Chapter 5
Property Transactions,
Capital Gains and Losses
Learning Objectives
? Determine the realized gain or
loss from the sale or other
disposition of property
? Determine the amount realized
from the sale or other
disposition of property
? Determine the basis
Learning Objectives
? Distinguish between capital
assets and other assets
? Understand how capital gains
and losses affect taxable
income
? Recognize when a sale or
exchange has occurred
? Determine the holding period for
an asset when a sale or
disposition occurs
Determination Of Gain
Or Loss
? Realized gain
or loss
– Amount
realized $ less
the assets’
adjusted basis
Determination Of Gains
And Losses
? Amount realized
consists of
money and FMV
of property
received plus
taxpayer’s debt
assumed by the
buyer less costs
of sale
Determination Of Basis
Original basis (Cost)
+ plus additions
(i.e.,Capital
improvements)
- less reductions (i.e.,
Depreciation)
= Adjusted basis
Recognized Gain Or
Loss
? The amount of recognized gain
or loss on disposition may be
less than the realized gain or
loss due to special statutory
provisions
? Like-kind exchange rules
?Involuntary conversions rules
Basis Considerations
In most cases the cost of
acquired property is the
basis,
Basis Considerations
? Original cost basis includes
? Cash
? FMV of other property
? Debt
? Transactional cost
? Uniform capitalization rules are
mandated for inventory
Basis Considerations
? Construction period interest and
taxes must be capitalized for certain
,long useful life” property
? Homogenous property
– Specific identification may not be possible
– Tax law requires a FIFO approach
Property Received As A Gift
? Donee’s adjusted basis for gain is donor’s basis
plus a gift tax adjustment
? The donee’s adjusted basis for loss is the lesser
of the gain basis or FMV at the date of gift
? The gain basis is used for calculating any
depreciation
– The amount of depreciation is subtracted from
applicable gain basis or loss basis in the event
of disposition
Property Received From A
Decedent
? Basis of inherited property
– FMV at date of death,or
Alternate valuation date
? Six months from date of death or
Disposition date if not held for six month
Property Converted From
Personal Use To Business
Use
? Basis is the lower
of the personal use
adjusted basis or
the property’s FMV
at conversion
Allocation Of Basis
? If multiple assets are
acquired for a single
purchase price,the
acquisition cost must
be allocated to
individual assets on
the basis of their FMV
? See example in
textbook on page 5-10,
Definition Of Capital Assets
? For tax purposes capital
assets are defined as
assets other than
inventory,depreciable
property,or real property
used in a trade or
business
Definition Of A Capital Asset
? Influence of
the courts
– Corn
Products
Refining CO
– Arkansas
Best
Corporation
Other Code Provisions
Relevant To Capital Gains
And Losses
? Dealers usually treat securities as
inventory
? Non-business bad debts are treated
as short-term capital losses
? Certain taxpayers can subdivide land
and sell a limited number of lots and
retain capital gain treatment
Tax Treatment For Capital
Gains And Losses Of Non-
corporate Taxpayers
? Capital gains
– Net capital gains result when net long-
term capital gains exceed net short-
term capital losses
? Capital losses
– Net capital losses offset ordinary
income to a $3,000 maximum,with an
unlimited carryover to future years
Long Term Capital
Assets
? Capital assets held for more than 12
months,
? Tax rate for Net Capital Gains may be
taxed
– 8%,10%,18%,20%,25%,28%
– Be sure to read this section in the
carefully,
Sale Or Exchange
? Worthless securities
–Securities that become totally
worthless in a tax year are treated
as a capital loss on the last day of
the year
Sale or Exchange
? Retirement of Debt Instruments
? Options
? Patents
? Franchises,Trademarks and Trade
Names
? Lease Cancellation Payments
Holding Period
? Holding period for long-term
treatment is more than 12 months
? Holding period of more than 5 years
–After December 31,2000
– Maximum rate is 18% (8% for taxpayers
whose tax rate is 15%)
Holding Period
? Property received as a gift
– If the donee’s adjusted basis is
determined by reference to the donor’s
adjusted basis,the donor’s holding
period is added to the donee’s holding
period
– If the donee’s adjusted basis is the FMV
at date of gift,the holding period begins
at the date of gift
Holding Period
? Property received from a decedent is always
subject to a long-term holding period
? Non-taxable exchanges
– Property given in a tax-free exchange is added to the
holding period of the property received in the exchange
? Non-taxable stock dividends and stock rights
– Generally includes the holding period of the underlying
stock
Tax Planning
Considerations
? Selection of property to transfer by gift
– Decision may be influenced by annual
exclusion
– Unwise to gift depreciated property
? Selection of property to transfer at time of death
– Highly appreciated property should be retained
until death
– Loss property should be sold before death
Compliance and
Procedural Considerations
? Capital gains and losses are reported by
individuals on Schedule D
? To improve taxpayer compliance,every broker is
required to furnish the government with
information pertaining to each customer,
? This is reported to the taxpayer on Form 1099-B,
? Taxpayer must use Schedule D to reconcile
amounts shown on Form 1099-B
