003, has been held for more than 12 months, it is subject to the 15% capital gains rate (or the 5% rate for taxpayers in the 10% or 15% brackets).
Chapter 12, Exhibit 2f
Capital Assets—Other Definitions
CCH Federal Taxation Comprehensive Topics 13 of 91
Determining the Capital/1231 Gains Rate “Basket”
Long-term capital gains and losses and Section 1231 gains and losses fall into one of five rate “baskets”: 10%, 15%, 20%, 25% and 28%. Two variables, (1) marginal ordinary tax rate, and (2) type of asset sold or exchanged, must be identified in order to determine the appropriate rate basket. Different combinations of these two variables result in different rate baskets.
Chapter 12, Exhibit 3a
CCH Federal Taxation Comprehensive Topics 14 of 91
Two Variables Affecting Rate Baskets
CollectibleAbove 25 %28 %
Code Sec.1231 Assets (to the extent of gain attributable to unrecaptured Code Sec. 1250 depreciation)Above 15 %25 %
Non-Collectible Capital Assets; or Code Sec. 1231 Assets (other than 1231 gain attributable to unrecaptured Code Sec. 1250 depreciation)Above 15 %15 %
Collectibles10%, 15%, or 25%10/15/25 %
Non-Collectible Capital Assets; or Code Sec. 1231 Assets10% or 15 %5%
(2) Type of Asset Sold (1) Marginal
Ordinary RateRate Basket
Chapter 12, Exhibit 3b
Determining The Capital/1231 Gains Rate “Basket”
CCH Federal Taxation Comprehensive Topics 15 of 91
Computing Capital Gain Tax—10% Rate
FACTS: Ben, a single individual, has 2006 taxable income in the amount of $32,000. This amount includes a $4,000 long-term capital gain on stock held over 12 months.
QUESTION: What is Ben’s tax liability for 2006?
SOLUTION: $4,159 as in the following calculations.
Chapter 12, Exhibit 4a
CCH Federal Taxation Comprehensive Topics 16 of 91
Computing Capital Gain Tax—10% Rate
$4,159.00$32,000Totals(g) = (c) + (d) + (e) + (f)
$203.0015%$1,350($4,000 – $2,650)
Long-term cap. gain subject to 15% rate
(f) = (b) – (e)
$133.005%$2,650(Lesser of: $4,000, or
$2,650 = $30,650 – $28,000)
Long-term capital gain subject to 5% rate
(e) = Lesser of:
(b), or $30,650 – (c)
$0.0025% $0(Lesser of: $43,550, or $0 = $32,000 – $4,000 – $28,000)
Ordinary income subject to 25% rate
(d) = Lesser of:
$43,550 (i.e., top 25% bracket for single individuals, $74,200, less top 15% bracket,
$30,650), or (a) – (b) – (c)
$3,823.0010, 15%$28,000 (Lesser of: $30,650, or $28,000=$32,000 – $4,000)
Ordinary income subject to 10% and 15% rates
(c) = Lesser of:
$30,650, or (a) – (b)
$4,000Long-term cap. gain(b)
$32,000Taxable income(a)
TaxTax RateTaxable IncomeDescription
Chapter 12, Exhibit 4b
SOLUTION:
CCH Federal Taxation Comprehensive Topics 17 of 91
Ben’s ordinary income is $28,000 ($32,000 – $4,000). According to the “single individual” rate table, the 10% and 15% tax rates apply to ordinary income up to $30,650. Since Ben’s ordinary income amount of $28,000 is below the $30,650 limit, a portion of his long-term capital gain gets taxed at the favorable 5% rate. The amount subject to the 5% rate is the difference between $30,650 (i.e., the 15% bracket’s upper limit), and $28,000 (i.e., Ben’s actual ordinary income). Any remaining long-term capital gain gets the favorable 15% long-term capital gain rate. Based on the computations above, Ben’s tax liability is $4,159.
Computing Capital Gain Tax—10% Rate
Chapter 12, Exhibit 4c
CCH Federal Taxation Comprehensive Topics 18 of 91
Computing Capital Gain Tax—15% Rate
FACTS: Conor, a single individual, has 2006 taxable income in the amount of $32,000. This amount includes a $2,000 long-term capital gain on stock held over 12 months.
QUESTION: What is Conor’s tax liability for 2006?
SOLUTION: $4,359.00 as shown in the following calculation.
Chapter 12, Exhibit 5a
CCH Federal Taxation Comprehensive Topics 19 of 91
$4,359.00$32,000Totals(g) = (c) + (d) + (e) + (f)
$203.0015%$1,350($2,000 – $650)
Long-term cap. gain subject to 15% rate
(f) = (b) – (e)
$33.005%$650(Lesser of: $2,000, or
$650 = $30,650 – $30,000)
Long-term capital gain subject to 5% rate
(e) = Lesser of:
(b), or $30,650 – (c)
$025% $0(Lesser of:
$43,550, or $0 = $32,000 – $2,000 – $30,000)
Ordinary income subject to 25% rate
(d) = Lesser of:
$43,550 (i.e., top 25% bracket for single individuals, $74,200, less top 15% bracket,
$30,650), or(a) – (b) – (c)
$4,123.0010%, 15%
$30,000 (Lesser of: $30,650, or$30,000 = $32,000 – $2,000)
Ordinary income subject to 10% and 15% rates
(c) = Lesser of:
$30,650, or (a) – (b)
$2,000Long-term cap. gain(b)
$32,000Taxable income(a)
TaxTax RateTaxable IncomeDescription
Computing Capital Gain Tax—15% Rate
Chapter 12, Exhibit 5b
SOLUTION:
CCH Federal Taxation Comprehensive Topics 20 of 91
Computing Capital Gain Tax—15% Rate
Conor’s ordinary income is $30,000 ($32,000 – $2,000). According to the rate tables, all of this $30,000 of ordinary income is subject to 10% and 15% ordinary rates. $650.00 of his long-term capital gain is taxed at 5% and $1,350.00 is taxed at 15%. Based on the computations, Conor must pay $4,359.00 in taxes.
