Liberty Tax Service Online
Basic Income Tax Course.
Lesson 11
1
Chapter 10 Homework 1
HOMEWORK 1: Prepare the requested forms or worksheets for each
of the following situations.
1. Social Security Benefits Worksheet.
Lex C. and Lana B. Turner are married and file
a joint return. Lex is retired and in 2008
received a fully taxable pension of
$14,500. Lana works for a dentist and her
2008 wages were $22,375. They also
received $2,000 in taxable interest from
various certificates of deposit and $1,400
in tax-exempt interest from municipal
bonds. Lex received Form SSA-1099 for
2008, which is shown below.
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Chapter 10 Homework 1
3
4
Chapter 10 Homework 1
2. Form 8812.
Peter S. and Tammy R. Piper are married and file a joint
return. In 2008, their three children were all under
age 17. Line 1 of their Child Tax Credit Worksheet
is $3,000. The amount on line 52 of Form 1040 is
$174 and they have no other credits except the
earned income credit. Based on their AGI, they will
receive an earned income credit of $2,426. Their only
income is Peter’s W-2 which is shown below.
5
Chapter 10 Homework 1
6
7
Chapter 10 Homework 2
HOMEWORK 2: Prepare a 2008 tax return using the
information and forms provided.
Lincoln J. (born 12/8/1963) and Theresa L. Bana (born
4/4/1965) live with their three children at 47 Clay
Street, Seattle, WA 98174. Lincoln is a computer
engineer and Theresa is a physician’s assistant. In
2008, their younger son Raul (SSN 364-86-4162,
born 08/16/1992) was in high school. Their
daughter Maria (SSN 399-23-0997, born 5/12/1990)
started her freshman year in college in August 2008.
Antonio, their older son (SSN 264-90-2662, born
10/15/1986), began his senior year in college in
September 2008. Antonio works on weekends and
during the summer and uses all the money he earns
to pay his own school expenses. Both Maria and
Antonio are full-time students who purchased their
books from and/or paid fees to their school as a
condition of enrollment.
8
Chapter 10 Homework 2
Maria’s school expenses were:
Tuition Fall Semester of 2008
Course related books
Student activity fees
Transportation
$1,400
350
200
150
Antonio’s school expenses were:
Tuition Fall Semester of 2008
$2,300
Tuition Spring Semester of 2009
(paid in December 2008)
2,700
Course related books
280
9
Chapter 10 Homework 2
For the purpose of this problem, use Form 8863 only. The
tuition and fees deduction, line 34 of Form 1040 will be
discussed in Chapter 16.
In addition to the W-2 forms and 1099-DIV shown
below, Lincoln and Theresa received $300 interest
from a certificate of deposit at First National Bank.
10
Chapter 10 Homework 2
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Chapter 10 Homework 2
12
Chapter 10 Homework 2
13
Chapter 10 Homework 2
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Chapter 10 Homework 2
15
Chapter 10 Homework 2
16
Chapter 10 Homework 2
17
Chapter 10 Homework 2
18
Chapter 10 Homework 2
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20
Chapter 11: Basis of Property and Capital
Gains (Including Sale of Home)
Chapter Contents
 Basis of Property
 Cost Basis
 Adjusted Basis
 Other Basis
 Sale of Property
 Long-term and Short-term Capital Gains
 Capital Losses
 Capital Gains Tax Rates
 Sale of Stocks
 Sale of Home
 Key Ideas
Objectives
 Learn About Basis of Property and How to Figure It
 Learn About How to Handle Short-term and Long-term
Capital Gains
 Learn How to Complete Schedule D
 Learn How to Report the Sale of Stocks
 Learn How to Report the Sale of Your Home
21
Basis of Property and Capital
Gains (Including Sale of Home)
Basis
 Basis is the amount of your investment in
property for tax purposes.
 Used to figure deductions for: depreciation,
amortization, depletion, charitable gifts,
casualty losses, gain or loss on sale or other
disposition of property.
 Basis of property you buy is usually its cost.
22
Basis of Property and Capital
Gains (Including Sale of Home)
 Original basis can be adjusted; improvements
increase basis, depreciation or casualty loss
decrease basis
 Generally, the higher your basis is for an asset,
the less gain is reported on its sale; the higher
your basis is in the depreciable asset, the higher
is your depreciation deduction.
23
COST BASIS
Cost includes:
 Sales tax (except if claimed on Schedule
A)
 Freight charges
 Installation and testing charges
 Excise taxes
 Legal and accounting fees
 Revenue stamps
 Recording fees
 Real estate taxes
24
COST BASIS
Stocks and Bonds
 Basis of stocks and bonds is purchase price plus
any costs of purchase or sale such as
commissions and recording and transfer fees.
 May use average basis for mutual fund shares if
acquired at different times and prices and
shares left on deposit in account kept by agent.
25
COST BASIS
Real Property
Certain fees and other expenses are part of basis for
real property (real estate); included are: taxes you
agree to pay that were owed by seller,
certain settlement fees and closing costs, and
expenses you pay for construction of nonbusiness
property.
Allocate cost basis between land and improvements to
figure basis for depreciation of improvements (land
is NOT depreciable property)
26
ADJUSTED BASIS
Before figuring gain or loss, etc., you must make
certain increases or decreases to the basis with the
result being the adjusted basis.
Add the cost of improvements to your basis in the
property if they increase the value of the property,
lengthen its life, or adapt it to a different use.
27
ADJUSTED BASIS
Table 11-1. Examples of Improvements
28
ADJUSTED BASIS
29
ADJUSTED BASIS
In January 2004, David paid $80,000 for real property
to be used as a factory. He also paid commissions of
$2,000 and title research and legal fees of $600.
