Chapter
16
Investment and Personal
Financial Planning
Business versus Investment Activity
Business activity
Time and talent on regular basis
Profit partially attributable to personal involvement
Income is considered earned income
Losses are fully deductible “above the line”
Hobby losses only deductible to extent of hobby income –
personal enjoyment vs. plausible profit motive
Investment activity
Investment of capital rather than time and talent
Income is considered unearned income
Losses are generally deductible only to extent of gains
from sale of other investment assets, plus $3,000
Investments in Financial Assets
Common investments in financial securities:
Common and Preferred stock (equity securities)
Savings accounts, CDs, bonds (debt securities)
How do you distinguish between debt vs. equity
securities?
Return on / Income from investment includes
Interest (ordinary income)
Dividends
Gains (Losses) on sale of assets.
Gains/Losses on Securities
Realization requires a sale or exchange
Gain/loss = Proceeds - adjusted basis
Character is capital—time period matters
< 1 year holding period → short term capital gain or loss
> 1 year holding period → long-term capital gain or loss
Preferential rates apply to net long-term capital gains
Securities/investment assets: 0-20%
Unrecaptured Section 1250 Recapture: 25%
Collectibles: 28%
Net short-term capital gains taxed as ordinary income
Preferential rates do not apply