Chapter 12, Exhibit 5c
CCH Federal Taxation Comprehensive Topics 21 of 91
Tax Treatment for Ordinary Income Property and Capital Assets
Accounts receivable
Inventory
Worthless securities held by non-dealers.
* (Holding period always ends on last day of tax year in which securities became worthless)
Worthless securities held by dealers
Non-business bad debts *(always short-term, regardless of holding period.)
Business bad debts
Subdivided real estate sold by investors
Subdivided real estate sold by dealers
Options
Lease cancellation payments received by tenant
Lease cancellation payments received by landlord
Franchises, trademarks, trade names
Patents
Always CapitalSometimes Ordinary Income, Sometimes Capital
Always Ordinary Income
Tax Treatment
Chapter 12, Exhibit 6
CCH Federal Taxation Comprehensive Topics 22 of 91
Patents
Substantial RightsGain or loss on sale of patents receives capital treatment if “all substantial rights” have been sold. Otherwise, gain or loss would get ordinary tax treatment. All substantial rights are deemed to have been sold if there are no restrictions regarding: Geographic areas within the country of issuance Time allowed to use the patent Markets or industries in which patent-related products may be sold Products or inventions related to the patent.
Chapter 12, Exhibit 7a
CCH Federal Taxation Comprehensive Topics 23 of 91
Patents
Holding Period
Regardless of how brief a patent is held, if it receives capital treatment, the holding period is ALWAYS long-term.
Chapter 12, Exhibit 7b
CCH Federal Taxation Comprehensive Topics 24 of 91
Patents
Contingent Payments Are Ok
Patents, unlike franchises, may receive capital treatment, even though the seller's receipt of patent royalties is contingent upon the patent's productivity, use, or disposition.
Chapter 12, Exhibit 7c
CCH Federal Taxation Comprehensive Topics 25 of 91
Patents
Ordinary Treatment for Certain Sellers
Authors, composers, and artists who sell their creations ALWAYS must report ordinary income or loss. Code Sec. 1221(3). However, the inventor of a patent may get long-term capital gain treatment if “all substantial rights” have been sold.
Chapter 12, Exhibit 7d
CCH Federal Taxation Comprehensive Topics 26 of 91
Franchises, Trademarks, and Trade Names
To qualify for capital treatment, the seller must (1) transfer all significant rights; and (2) receive noncontingent payments.
Chapter 12, Exhibit 8a
CCH Federal Taxation Comprehensive Topics 27 of 91
Franchises, Trademarks, and Trade Names
Significant Rights
“Significant rights” refers to the ability of the seller to make on-going decisions for the buyer, after the franchise, trademark, or trade name has been sold.
Chapter 12, Exhibit 8b
CCH Federal Taxation Comprehensive Topics 28 of 91
Franchises, Trademarks, and Trade Names
Contingent Payments Are Not Ok
Franchises, trademarks, and trade names do not receive capital treatment if the seller's receipt of payments is contingent upon productivity, use, or disposition.
Chapter 12, Exhibit 8c
CCH Federal Taxation Comprehensive Topics 29 of 91
Franchises, Trademarks, or Trade Names
Special Rules for Buyers of Franchises, Trademarks,or Trade Names
Contingent payments are deductible. Noncontingent payments must be amortized over 15 years.
Chapter 12, Exhibit 8d
CCH Federal Taxation Comprehensive Topics 30 of 91
Lease Cancellation Payments
Landlord. Lease cancellation payments are always ordinary income. Tenant. Lease cancellation payments are either ordinary or capital, depending upon the character of the leased asset. For example, a lease cancellation payment for retail space is ordinary income to the tenant; however, a lease cancellation payment for a principal residence is capital gain to the tenant.
Chapter 12, Exhibit 9
CCH Federal Taxation Comprehensive Topics 31 of 91
Options—General Rules
Grantor = The maker of an option who receives value in exchange for a contractual obligation to sell or buy at a certain price
Chapter 12, Exhibit 10a
CCH Federal Taxation Comprehensive Topics 32 of 91
Grantor’s Tax Treatment
If an option expires, the option money received by the grantor is either short-term capital gain or ordinary income, depending on the character of the property.
Options—General Rules
Chapter 12, Exhibit 10b
CCH Federal Taxation Comprehensive Topics 33 of 91
Grantor's tax treatment upon expiration of option to buy or sell
Stock and Securities Other property
Tax treatment ALWAYS short-term capital gain, regardless of holding period
ALWAYS ordinary income
Examples Stock, commodity futures, calls, puts, etc.
Land, warehouse, car, computer, etc.
Options—General Rules
Chapter 12, Exhibit 10c
CCH Federal Taxation Comprehensive Topics 34 of 91
Grantee = The holder of an option who pays a price for the right to buy or sell at a certain price
Options—General Rules
Chapter 12, Exhibit 10d
CCH Federal Taxation Comprehensive Topics 35 of 91
Grantee’s Tax Treatment
If the option is sold, or allowed to expire, the character of the property dictates the tax treatment. If the option is exercised, the option payment is added to the grantee's (if grantee is buyer and grantor is seller), or subtracted from the grantee's amount realized (if grantee is seller and grantor is buyer).
