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

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

Federal Income

Tax




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





B. Business

Consider anExample





B. Business





B. Business

ConsiderAnotherExample





B. BusinessGains but NOT Losses





B. Business

Here’s Another

One





B. Business




1. Gains and losses2. Gains and losses

B. Business1.2.3.

Will Complete Laternot


II. Other Information Needed?

B A


Other Information Needed?

B AA. Sales Price (and date)II.



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

II.

Today’sLesson



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

II.



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

II.


II. Other Information Needed?

B A

III.III. Holding Period

A. Short-termB. Long-term


Which would you prefer?

GainST

LT


Which would you prefer?

LossST

LT


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)

LT

<LT>

*


Special Treatment

’54 – ’69ST 100%


LT 50 / 50LTCGD / taxed

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

**


Special Treatment

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

<LT>

50 / 50LTCGD / taxed

LT


<ST>

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%



<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?

Yes

(afte

r 3/1/

13)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76

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









basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76

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


Yes

(afte

r 3/1/

13)

No

Yes

2 FMV - annual exclusion









basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Cost + Capital Improvements— Accumulated Depr = Adjusted Basis










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76



Yes

(afte

r 3/1/

13)

No No










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Acquiredby Gift?

Yes(af

ter 19

20)

No

(inheritance) Y

es










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76



YesNo

Donor’s Basis2 FMV - annual exclusion


“Step into the shoes of the

donor.”









basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Acquiredby Gift?

Yes(af

ter 19

20)

No

(inheritance)

NO










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76





YesNo










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76





YesNo

Inherited Property= FMV on DOD

“Stepped-Up” Basis










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


“Stepped-Up” Basis2 FMV - annual exclusion

“Step into the shoesof the donor.”









basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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.


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



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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76





YesNo

Best!










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Acquiredby Gift?

Yes(af

ter 19

20)

No

(inheritance) Y

es










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76



YesNo

Donor’s Basis2 FMV - annual exclusion









basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


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










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76



Donor’s basis+ “some” GT pd= Basis










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Gift tax x “net appreciation” total value of property










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


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










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Gift tax x “net appreciation” total value of property










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


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










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


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










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76



YesNo

NO


Possible to Have Two Bases








basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Donor’s Basis

FMV

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Donor’s Basis

FMV











basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


$10,000

$8,000











basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


$10,000

$8,000

$11,000 Area ofGain





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

None!

All or Some









basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Donor’s Basis

FMV

Sales Price

Area ofLoss










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

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?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Donor’s Basis

FMV

Sales Price


Area ofLoss

Sales Price










basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Donor’s Basisof $10,000

Sales Priceof $9,000


Area ofGain

Yields a LOSS!









basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


FMV of$8,000 Area of

Loss

Sales Price of $9,000


Yields a GAIN!Therefore









basis for







Acquiredby gift?

Yes

(after

3/1/1

3)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


Donor’s Basis

FMV

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?

Yes

(afte

r 3/1/

13)

Yes

(afte

r 192

0)

Yes

befor

e

1/1/77

gain

Yes

No

No

(inheritance)

NoNo

lossafter

12/31/76


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

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