Property Transactions,
Capital Gains and Losses
Learning Objectives
? Determine the realized gain or
loss from the sale or other
disposition of property
? Determine the amount realized
from the sale or other
disposition of property
? Determine the basis
Learning Objectives
? Distinguish between capital
assets and other assets
? Understand how capital gains
and losses affect taxable
income
? Recognize when a sale or
exchange has occurred
? Determine the holding period for
an asset when a sale or
disposition occurs
Determination Of Gain
Or Loss
? Realized gain
or loss
– Amount
realized $ less
the assets’
adjusted basis
Determination Of Gains
And Losses
? Amount realized
consists of
money and FMV
of property
received plus
taxpayer’s debt
assumed by the
buyer less costs
of sale
Determination Of Basis
Original basis (Cost)
+ plus additions
(i.e.,Capital
improvements)
- less reductions (i.e.,
Depreciation)
= Adjusted basis
Recognized Gain Or
Loss
? The amount of recognized gain
or loss on disposition may be
less than the realized gain or
loss due to special statutory
provisions
? Like-kind exchange rules
?Involuntary conversions rules
Basis Considerations
In most cases the cost of
acquired property is the
basis,
Basis Considerations
? Original cost basis includes
? Cash
? FMV of other property
? Debt
? Transactional cost
? Uniform capitalization rules are
mandated for inventory
Basis Considerations
? Construction period interest and
taxes must be capitalized for certain
,long useful life” property
? Homogenous property
– Specific identification may not be possible
– Tax law requires a FIFO approach
Property Received As A Gift
? Donee’s adjusted basis for gain is donor’s basis
plus a gift tax adjustment
? The donee’s adjusted basis for loss is the lesser
of the gain basis or FMV at the date of gift
? The gain basis is used for calculating any
depreciation
– The amount of depreciation is subtracted from
applicable gain basis or loss basis in the event
of disposition
Property Received From A
Decedent
? Basis of inherited property
– FMV at date of death,or
Alternate valuation date
? Six months from date of death or
Disposition date if not held for six month
Property Converted From
Personal Use To Business
Use
? Basis is the lower
of the personal use
adjusted basis or
the property’s FMV
at conversion
Allocation Of Basis
? If multiple assets are
acquired for a single
purchase price,the
acquisition cost must
be allocated to
individual assets on
the basis of their FMV
? See example in
textbook on page 5-10,
Definition Of Capital Assets
? For tax purposes capital
assets are defined as
assets other than
inventory,depreciable
property,or real property
used in a trade or
business
Definition Of A Capital Asset
? Influence of
the courts
– Corn
Products
Refining CO
– Arkansas
Best
Corporation
Other Code Provisions
Relevant To Capital Gains
And Losses
? Dealers usually treat securities as
inventory
? Non-business bad debts are treated
as short-term capital losses
? Certain taxpayers can subdivide land
and sell a limited number of lots and
retain capital gain treatment
Tax Treatment For Capital
Gains And Losses Of Non-
corporate Taxpayers
? Capital gains
– Net capital gains result when net long-
term capital gains exceed net short-
term capital losses
? Capital losses
– Net capital losses offset ordinary
income to a $3,000 maximum,with an
unlimited carryover to future years
Long Term Capital
Assets
? Capital assets held for more than 12
months,
? Tax rate for Net Capital Gains may be
taxed
– 8%,10%,18%,20%,25%,28%
– Be sure to read this section in the
carefully,
Sale Or Exchange
? Worthless securities
–Securities that become totally
worthless in a tax year are treated
as a capital loss on the last day of
the year
Sale or Exchange
? Retirement of Debt Instruments
? Options
? Patents
? Franchises,Trademarks and Trade
Names
? Lease Cancellation Payments
Holding Period
? Holding period for long-term
treatment is more than 12 months
? Holding period of more than 5 years
–After December 31,2000
– Maximum rate is 18% (8% for taxpayers
whose tax rate is 15%)
Holding Period
? Property received as a gift
– If the donee’s adjusted basis is
determined by reference to the donor’s
adjusted basis,the donor’s holding
period is added to the donee’s holding
period
– If the donee’s adjusted basis is the FMV
at date of gift,the holding period begins
at the date of gift
Holding Period
? Property received from a decedent is always
subject to a long-term holding period
? Non-taxable exchanges
– Property given in a tax-free exchange is added to the
holding period of the property received in the exchange
? Non-taxable stock dividends and stock rights
– Generally includes the holding period of the underlying
stock
Tax Planning
Considerations
? Selection of property to transfer by gift
– Decision may be influenced by annual
exclusion
– Unwise to gift depreciated property
? Selection of property to transfer at time of death
– Highly appreciated property should be retained
until death
– Loss property should be sold before death
Compliance and
Procedural Considerations
? Capital gains and losses are reported by
individuals on Schedule D
? To improve taxpayer compliance,every broker is
required to furnish the government with
information pertaining to each customer,
? This is reported to the taxpayer on Form 1099-B,
? Taxpayer must use Schedule D to reconcile
amounts shown on Form 1099-B