Options—General Rules
Chapter 12, Exhibit 10e
CCH Federal Taxation Comprehensive Topics 36 of 91
Options—Example
Chapter 12, Exhibit 11a
($2,000) Long-term capital loss
($3,000 – $5,000)
No effect($2,000) Long-term capital loss
($3,000 – $5,000)
No effect1. Two years later, Tina sells the option to Fred for $3,000.
GranteeGrantorGranteeGrantorAlternate Assumptions
Other PropertyStock and Securities
Tax treatment
FACTS: On 6/30/x1, George grants Tina a $5,000, 2-year option to buy investment property for $100,000. QUESTION: Consider the tax treatment if the investment property were stocks or land under the 6 alternative assumptions below.
CCH Federal Taxation Comprehensive Topics 37 of 91
$3,000 Long-term capital gain
($8,000 – $5,000)
No effect$3,000 Long-term
capital gain ($8,000 – $5,000)
No effect2. Two years later, Tina sells the option to Fred for $8,000.
GranteeGrantorGranteeGrantorAlternate Assumptions
Other PropertyStock and Securities
Tax treatment
Chapter 12, Exhibit 11b
Options—Example
CCH Federal Taxation Comprehensive Topics 38 of 91
$3,000 Long-term capital gain
($8,000 – $5,000)
No effect$3,000 Short-term capital gain
($8,000 – $5,000)
No effect3. One year later, Tina sells the option to Fred for $8,000.
GranteeGrantorGranteeGrantorAlternate Assumptions
Other PropertyStock and Securities
Tax treatment
Chapter 12, Exhibit 11c
Options—Example
CCH Federal Taxation Comprehensive Topics 39 of 91
Tax treatment
Stock and Securities Other Property
Alternate Assumptions
Grantor Grantee Grantor Grantee
4. The option expires on 6/30/x3.
$5,000 Short-term capital gain
($5,000) Long-term capital loss
$5,000 Ordinary income
($5,000) Long-term capital loss
Chapter 12, Exhibit 11d
Options—Example
CCH Federal Taxation Comprehensive Topics 40 of 91
Tax treatment
Stock and Securities Other Property
Alternate Assumptions
Grantor Grantee Grantor Grantee
5. Tina exercises the option on 6/30/x1.
$105,000 amount realized
$105,000 basis $105,000 amount realized
$105,000 basis
Chapter 12, Exhibit 11e
Options—Example
CCH Federal Taxation Comprehensive Topics 41 of 91
Tax treatment
Stock and Securities Other Property
Alternate Assumptions
Grantor Grantee Grantor Grantee
6. Same facts as 5, except Tina is paying for the option to sell, not buy, the property.
$95,000 basis $95,000 amount realized
$95,000 basis $95,000 amount realized
Chapter 12, Exhibit 11f
Options—Example
CCH Federal Taxation Comprehensive Topics 42 of 91
Subdivided Real Estate Sold by Investors
Qualifying Property
To qualify for capital gains treatment, three requirements must be met: 1. The subdivided lots must not have been previously held
primarily for sale to customers in the ordinary course of business
2. The subdivided lots have not been “substantially improved”
3. The subdivided lots must be held for at least 5 years
Chapter 12, Exhibit 12a
CCH Federal Taxation Comprehensive Topics 43 of 91
Subdivided Real Estate Sold by Investors
Substantial Improvements
Improvements such as infrastructure are substantial if they increase the value of the lots by over 10%. However, certain costs are deemed NEVER to be “substantial improvements.” Examples include: surveying, clearing drainage, and minimum all-weather access roads.
Chapter 12, Exhibit 12b
CCH Federal Taxation Comprehensive Topics 44 of 91
Subdivided Real Estate Sold by Investors
Tax Treatment for the First 5 Lot Sales. Gains on the first 5 lots sold receive capital treatment. Losses are ALWAYS ordinary.
Tax Treatment for Gains on Subsequent Lot Sales. Gains receive BOTH capital and ordinary treatment, beginning in the year in which the 6th lot is sold, using the following formula:
Total gain – (a)Capital treatment(b)
(5% SP) – (100% selling exp.)Ordinary treatment(a)
Tax treatment for GAINS after the fifth lot sale
Chapter 12, Exhibit 12c
CCH Federal Taxation Comprehensive Topics 45 of 91
Worthless SecuritiesTax Treatment. Generally capital. However, if held by a dealer, then ordinary.
Holding Period. The holding period for worthless securities begins on the day after the acquisition date and ends on the LAST DAY OF THE YEAR in which the securities are deemed to be worthless.
Long-term or Short-term?
Holding period end. date?
Holding period beginning date?
Worthless datePurchase date
Example
Long term12/31/x212/31/x11/1/x212/30/x1
Short-term12/31/x21/1/x212/31/x212/31/x1
Chapter 12, Exhibit 13
CCH Federal Taxation Comprehensive Topics 46 of 91
Depreciation Recapture—Example 1
Chapter 12, Exhibit 14a
FACTS:1. A taxpayer has $2 million of gross income in year 1.2. The taxpayer purchases a machine for $800,000 and depreciates it for $500,000 in year 1. 3. The machine is sold in year 2 for $1 million.4. The taxpayer’s capital gains rate is 15%; the ordinary tax rate is 40%. (Actual tax brackets, actual MACRS depreciation computations, and deductions “from” AGI are ignored for purposes of simplifying this illustration.)
