© Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 1 Federal Income Tax.

transcript

Federal Income

Introduction to Capital Gainsand Losses

So YouSold SomeProperty … ...

What must we knowabout the asset?

I. Type of asset soldA. Personal

B. Business

I. Type of asset soldA. Personal -- “capital”

B. Business

Capital AssetsSection 2619

Capital assets include all assets held by the taxpayer except:1. Stock in trade of the taxpayer or other property of a kind that would properly be

included in the inventory of the taxpayer if on hand at the close of the tax year.2. Property held by the taxpayer primarily for sale to customers in the ordinary course

of his trade or business.3. Accounts or notes receivable acquired in the ordinary course of a trade or

business for services rendered or from the sale of any properties described in 1. and 2. above.

4. Depreciable property used in the taxpayer's trade or business.5. Real property used in the taxpayer's trade or business.6. Certain copyrights, and literary, musical or artistic compositions7. Letters, memoranda or similar property in the hands of the writer, donees of the

writer and persons to whom they were sent or for whom they were produced.8. U.S. government publications (Congressional Record) received from the

government without charge or below the price sold to the public, in the hands of the recipient and carryover_basis transferees (Code Sec. 1221)

EXCEPT

1. Gains and Losses2. Gains and Losses

B. Business

Consider anExample

B. Business

ConsiderAnotherExample

B. BusinessGains but NOT Losses

B. Business

Here’s Another

B. Business

1. Gains and losses2. Gains and losses

B. Business1.2.3.

Will Complete Laternot

II. Other Information Needed?

Other Information Needed?

B AA. Sales Price (and date)II.

B AA. Sales Price (and date)B. – Basis (Cost) (and date)

Today’sLesson

B AA. Sales Price (and date)B. – Basis (Cost) (and date)C. = Gain or (Loss)

II. Other Information Needed?

III.III. Holding Period

A. Short-termB. Long-term

Which would you prefer?

GainST

Which would you prefer?

LossST

Special Treatment of Long-Term Gains

1954 1986

LTCGD ***

Special Treatmentof Long-Term Gains

1954 1986 1997

LTCGD alternate tax rate*

1954 1986 1997

LTCGD alternate tax rate

reduced rates**

Special Treatment

’54 – ’69ST 100%

<ST> <100%>($1,000 annual maximum)

Special Treatment

’54 – ’69ST 100%

LT 50 / 50LTCGD / taxed

<LT> <100%>($1,000 annual maximum)

Special Treatment

<100%>($1,000 annual maximum)

50 / 50LTCGD / taxed

100%ST’54 – ’69

$1,000

Special Treatment

’54 – ’69 ’69 – ’86ST 100% 100%

Special Treatment

’54 – ’69 ’69 – ’86ST 100% 100%

Special Treatment

’54 – ’69 ’69 – ’86 After ’86ST 100% 100%

Special Treatment

’54 – ’69 ’69 – ’86 After ’86ST 100% 100% 100%

<100%>($3,000 annual maximum)*Alternative Tax Rate

1954 1986 1997

LTCGD alternate tax rate

reduced rates

How can one acquire property?

Name as many ways asyou can think of.

Be creative!

• find it• win it• purchase it• marry someone

who owns it• receive it as

compensation

• divorce• inherit it• receive it as a gift• steal it• squat (as the

pioneers did)• trade for it

• find it• win it• purchase it• marry someone

who owns it• receive it as

compensation

• divorce• inherit it• steal it• receive it as a gift• squat (as the

pioneers did)• trade for it

•Purchase•Gift•Inherit•Trade

Determining the Basis of Assets

Asset acquiredby purchase?

cost + capital improvements - accumulated depreciation = adjusted basis

Federal gift tax paid(basis limited to FMV on date of gift)

Fed. Gift tax x“net appreciation”1

total value of prop.2

donor’s adjusted basis(“date” basis = donor’s date)

FMV on date of gift(“date” basis = date of gift)

basis for

donor’s adj.basis plus

FMV > donor’sadjusted basis?

All dispositions yieldLONG TERM results

FMV 6 monthsafter date of death

FMV on date of death

alt. valuationdate elected?

Acquiredby gift?

r 3/1/

1/1/77

(inheritance)

lossafter

12/31/76

1 “net appreciation” = (FMV - donor’s adjusted basis)2 FMV - annual exclusion

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

1 “net appreciation” = (FMV - donor’s adjusted basis)

r 3/1/

2 FMV - annual exclusion

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Cost + Capital Improvements— Accumulated Depr = Adjusted Basis

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

r 3/1/

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Acquiredby Gift?

Yes(af

ter 19

(inheritance) Y

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s Basis2 FMV - annual exclusion

“Step into the shoes of the

donor.”

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Acquiredby Gift?

Yes(af

ter 19

(inheritance)

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Inherited Property= FMV on DOD

“Stepped-Up” Basis

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

“Stepped-Up” Basis2 FMV - annual exclusion

“Step into the shoesof the donor.”

