4. Reporting
Gains and Losses
This chapter explains how to report capital gains
and losses and ordinary gains and losses from sales, exchanges, and other dispositions
of property.
Although this discussion refers to Schedule D (Form
1040), the rules discussed here also apply to taxpayers other than individuals.
However, the rules for property held for personal use usually will not apply to
taxpayers other than individuals.
Topics - This
chapter discusses:
- Information returns
- Schedule D (Form 1040)
- Form 4797
Useful Items -
You may want to see:
Publication
- 550 Investment Income and Expenses
- 537 Installment Sales
- 954 Tax Incentives for Distressed Communities
Form (and Instructions)
- Schedule D (Form 1040)
Capital Gains and Losses
- 1099-B
Proceeds From Broker and Barter Exchange
Transactions
- 1099-S
Proceeds From Real Estate Transactions
- 4684
Casualties and Thefts
- 4797
Sales of Business Property
- 6252
Installment Sale Income
- 8824
Like-Kind Exchanges
See chapter 5 for information about getting publications
and forms.
If you sell or exchange certain assets, you should receive an
information return showing the proceeds of the sale. This information is also
provided to the Internal Revenue Service.
Form 1099-B. If you sold stocks, bonds,
commodities, etc., you should receive Form 1099-B or an equivalent statement.
Whether or not you receive Form 1099-B, you must report all taxable sales of stocks,
bonds, commodities, etc., on Schedule D. For more information on figuring gains
and losses from these transactions, see chapter 4 in Publication 550.
Form 1099-S. An information return must
be provided on certain real estate transactions. Generally, the person responsible
for closing the transaction must report on Form 1099-S sales or exchanges of the
following types of property.
- Land (improved or unimproved), including air
space.
- An inherently permanent structure, including
any residential, commercial, or industrial building.
- A condominium unit and its related fixtures and
common elements (including land).
- Stock in a cooperative housing corporation.
If you sold or exchanged any of the above types of
property, the reporting person must give you a copy of Form 1099-S or a statement
containing the same information as the Form 1099-S.
If you receive or will receive property
or services in addition to gross proceeds (cash or notes) in this transaction,
the person reporting it does not have to value that property or those services.
In that case, the gross proceeds reported on Form 1099-S will be less than the
sales price of the property you sold. Figure any gain or loss according to the
sales price, which is the total amount you realized on the transaction.
Use Schedule D (Form 1040) to report sales, exchanges, and other
dispositions of capital assets. Before completing Schedule D, you may have to
complete other forms as shown below.
- For a sale, exchange, or involuntary conversion
of business property, complete Form 4797.
- For a like-kind exchange, complete Form 8824.
See Reporting the exchange under Like-Kind Exchanges in
chapter 1.
- For an installment sale, complete Form 6252.
See Publication 537.
- For an involuntary conversion due to casualty
or theft, complete Form 4684. See Publication 547, Casualties, Disasters, and
Thefts.
- For a disposition of an interest in, or property
used in, an activity to which the at-risk rules apply, complete Form 6198, At-Risk
Limitations. See Publication 925, Passive Activity and At-Risk Rules.
- For a disposition of an interest in, or property
used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations.
See Publication 925.
Personal-use property. Report
gain on the sale or exchange of property held for personal use (such as your home)
on Schedule D. Loss from the sale or exchange of property held for personal use
is not deductible. But if you had a loss from the sale or exchange of real estate
held for personal use for which you received a Form 1099-S, report the transaction
on Schedule D, even though the loss is not deductible. Complete columns (a) through
(e) and enter -0- in column (f).
Where you report a capital gain or loss depends
on how long you own the asset before you sell or exchange it. The time you own
an asset before disposing of it is the holding period.
If you hold a capital asset 1 year or less, the
gain or loss from its disposition is short term. Report it in Part I of Schedule
D. If you hold a capital asset longer than 1 year, the gain or loss from its disposition
is long term. Report it in Part II of Schedule D (Form 1040).
| IF you hold the property... |
THEN
you have a... |
| 1
year or less, |
Short-term
capital gain or
loss. |
| More than 1
year, |
Long-term capital gain or
loss. |
These distinctions are essential to correctly arrive
at your net capital gain or loss. Capital losses are allowed in full against capital
gains plus up to $3,000 of ordinary income. See Capital
Gains Tax Rates, later.
Holding period.
To figure if you held property longer than 1 year, start counting
on the day following the day you acquired the property. The day you disposed of
the property is part of your holding period.