QUESTION:Compare the results in years 1 and 2 with and without depreciation.
Example 1
CCH Federal Taxation Comprehensive Topics 47 of 91
Depreciation Recapture—Example 1
200
($800 – $600); or ($500 x 40%)
Tax Benefit from Depreciation
$800$600Ordinary Income Tax
40%40%Ordinary Tax Rate
$2,000$1,500Taxable Income
$0$500Depreciation, Year 1
$2,000$2,000Gross Income
Without Depreciation
WithDepreciation
Year 1
Tax “Benefit” from Depreciation Deduction
Chapter 12, Exhibit 14b
CCH Federal Taxation Comprehensive Topics 48 of 91
Depreciation Recapture—Example 1
$75
($105 – $30); or ($500 x 15%)
Tax Burden From Depreciation, Absent Any Depreciation Recapture
$30$105Capital Gain Tax (Ignoring Depreciation Recapture)
15%15%Capital Gain Tax Rate
$200$700Realized Gain
$800$300Adjusted Basis
$0$500Less: Accumulated Depreciation
$800$800Cost of Machine
$1,000$1,000Sales Price
Without Depreciation
With Depreciation
Year 2
Tax “Burden” from Depreciation Adjustment to Basis
Chapter 12, Exhibit 14c
CCH Federal Taxation Comprehensive Topics 49 of 91
Observation: Overall tax advantage from depreciation if depreciation is not recaptured: $125 ($200 benefit in year 1, minus $75 tax burden in year 2.)
Depreciation Recapture—Example 1
Chapter 12, Exhibit 14d
CCH Federal Taxation Comprehensive Topics 50 of 91
Depreciation Recapture—Example 2
Rationale for Recapture RulesThe foregoing illustration demonstrates how unrecaptured depreciation would create an overall tax advantage—this, despite a reduced basis equivalent to the amount of accumulated depreciation deductions. The overall advantage was eliminated in the early 1960s with the enactment of the depreciation recapture rules. The depreciation recapture rules recharacterize capital gains as ordinary income to the extent of all or a portion of accumulated depreciation. Using the facts from Example 1, the following example shows how the recapture rules work.
Chapter 12, Exhibit 15a
CCH Federal Taxation Comprehensive Topics 51 of 91
Depreciation Recapture—Example 2
Example 2
$700Realized Gain
$300Adjusted Basis
$500Less: Accumulated Depreciation
$800Cost of Machine
$1,000Sales Price
Year 2: Sale of the Machinery
Chapter 12, Exhibit 15b
CCH Federal Taxation Comprehensive Topics 52 of 91
Depreciation Recapture—Example 2
$100
($240 – $140)
Additional taxes attributable to Depreciation Recapture
$140$240Total Tax
$140$40$200Tax
20%20%40%Ordinary/Capital Tax Rates
$700$200$500Recharacterized Gain
(Capital)
Code Sec. 1231
(Capital)
Code Sec. 1245
(Ordinary)
Without Depreciation Recapture
With Depreciation Recapture
Chapter 12, Exhibit 15c
CCH Federal Taxation Comprehensive Topics 53 of 91
Observation: The $100 additional taxes offsets the $100 tax advantage that would have resulted if depreciation had not been recaptured.
Depreciation Recapture—Example 2
Chapter 12, Exhibit 15d
CCH Federal Taxation Comprehensive Topics 54 of 91
Business Asset Dispositions—Template for Problem Solving
Chapter 12, Exhibit 16a
[Realized gain – (a)]
N/AN/ALesser of:
1. Accumulated depreciation, or
2. Realized gain.
(1) Gains on all depreciable personal property.
15% Basket
(for any remaining gain or
any loss)
25% Basket
(for unrecaptured
Code Sec. 1250 Gain)
35% Basket
(Always Ordinary Income)
35% Basket
(Always Ordinary Income)
Category #/Description
(d)(c)(b)(a)
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245
Depreciation Recapture
CCH Federal Taxation Comprehensive Topics 55 of 91Chapter 12, Exhibit 16b
Code Sec. 1245 Depreciation
Recapture
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
(a) (b) (c) (d)
Category #/Description
35% Basket
(Always Ordinary Income)
35% Basket
(Always Ordinary Income)
25% Basket(For
unrecaptured Sec. 1250
Gain)
15% Basket
(For any remaining
gain or any loss)
(2) Gains on non-residential real property acquired 1981-1986, with ACRS depreciation.
Lesser of:
1. Accumulated depreciation, or
2. Realized gain.
N/A N/A [Realized gain – (a)]
Business Asset Dispositions—Template for Problem Solving
CCH Federal Taxation Comprehensive Topics 56 of 91Chapter 12, Exhibit 16c
Business Asset Dispositions—Template for Problem Solving
[Realized gain – (b) – (c)]
[Note that (b) = 0]
Lesser of: 1. Straight-line accumulated depreciation
2. Realized gain – (b)
Lesser of: 1. Actual accumulated depreciation – straight-line accumulated depreciation,* or 2. Realized gain
N/A(3) Gains on residential and non-residential real property acquired after 1986.
15% Basket
(For any remaining
gain or any loss)
25% Basket
(For unrecaptured
Code Sec. 1250 Gain)
35% Basket
(Always Ordinary Income)
35% Basket
(Always Ordinary Income)
Category #/Description
(d)(c)(b)(a)
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245
Depreciation Recapture
* (always 0 for individuals since actual accumulated depreciation = straight-line accumulated depreciation)
CCH Federal Taxation Comprehensive Topics 57 of 91Chapter 12, Exhibit 16d
[Real gain – (b) – (c)]
Lesser of:
1. Straight-line accumulated depreciation
2. Realized gain – (b)
Lesser of:
1.Actual accumulated depreciation – straight-line accumulated depreciation; or
2. Realized gain
N/A(4) Gains on residential real property acquired 1981-1986, with ACRS depreciation.