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

“Stepped-Up” Basis2 FMV - annual exclusion

“Step into the shoesof the donor.”

Grandpa, who is on his death bed,

wants YOU to have his 5,000

acre farm.

Should hegive it to you?Or should he

change his will?

Grandpa rec’d farm as gift from great-grandpa who had paid $1 per acre.FMV today is $500 per acre.

Received As A Gift(simplified version)

Sales Price $2,500,000

Sales Price $2,500,000 – Your basis ? ? ?

Sales Price $2,500,000 – Your basis 5,000

Taxable Gain $2,495,000

Inherited(simplified version)

Sales Price $2,500,000

Sales Price $2,500,000 – Your basis ? ? ?

Sales Price $2,500,000 – Your basis 2,500,000

Taxable Gain -0-

Which wouldYOU prefer?

??? ???.

?????? ???

Taxable Gain -0-

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Acquiredby Gift?

Yes(af

ter 19

(inheritance) Y

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s Basis2 FMV - annual exclusion

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s basis+ “all” GT pd= Basis (limited)

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s basis+ “some” GT pd= Basis

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Illustration

1) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $20,000 at the time of the gift. The donor paid $1,000 in gift tax.

Handout Example 1 a. 1)

Basis $10,000+ Gift Tax 1,000 11,000

Sales Price $21,000 Basis $10,000+ Gift Tax 1,000 11,000

Gain $10,000

Illustration1. a. 3)

Basis $10,000+ Gift Tax 1,000 11,000

Sales Price $ 9,000 Basis $10,000+ Gift Tax 1,000 11,000

Loss ($ 2,000)

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s basis+ “some” GT pd= Basis

Another

Illustration

1) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $20,000 at the time of the gift. The donor paid $1,000 in gift tax.

Handout Example 1 b. 1)

Basis $10,000+ Gift Tax ??? ? ? ?

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Gift tax x “net appreciation” total value of property

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$1,000 x “net appreciation” total value of property

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$1,000 x ($20,000 - $10,000)

total value of property2 FMV - annual exclusion

AssumptionFor introductory purposes, assume donor gave donee other gifts totaling > $11,000.

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$1,000 x $10,000 = $500

$20,0002 FMV - annual exclusion

Basis $10,000+ Gift Tax 500 10,500

Sales Price $21,000 Basis $10,000+ Gift Tax 500 10,500

Sales Price $21,000 Basis $10,000+ Gift Tax 500 10,500 Gain $10,500

ConsiderAnother

Illustration

Basis $10,000+ Gift Tax ??? ? ? ?

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Gift tax x “net appreciation” total value of property

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$1,000 x “net appreciation” total value of property

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$1,000 x $5,000 total value of property

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$1,000 x $5,000 = $333

$15,0002 FMV - annual exclusion

Basis $10,000+ Gift Tax 333 10,333

Sales Price $ 9,000 Basis $10,000+ Gift Tax 333 10,333

Sales Price $ 9,000 Basis $10,000+ Gift Tax 333 10,333 Loss ($ 1,333)

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Possible to Have Two Bases

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

1 “net appreciation” = (FMV - donor’s adjusted basis)2 say something about $10,000 annual exclusion2 FMV - annual exclusion

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s Basis

Sales Price

Sales Price Area ofGain

Area ofLoss

NeitherGainnorLoss

Sales Price

Here Are Some

Illustrations

4) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $8,000 at the time of the gift. The donor paid $500 in gift tax.

Basis $ ? ? ?

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s Basis

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$10,000

$8,000

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$10,000

$8,000

$11,000 Area ofGain

Basis $10,000+ Gift Tax ? ? ? ? ? ?

All or Some

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Sales Price $11,000 Basis for Gain $10,000+ Gift Tax -0- 10,000

Gain $ 1,000

Basis $ ? ? ?

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s Basis

Sales Price

Area ofLoss

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

$10,000

$8,000

$7,500

Area ofLoss

Basis for Loss $8,000+ Gift Tax -0- 8,000

Sales Price $7,500 Basis for Loss $8,000+ Gift Tax -0- 8,000

Loss ($ 500)

Sales Price $9,000 Basis $ ? ? ?

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s Basis

Sales Price

Area ofLoss

Sales Price

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s Basisof $10,000

Sales Priceof $9,000

Area ofGain

Yields a LOSS!

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

FMV of$8,000 Area of

Sales Price of $9,000

Yields a GAIN!Therefore

basis for

Acquiredby gift?

(after

1/1/77

(inheritance)

lossafter

12/31/76

Donor’s Basis

NeitherGainnorLoss

Sales Price

Answers for b. 4 - 6(after 1976)

would be the sameas for part a.

since no gift tax addedMore of Handout

basis for

Acquiredby gift?

r 3/1/

1/1/77

(inheritance)

lossafter

12/31/76

© Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 1 Federal Income Tax.

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