Example.
If you bought an asset on June 19, 2003, you should
start counting on June 20, 2003. If you sold the asset on June 19, 2004, your
holding period is not longer than 1 year, but if you sold it on June 20, 2004,
your holding period is longer than 1 year.
Patent property. If
you dispose of patent property, you generally are considered to have held the
property longer than 1 year, no matter how long you actually held it. For more
information, see Patents in chapter 2.
Inherited property. If you inherit
property, you are considered to have held the property longer than 1 year, regardless
of how long you actually held it.
Installment sale. The gain from an installment
sale of an asset qualifying for long-term capital gain treatment in the year of
sale continues to be long term in later tax years. If it is short term in the
year of sale, it continues to be short term when payments are received in later
tax years.
The date the installment payment is received
determines the capital gains rate that should be applied not the date the asset
was sold under an installment contract.
Nontaxable exchange. If
you acquire an asset in exchange for another asset and your basis for the new
asset is figured, in whole or in part, by using your basis in the old property,
the holding period of the new property includes the holding period of the old
property. That is, it begins on the same day as your holding period for the old
property.
Example.
You bought machinery on December 4, 2003. On June
4, 2004, you traded this machinery for other machinery in a nontaxable exchange.
On December 5, 2004, you sold the machinery you got in the exchange. Your holding
period for this machinery began on December 5, 2003. Therefore, you held it longer
than 1 year.
Corporate liquidation. The
holding period for property you receive in a liquidation generally starts on the
day after you receive it if gain or loss is recognized.
Profit-sharing plan. The
holding period of common stock withdrawn from a qualified contributory profit-sharing
plan begins on the day following the day the plan trustee delivered the stock
to the transfer agent with instructions to reissue the stock in your name.
Gift. If you receive a gift of
property and your basis in it is figured using the donor's basis, your holding
period includes the donor's holding period. For more information on basis, see
Publication 551, Basis of Assets.
Real property. To
figure how long you held real property, start counting on the day after you received
title to it or, if earlier, the day after you took possession of it and assumed
the burdens and privileges of ownership.
However, taking possession of real property
under an option agreement is not enough to start the holding period. The holding
period cannot start until there is an actual contract of sale. The holding period
of the seller cannot end before that time.
Repossession. If you sell
real property but keep a security interest in it and then later repossess it,
your holding period for a later sale includes the period you held the property
before the original sale, as well as the period after the repossession. Your holding
period does not include the time between the original sale and the repossession.
That is, it does not include the period during which the first buyer held the
property.
Nonbusiness bad debts. Nonbusiness
bad debts are short-term capital losses. For information on nonbusiness bad debts,
see chapter 4 of Publication 550.
The totals for short-term capital gains and losses
and the totals for long-term capital gains and losses must be figured separately.
Net short-term capital gain or loss.
Combine your short-term capital gains and losses, including your share
of short-term capital gains or losses from partnerships, S corporations, and fiduciaries
and any short-term capital loss carryover. Do this by adding all your short-term
capital gains. Then add all your short-term capital losses. Subtract the lesser
total from the other. The result is your net short-term capital gain or loss.
Net long-term capital gain or loss.
Follow the same steps to combine your long-term capital gains and
losses. Include the following items.
- Net section 1231 gain from Part I, Form 4797,
after any adjustment for nonrecaptured section 1231 losses from prior tax years.
- Capital gain distributions from regulated investment
companies (mutual funds) and real estate investment trusts.
- Your share of long-term capital gains or losses
from partnerships, S corporations, and fiduciaries.
- Any long-term capital loss carryover.
The result from combining these items with other long-term
capital gains and losses is your net long-term capital gain or loss.
Net gain. If the total
of your capital gains is more than the total of your capital losses, the difference
is taxable. However, the part that is not more than your net capital gain may
be taxed at a rate that is lower than the rate of tax on your ordinary income.
See Capital Gains Tax Rates, later.
Net loss. If the total
of your capital losses is more than the total of your capital gains, the difference
is deductible. But there are limits on how much loss you can deduct and when you
can deduct it. See Treatment of Capital Losses, next.
Treatment
of Capital Losses
If your capital losses are more than your capital gains, you
must deduct the difference even if you do not have ordinary income to offset it.
The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500
if you are married and file a separate return).