15% Basket
(For any remaining gain or
any loss)
25% Basket
(For unrecaptured
Code Sec. 1250 Gain)
35% Basket
(Always Ordinary Income)
35% Basket
(Always Ordinary Income)
Category #/Description
(d)(c)(b)(a)
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245 Depreciation
Recapture
Business Asset Dispositions—Template for Problem Solving
CCH Federal Taxation Comprehensive Topics 58 of 91Chapter 12, Exhibit 16e
[Real gain – (b) – (c)]
[Note that (b) = 0]
Lesser of: 1. Straight-line accumulated depreciation 2. Realized gain – (b).
Lesser of:1. Actual accumulated depreciation – straight-line accumulated depreciation; or 2. Realized gain
N/A(5) Gains on non-residential real property acquired 1981-1986, with straight-line depreciation.
15% Basket
(For any remaining gain or any loss)
25% Basket
(For unrecaptured Code Sec. 1250
Gain)
35% Basket
(Always Ordinary Income)
35% Basket
(Always Ordinary Income)
Category #/Description
(d)(c)(b)(a)
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245 Depreciation
Recapture
Business Asset Dispositions—Template for Problem Solving
CCH Federal Taxation Comprehensive Topics 59 of 91Chapter 12, Exhibit 16f
[Real gain – (a)]N/AN/ALesser of:
1. Accumulated amortization or
2. Realized gain
(6) Gains on amortizable personal property used in business (e.g., patents, copyrights, leaseholds).
15% Basket
(For any remaining gain or
any loss)
25% Basket(For
unrecaptured Code Sec.
1250 Gain)
35% Basket
(Always Ordinary Income)
35% Basket
(Always Ordinary Income)
Category #/Description
(d)(c)(b)(a)
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245 Depreciation
Recapture
Business Asset Dispositions—Template for Problem Solving
CCH Federal Taxation Comprehensive Topics 60 of 91Chapter 12, Exhibit 16g
Code Sec. 1245
Depreciation Recapture
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
(a) (b) (c) (d)
Category #/Description
35% Basket
(Always Ordinary Income)
35% Basket
(Always Ordinary Income)
25% Basket
(For unrecaptured
Code Sec. 1250 Gain)
15% Basket
(For any remaining gain or
any loss)
(7) All losses on any long-term business assets.
N/A N/A N/A 100% losses are Code Sec. 1231.
Business Asset Dispositions—Template for Problem Solving
CCH Federal Taxation Comprehensive Topics 61 of 91Chapter 12, Exhibit 16h
Code Sec. 1245
Depreciation Recapture
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
(a) (b) (c) (d)
Category #/Description
35% Basket
(Always Ordinary Income)
35% Basket
(Always Ordinary Income)
25% Basket
(For unrecaptured
Code Sec. 1250 Gain)
15% Basket
(For any remaining gain or
any loss)
(8) G/L on sale of short-term business assets.
100% ordinary. (Short-term gains or losses on business property are neither Code Sec. 1231, 1245, nor 1250.)
Business Asset Dispositions—Template for Problem Solving
CCH Federal Taxation Comprehensive Topics 62 of 91
Business Asset Dispositions—Example 1
FACTS:
David, a 35% taxpayer, purchases a building in 1992 for $390,000. He takes $90,000 of depreciation using the straight-line method. On October 15, 20x1, he sells the building for $440,000.
QUESTION:
How much taxes are attributable to the sale?
Chapter 12, Exhibit 17a
CCH Federal Taxation Comprehensive Topics 63 of 91
Business Asset Dispositions—Example 1
Computation of Taxes on Code Sec. 1250 and Code Sec. 1231 Gains
Code Sec. 1231 Gain/Loss
(Sent to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245 Depreciation
Recapture
15% Basket(for any
remaining gain or any
loss)
25% Basket
(for unrecaptured Code Sec. 1250
Gain)
35% Basket
(Always Ordinary Income)
Category #/
Type of Gain
(d)(c)(b)(a)
[Realized gain – (b) – (c)]
[Note that (b) = 0]
Lesser of:
1. Actual accumulated depreciation – straight-line accumulated depreciation,* or
2. Realized gain
Lesser of: 1. Straight-line accumulated depreciation
2. Realized gain – (b).
N/A# 3/Gains on residential and non-residential real property acquired after 1986.
* (always 0 for individuals since actual accumulated depreciation = straight-line accumulated depreciation)
Chapter 12, Exhibit 17b
CCH Federal Taxation Comprehensive Topics 64 of 91
Business Asset Dispositions—Example 1
Computation of Taxes on Code Sec. 1250 and Code Sec. 1231 Gains
Code Sec. 1231 Gain/Loss
(Sent to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245 Depreciation
Recapture
15% Basket(for any
remaining gain or any loss)
25% Basket
(for unrecaptured Code Sec. 1250
Gain)
35% Basket
(Always Ordinary Income)
Category #/
Type of Gain
(d)(c)(b)(a)
$7,500$22,5000 Tax amount ($30,000 total)
15%25%35% Tax rates
$50,000
[$140,000 – 0 – $90,000]
$90,000
Lesser of
1. $90,000, or
2. $140,000 – 0
$0
The lesser of :
1. 0 = $90,000 – $90,000
2. $140,000
Computation of realized gain:
Sale Price…. ……...$440,000
Cost ……….………$390,000
Straight-line depr...... $90,000
Adjusted basis……..$300,000
Realized gain……...$140,000
Chapter 12, Exhibit 17c
CCH Federal Taxation Comprehensive Topics 65 of 91
Business Asset Dispositions—Example 2
FACTS:
Conor, a 35% taxpayer, purchased an apartment building in 1986 for $390,000. He had taken $99,000 of ACRS depreciation. Straight-line depreciation would have been $90,000. On October 15, 19x1, he sells the building for $440,000.
QUESTION:
What are his taxes on the transaction?
Chapter 12, Exhibit 18a
CCH Federal Taxation Comprehensive Topics 66 of 91
Business Asset Dispositions—Example 2
Computation of Taxes on Code Sec. 1250 and Code Sec. 1231 Gains
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245
Depreciation Recapture
15% Basket(For any
remaining gain or any loss)
25% Basket(For unrecaptured
Code Sec. 1250 Gain)
35% Basket
(Always Ordinary Income)
Category #/ Type of Gain
(d)(c)(b)(a)
[Real gain – (b) – (c)]
Lesser of:
1. Actual accumulated depreciation – straight-line accumulated depreciation; or
2. Realized gain
Lesser of:
1. Straight-line accumulated depreciation
2. Realized gain – (b).
N/A# 4 /Gains on residential real property acquired 1981-1986, with ACRS depreciation.
Chapter 12, Exhibit 18b
CCH Federal Taxation Comprehensive Topics 67 of 91
Business Asset Dispositions—Example 2
Chapter 12, Exhibit 18c
$7,500$22,500$3,150Tax amount ($33,150 total)
15%25%35%Rate baskets
$50,000
[$149,000 – $9,000 – $90,000]
$90,000
Lesser of
1. $90,000, or
2. $149,000 – $9,000
$9,000
The lesser of :
1. $9,000 = $99,000 – $90,000
2. $149,000
Computation of realized gain:
Sale Price…….....…$440,000 Cost ………….....…$390,000
ACRS depr................ $99,000
Adjusted basis .. ......$291,000
Realized gain …......$149,000
Computation of Taxes on Code Sec. 1250 and Code Sec. 1231 Gains
15% Basket(For any
remaining gain or any loss)
25% Basket(For unrecaptured
Code Sec. 1250 Gain)
35% Basket
(Always Ordinary Income)
Category #/ Type of Gain
(d)(c)(b)(a)
Code Sec. 1231 Gain/Loss
(Send to 2nd Netting)
Code Sec. 1250 Depreciation
Recapture
Code Sec. 1245
Depreciation Recapture
CCH Federal Taxation Comprehensive Topics 68 of 91
The First Netting—Capital Gains and Losses
Offset Gains and Losses Within Each Basket
Offset capital gains and losses within each basket (i.e., the 10%, 15%, and 28% baskets). (The 25% basket is not listed here because it holds only gains, never losses. Why no losses? Because the 25% basket applies only to that portion of Code Sec. 1231 gain attributable to unrecaptured Code Sec. 1250 depreciation.)
Chapter 12, Exhibit 19a
CCH Federal Taxation Comprehensive Topics 69 of 91
Offset Gains and Losses from Separate Baskets
If, after step 1, there are opposites (i.e., one or more baskets has a net gain and one or more a net loss), then the gains and losses must be further offset. The pecking order in selecting “net gain” and “net loss” baskets to offset is as follows.
Chapter 12, Exhibit 19b
The First Netting—Capital Gains and Losses
CCH Federal Taxation Comprehensive Topics 70 of 91
The First Netting—Capital Gains and Losses
Pecking Order of Baskets Selected For The First Netting
“Net gain baskets” to be offset against “net loss baskets”
Start with short-term capital gains (might be as high as the 35% bracket), then long-term capital gains beginning with the highest-rate baskets holding net gains (i.e., 28%, then 15%).
“Net loss baskets” to be offset against “net gain baskets”
Start with short-term capital losses (might be as high as the 35% bracket), then long-term capital losses beginning with the highest-rate baskets holding net losses (i.e., 28%, then 15%).
Chapter 12, Exhibit 19c
CCH Federal Taxation Comprehensive Topics 71 of 91
The First Netting—Example 1
Chapter 12, Exhibit 20a
FACTS: Fred reports the following gains and losses:
QUESTION: How is the first netting performed?
$4,000 gain; ($7,000) loss35%Short-Term
$1,000 gain28%Long-Term
$7,000 gain; ($4,000) loss15%Long-Term
AmountBasketHolding Period
CCH Federal Taxation Comprehensive Topics 72 of 91
$0($3,000) net loss35%
$0$1,000 gain28%
$1,000 LTCG at 15%$3,000 net gain15%
Result after 1st NettingNet Amount Within Each Basket
Basket
STEP 1: Offset Gains and Losses Within Each Basket
Chapter 12, Exhibit 20b
The First Netting—Example 1
Two-Step Solution
CCH Federal Taxation Comprehensive Topics 73 of 91
STEP 2: Offset Gains and Losses From Separate Baskets
The $3,000 net loss from the 35% basket is first used to offset the $1,000 gain from the 28% basket; then $2,000 of the $3,000 net gain from the 15% basket. The result of the 1st netting is a $1,000 long-term capital gain subject to a 15% rate.
Chapter 12, Exhibit 20c
Two-Step Solution
The First Netting—Example 1
CCH Federal Taxation Comprehensive Topics 74 of 91
The First Netting—Example 2
Chapter 12, Exhibit 21a
QUESTION: How is the first netting performed?