Table 4-2. Holding Period for Different Types
of Acquisitions
| Type of acquisition: |
When your holding period starts: |
| Stocks
and bonds bought on a securities market |
Day after trading
date you bought security. Ends on trading date you sold security. |
| U.S.
Treasury notes and bonds |
If bought at
auction, day after notification of bid acceptance. If bought through subscription,
day after subscription was submitted. |
| Nontaxable
exchanges |
Day after date
you acquired old property. |
| Gift
|
If your basis
is giver's adjusted basis, same day as giver's holding period began. If your basis
is FMV, day after date of gift. |
| Real
property bought |
Generally,
day after date you received title to the property. |
| Real property
repossessed |
Day after date you originally received title to
the property, but does not include time between the original sale and date of
repossession. |
Capital loss carryover. Generally,
you have a capital loss carryover if either of the following situations applies
to you.
- Your net loss on Schedule D, line 16, is more
than the yearly limit.
- The amount shown on Form 1040, line 40 (your
taxable income without your deduction for exemptions), is less than zero.
If either of these situations applies to you for 2004,
see Capital Losses under Reporting
Capital Gains and Losses in chapter 4 of Publication 550 to figure
the amount you can carry over to 2005.
Example.
Bob and Gloria Sampson sold property in 2004. The
sale resulted in a capital loss of $7,000. The Sampsons had no other capital transactions.
On their joint 2004 return, the Sampsons deduct $3,000, the yearly limit. They
had taxable income of $2,000. The unused part of the loss, $4,000 ($7,000 - $3,000),
is carried over to 2005.
If the Sampsons' capital loss had been $2,000,
it would not have been more than the yearly limit. Their capital loss deduction
would have been $2,000. They would have no carryover to 2005.
Short-term and long-term losses.
When you carry over a loss, it retains its original character as either
long term or short term. A short-term loss you carry over to the next tax year
is added to short-term losses occurring in that year. A long-term loss you carry
over to the next tax year is added to long-term losses occurring in that year.
A long-term capital loss you carry over to the next year reduces that year's long-term
gains before its short-term gains.
If you have both short-term and long-term
losses, your short-term losses are used first against your allowable capital loss
deduction. If, after using your short-term losses, you have not reached the limit
on the capital loss deduction, use your long-term losses until you reach the limit.
To figure your capital loss carryover from 2003
to 2004, use the Capital Loss Carryover Worksheet in the 2004 Instructions for
Schedule D (Form 1040).
Joint and separate returns. On
a joint return, the capital gains and losses of a husband and wife are figured
as the gains and losses of an individual. If you are married and filing a separate
return, your yearly capital loss deduction is limited to $1,500. Neither you nor
your spouse can deduct any part of the other's loss.
If you and your spouse once filed separate
returns and are now filing a joint return, combine your separate capital loss
carryovers. However, if you and your spouse once filed jointly and are now filing
separately, any capital loss carryover from the joint return can be deducted only
on the return of the spouse who actually had the loss.
Death of taxpayer. Capital
losses cannot be carried over after a taxpayer's death. They are deductible only
on the final income tax return filed on the decedent's behalf. The yearly limit
discussed earlier still applies in this situation. Even if the loss is greater
than the limit, the decedent's estate cannot deduct the difference or carry it
over to following years.
Corporations. A corporation
can deduct capital losses only up to the amount of its capital gains. In other
words, if a corporation has a net capital loss, it cannot be deducted in the current
tax year. It must be carried to other tax years and deducted from capital gains
occurring in those years. For more information, see Publication 542.
The tax rates that apply to a net capital gain
are generally lower than the tax rates that apply to other income. These lower
rates are called the maximum capital gains rates.
The term “net capital gain”
means the amount by which your net long-term capital gain for the year is more
than your net short-term capital loss.
See the Schedule D (Form 1040) Instructions.
Unrecaptured section 1250 gain. This
is the part of any long-term capital gain on section 1250 property (real property)
that is due to depreciation. Unrecaptured section 1250 gain cannot be more than
the net section 1231 gain or include any gain otherwise treated as ordinary income.
Use the worksheet in the Schedule D instructions to figure your unrecaptured section
1250 gain. For more information about section 1250 property and net section 1231
gain, see chapter 3.
Use Form 4797 to report gain or loss from a sale, exchange,
or involuntary conversion of property used in your trade or business or that is
depreciable or amortizable. You can use Form 4797 with Forms 1040, 1065, 1120,
or 1120S.