FACTS: Wilma reports the following gains and losses:
$7,000 gain; ($3,000) loss35%Short-Term
$4,000 gain28%Long-Term
$4,000 gain; ($7,000) loss15%Long-Term
($6,000) loss10%Long-Term
AmountBasketHolding Period
CCH Federal Taxation Comprehensive Topics 75 of 91Chapter 12, Exhibit 21b
The First Netting—Example 2
Two-Step Solution
0 net gain$4,000 net gain35%
0 net gain$4,000 gain28%
0 net loss($3,000) net loss15%
Result after 1st NettingNet Amount Within Each Basket
Basket
STEP 1: Offset Gains and Losses Within Each Basket
CCH Federal Taxation Comprehensive Topics 76 of 91
STEP 2: Offset Gains and Losses From Separate Baskets
The $4,000 net gain from the 35% basket is netted against the ($3,000) loss from the 15% basket. The $4,000 gain from the 28% basket is taxed at 28%.
Chapter 12, Exhibit 21c
The First Netting—Example 2
Two-Step Solution
CCH Federal Taxation Comprehensive Topics 77 of 91
The First Netting—Personal-Use Casualty/Theft Gains/Losses
Combine casualty/theft gains and losses less $100 per event, on personal-use property.
If a net gain, both gains and losses are capital. Transfer the net gain to the second netting. Recall that the losses had been reduced by $100 per event but NOT by the 10% AGI floor.
If a net loss, the net amount is treated as an ordinary itemized deduction, having been reduced by $100 per event AND to be further reduced by the 10% AGI floor. (No need to transfer to the second netting; rather, report on Schedule A.)
Chapter 12, Exhibit 22
CCH Federal Taxation Comprehensive Topics 78 of 91
The First Netting—Business/Investment Use Casualty/Theft Gains/Losses
Combine casualty/theft gains and losses on business and PI property held long-term. (If the holding period is short-term, the gain or losses get ordinary treatment and are NOT part of the netting process.)
If a net gain, then treat the net amount as a Code Sec. 1231 gain and transfer it to the second netting.
If a net loss, then treat the net amount as an ordinary deduction for AGI. (No need to transfer to the second netting; rather, report on Schedule C.)
Chapter 12, Exhibit 23
CCH Federal Taxation Comprehensive Topics 79 of 91
The First Netting—Personal-Use Condemnation Gains/Losses
Long-term gains receive capital treatment; short-term gains receive ordinary treatment; losses are not deductible. Transfer any personal-use condemnation long-term gains to the second netting.
Chapter 12, Exhibit 24
CCH Federal Taxation Comprehensive Topics 80 of 91
The First Netting—Business/Investment-Use Condemnation Gains/Losses
Long-term gains and losses BOTH get Code Sec. 1231 treatment. (Code Sec. 1231 gains get capital tax rates; Code Sec. 1231 losses are deductible at ordinary tax rates. Also, note the difference in tax treatment for (1) business/investment casualty/theft net losses and (2) business/investment condemnation losses. Transfer the Code Sec. 1231 condemnation gains and losses to the second netting.)
Chapter 12, Exhibit 25
CCH Federal Taxation Comprehensive Topics 81 of 91
The First Netting—Long-Term Business Assets
Upon the sale of a long-term business asset, any gain remaining after Code Sec. 1245 or Code Sec. 1250 depreciation recapture is a Code Sec. 1231 gain. Any loss is a Code Sec. 1231 loss. Transfer both Code Sec. 1231 gains and losses to the second netting.
(Note that gains or losses on the sale of short-term business assets are always ordinary. No need to transfer to the second netting.)
Chapter 12, Exhibit 26
CCH Federal Taxation Comprehensive Topics 82 of 91
The First Netting—Recap
Chapter 12, Exhibit 27
15% 28%25%15%
15% 28%25%15%
N/A for nettingNet gain or loss “35%”
Net Gain or LossNet Gain or LossNet totals for 2nd Netting
Code Sec. 1245 and 1250 recaptured as ordinary income
Gains, net of depr. Recap.; losses
L-T business asset G/L
Gains and lossesBus./inv. Condemnation G/L
Gains (losses not deductible)Gains (losses not deductible)
Personal-use condemnation gains & losses
Net losses, for AGINet gain
Bus./inv. Casualty net gain
Net losses, from AGI, reduced $100 per event
& 10% AGI (if net loss)
Net gainNet gainPersonal casualty net gain
Gains or lossesCapital gains & losses
“35%”
Gains or losses
Short-termLong-termCode Sec. 1231Description
Capital Gains and Losses (This column is not part of the netting process.) Always Ordinary Income
CCH Federal Taxation Comprehensive Topics 83 of 91
The Second Netting—Examples
$4,000, i.e.,
$3,000 offsets the “28% LTCL basket”
(Capital gains may not be offset against Code Sec. 1231 losses)
($4,000), i.e.,
($3,000) is offset against the “25% Code Sec. 1231 basket”
(Code Sec. 1231 losses may not be offset against capital gains)
Solution
($3,000)$7,000$3,000($7,000)Gains (Losses)
28%15%25%15%Problem # 1
Short-TermLong-TermCode Sec. 1231 G/L’s
Rate Basket for Capital Gains and LossesRate Basket for
QUESTION: For each independent set of gains and losses below, determine the tax treatment after the second netting.
Chapter 12, Exhibit 28a
CCH Federal Taxation Comprehensive Topics 84 of 91
The Second Netting—Examples
$6,000 net STCG, taxed at ordinary rate
00($4,000) ordinary loss
deduction
Solution
$21,000$3,000($18,000)$3,000($7,000)Gains (Losses)
28%15%25%15%Problem # 2
Short-TermLong-TermCode Sec. 1231 G/L’s
Rate Basket for Capital Gains and LossesRate Basket for
QUESTION: For each independent set of gains and losses below, determine the tax treatment after the second netting.
Chapter 12, Exhibit 28b
CCH Federal Taxation Comprehensive Topics 85 of 91
The Second Netting—Examples
($3,000) ordin. loss deduction;
($2,000) STCL carryover
000($4,000) ordinary loss
deduction
Solution
($27,000)$3,000$19,000$3,000($7,000)Gains (Losses)
28%15%25%15%Problem # 3
Short-TermLong-TermCode Sec. 1231 G/L’s
Rate Basket for Capital Gains and LossesRate Basket for
QUESTION: For each independent set of gains and losses below, determine the tax treatment after the second netting.
Chapter 12, Exhibit 28c
CCH Federal Taxation Comprehensive Topics 86 of 91
The Second Netting—Examples
($2,000) ordinary loss deduction
($21,000 - $19,000)
($19,000 = $18,000 + $4,000 - $3,000)
0000 (Code Sec. 1231 gains
offset capital losses, first
from the highest LTCL basket, then
from STCLs!)
Solution
($21,000)($3,000)$18,000($3,000)$7,000Gains (Losses)
28%15%25%15%Problem # 4
Short-TermLong-TermCode Sec. 1231 G/L’s
Rate Basket for Capital Gains and LossesRate Basket for
QUESTION: For each independent set of gains and losses below, determine the tax treatment after the second netting.
Chapter 12, Exhibit 28d
CCH Federal Taxation Comprehensive Topics 87 of 91
The Second Netting—Recap of the Rules
To complete the second netting, follow these steps:
1. Net each category by totaling the columns.
2. If the long-term capital column still shows a gain after offsetting any net short-term capital losses (STCLs) treat the net amount as a net long-term capital gain
(LTCG) subject to a maximum 15% or 28% tax rate, depending on which basket survives the netting.
3. If the short-term capital column still shows a gain after offsetting any net LTCLs, treat the net amount as a net STCG subject to the ordinary marginal tax rate.
4. If the Code Sec. 1231 column total shows a net loss, treat the net amount as an ordinary loss, deductible for AGI, without the $3,000 limitation. Do not offset it against net long-term or short-term capital gains.
5. If the Code Sec. 1231 column total shows a net gain: Treat as ordinary income to the extent of Code Sec. 1231 net losses for the previous five years that have not been recaptured. (Refer to the example regarding 5-Year Look-Back Rules in the following slide.)
Chapter 12, Exhibit 29a
CCH Federal Taxation Comprehensive Topics 88 of 91
The Second Netting—Recap of the Rules
(b) If any Code Sec. 1231 gain survives, offset it against any net LTCLs, starting with the highest baskets containing LTCLs.(c) If a Code Sec. 1231 gain still survives, offset it against any net STCLs.(d) If yet a Code Sec. 1231 gain survives, treat it as a long-term capital gain, subject to a maximum 25% tax rate.
10,00010,000Surviving Code Sec. 1231 gain treated as L-T capital gain
40,00030,000
10,000
30,00020,000
10,000
Recharacterized as ordinary income
50,000(30,000)(10,000)40,000(20,000)(10,000)Code Sec. 1231 G/L before look-back
20x620x520x420x320x220x1
QUESTION: Given the following facts, how much of the Code Sec. 1231 gains in 20x3 and 20x6 should be recharacterized as ordinary income?
Example on the 5-Year Look-Back Rules
Chapter 12, Exhibit 29b
CCH Federal Taxation Comprehensive Topics 89 of 91
The Second Netting—Recap of the Rules
If LTCLs or STCLs survive after netting with Code Sec. 1231 gains, first treat STCLs as ordinary losses, limited to $3,000. If any part of the $3,000 remains, treat any LTCLs as ordinary to the extent of the remainder (starting with the highest basket). Unused STCLs and LTCLs are carried forward indefinitely.
Chapter 12, Exhibit 29c
CCH Federal Taxation Comprehensive Topics 90 of 91
Applying the $3,000 Capital Loss Limitation
Only $3,000 may be deducted each year for the aggregate of “net” short-term and “net” long-term capital losses. Short-term capital losses (STCLs) are used up first, then long-term capital losses (LTCLs) beginning with the highest LTCL “baskets.” Note that STCLs and LTCLs get “ordinary” treatment to the extent of the $3,000 deduction noted above. Any remaining capital losses (i.e., in excess of $3,000) are carried over. However, also note that STCLs and LTCLs on the sale of personal use property such as a principal residence or a car used for commuting, are NEVER deductible, and NEVER carried forward!
Chapter 12, Exhibit 30a
CCH Federal Taxation Comprehensive Topics 91 of 91Chapter 12, Exhibit 30b
Applying the $3,000 Capital Loss Limitation
Note that there is no 25% basket for losses since this basket applies only to the portion of Code Sec. 1231 gain attributable to unrecaptured Code Sec. 1250 depreciation.
$3,000 – (a) – (b)LTCLs, 15% Basket(c)
$3,000 – (a)LTCLs, 28% Basket(b)
$3,000Short-Term Capital Losses(a)
Deductible against ordinary income, limited to:
Pecking Order of Loss “Baskets”