Section 1231 gains and losses. Show
any section 1231 gains and losses in Part I. Carry a net gain to Schedule D (Form
1040) as a long-term capital gain. Carry a net loss to Part II of Form 4797 as
an ordinary loss.
If you had any nonrecaptured net section
1231 losses from the preceding 5 tax years, reduce your net gain by those losses
and report the amount of the reduction as an ordinary gain in Part II. Report
any remaining gain on Schedule D (Form 1040). See Section
1231 Gains and Losses in chapter 3.
Ordinary gains and losses. Show
any ordinary gains and losses in Part II. This includes a net loss or a recapture
of losses from prior years figured in Part I of Form 4797. It also includes ordinary
gain figured in Part III.
Ordinary income from depreciation.
Figure the ordinary income from depreciation on personal property
and additional depreciation on real property (as discussed in chapter 3) in Part
III. Carry the ordinary income to Part II of Form 4797 as an ordinary gain. Carry
any remaining gain to Part I as section 1231 gain, unless it is from a casualty
or theft. Carry any remaining gain from a casualty or theft to Form 4684.
Jane Smith is single. At the beginning of 2004, she owned and
operated Jane's Dress Shop at 25 Main Street, Smalltown, Virginia. On March 16,
she traded the land and building where she operated her dress shop for other land
and a building around the corner at 97 Oak Street. She then opened the J. Smith
Hardware Store. Jane also sold all the equipment she had used in her dress shop,
as well as a vacant lot across the street from the shop used for customer parking.
She reports these transactions as shown in the filled-in Form 4797 and Form 8824
at the end of this chapter.
Jane sold the equipment she used in her dress shop
for $3,000. She originally paid $6,000 for it on January 20, 1986, and had fully
depreciated it. She realized a gain of $3,000. The gain was less than the $6,000
depreciation taken, so all her gain is ordinary income from depreciation. This
amount is reported in Part III of Form 4797 and entered in Part II on line 13.
The adjusted basis of the customer parking lot
(acquired in 1980) was $6,000 and its sales price was $8,000. Jane reports her
$2,000 gain from the sale in Part I of Form 4797.
Jane had a nonrecaptured net section 1231 loss
of $1,200. She shows this loss in Part I on line 8. The net section 1231 gain
of $2,000 is more than the nonrecaptured loss, so that gain is treated as ordinary
gain only up to the loss. Therefore, the loss of $1,200 on line 8 is entered as
an ordinary gain in Part II on line 12. The loss is also subtracted from the $2,000
gain on line 7. The $800 balance is entered on line 9.
Jane entered into a like-kind exchange by trading
her business real property for other business real property, so she must report
the transaction on Form 8824 and attach the form to her tax return.
On lines 16 and 17 of Form 8824, Jane enters the
fair market value of her new property, $120,000, consisting of $95,000 for the
building and $25,000 for the land. On line 18, she enters the adjusted basis of
the old property, $100,000, consisting of $17,687 for the building and $82,313
for the land. Her realized gain on line 19 is $20,000. Under the like-kind exchange
rules, this gain is not recognized. Jane enters “-0-” on line 20.
However, because there is additional depreciation
of $4,405 on the old building, Jane must determine whether any of her gain has
to be recognized as ordinary income under the recapture rules. The old building
has an FMV of $90,000. Had the transaction been a cash sale, Jane's realized gain
on the building would have been $72,313 ($90,000 - $17,687). The additional depreciation
is less than that amount, so her ordinary income due to the additional depreciation
would have been $4,405. That amount is less than the $95,000 fair market value
of the new building, so there is no ordinary income recognized on the exchange.
The $4,405 ordinary income that does not have to be reported is carried over to
the new building as additional depreciation. Jane enters “-0-” on Form 8824, line 21 and Form
4797, line 16.
All of Jane's $20,000 gain is deferred (line 24).
The basis of her new property (line 25) is $100,000, the same as the adjusted
basis of her old property. Of that amount, $79,167 [($95,000 ÷ $120,000) × $100,000]
is allocated to the building and $20,833 [($25,000 ÷ $120,000) × $100,000] is
allocated to the land.
The entries in Part II, Form 4797, show an ordinary
gain of $4,200 that is carried to Form 1040, line 14.
The entries in Part I, Form 4797, result in a long-term
capital gain of $800 from section 1231 transactions. This is carried to Schedule
D (Form 1040), line 11, column (f).
For
more information about a specific exchange, please contact a Babon Group Realtor. |