He allocated the total cost of $82,600 between the
land and the building- $10,325 for the land and
$72,275 for the building. Immediately, he spent
$20,000 in remodeling the building before he placed
it in service.
He was allowed depreciation of $11,735 for the years
2004 through 2008. In 2005 Dave had a casualty loss
of $5,000 on the building from a fire that was
not covered by insurance. This loss was claimed as a
deduction. He spent $5,500 to repair the fire
damages. The adjusted basis of the building on
January 1, 2009, is figured as follows:
30
ADJUSTED BASIS
Original cost of building, including fees and commissions
Adjustments to basis:
Add:
Improvements
Repair of fire damage
Subtract:
Depreciation
Casualty loss
Adjusted basis on January 1, 2009
$72,275
$20,000
5,500
11,735
5,000
81,040
The basis of the land, $10,325, remains unchanged. It is not affected by any
of the above adjustments, which affect only the basis of the building.
31
OTHER BASIS
Cost cannot be used as basis
1. Main factor used in determining basis is how you
acquired the property
2. Fair market value (FMV) is used as adjusted basis
FMV:



Price at which property would change hands between
a buyer and a seller,
Neither having to buy or sell,
Both having reasonable knowledge of all necessary
facts.
32
OTHER BASIS
3. For property received for your services, include FMV
of property in income with the amount you include
in income being your basis.
4. For property inherited from decedent, basis is
generally one of the following:
a. FMV at time of death
b. FMV on alternate valuation date
33
OTHER BASIS
Example:
John’s father died on February 10, 2008 and left him
100 shares of XYZ stock for which his father paid
$6,000 in 2000. The $6,000 is not the basis of John’s
stock. On the date of his father’s death, XYZ was
trading at $105 per share. Since the alternate
valuation date was not chosen, the basis of the stock
is $10,500 (100 shares x $105).
34
OTHER BASIS
5. For property you receive as a gift, if at time of gift
the FMV is more than donor’s basis, use donor’s basis
to figure gain or loss; if at time of gift the FMV is less
than donor’s basis, use donor’s basis for gain and
FMV for loss.
35
OTHER BASIS – Problem 1
Jim received an acre of land as a gift. At the time of the
gift, the land had a FMV of $8,000. The donor’s
adjusted basis was $10,000. After Jim received the
property, no events occurred to increase or decrease
his basis in it. If he sells the property for $12,000,
how much of a gain will Jim realize?
a. $2,000
b. $4,000
c. $0
36
OTHER BASIS – Problem 1
Jim received an acre of land as a gift. At the time of the
gift, the land had a FMV of $8,000. The donor’s
adjusted basis was $10,000. After Jim received the
property, no events occurred to increase or decrease
his basis in it. If he sells the property for $12,000,
how much of a gain will Jim realize?
a. $2,000
He must use the donor’s adjusted basis ($10,000) at the time
of the gift as his basis to figure gain. If he sells the
property for $7,000, he will have a $1,000 loss because he
must use the FMV ($8,000) at the time of the gift to figure
loss. If the sales price is between $8,000 and $10,000, he
has neither gain nor loss.
37
OTHER BASIS
6. For property for personal use and then changed
to business or rental, basis for depreciation is
the lesser of: FMV of property on date of change
or adjusted basis on date of change.
38
OTHER BASIS
Example:
Several years ago Craig paid $160,000 to have his home built
on a lot that cost him $20,000. Before changing the
property to rental use last year, he paid $20,000 for
permanent improvements to the house and claimed a
$2,000 casualty loss deduction for damage to the house.
Because land is not depreciable, he can only include the
cost of the house when figuring the basis for depreciation.
His adjusted basis in the house when he changes its use is
$178,000 ($160,000+ $20,000 - $2,000). On the date of
change in use, his property has an FMV of $180,000 of
which $15,000 is for the land and $165,000 is for the
house. The basis of depreciation on the house is the FMV
on the date of change ($165,000), because it is less than
his adjusted basis ($178,000).
39
SALE OF PROPERTY
A sale is transfer of property for money or a
mortgage, note, or other promise to pay
money.
1. A trade is transfer of property for other
property or services and may be taxed in
same way as a sale.
40
SALE OF PROPERTY
Gain or Loss
Gain or loss on sale or trade of property is
figured by comparing amount realized with
the adjusted basis of the property.
41
SALE OF PROPERTY
Capital or Ordinary Gain or Loss
A capital gain may be taxed at a lower tax rate
than ordinary income.
1. You have a capital gain or loss if you sell or
exchange a capital asset.
2. Examples of capital assets include: stocks
and bonds; home owned and occupied by
you and your family; household furnishings;
car used for pleasure or commuting; gems
and jewelry; coin or stamp.
42
SALE OF PROPERTY
Reporting Gains and Losses
If you sold stocks, bonds, commodities, etc., you
should receive Form 1099-B or Form 1099-S for
certain real estate transactions. Table 11-3
shows information you will need from Form
1099-B.
You must report all taxable sales of stocks, bonds,
commodities, etc. on Schedule D.
43
SALE OF PROPERTY
44
SALE OF PROPERTY
Table 11-3. Information You Will Need From Form 1099-B
IF Form 1099-B shows information in:
THEN report it on:
Box 1a, Date of Sale
Schedule D, column (c), of either
Part I, line 1, or Part II, line 8
Box 2, Sales Price reported to Internal
Revenue Service (whether gross or net
proceeds were reported)
Schedule D, column (d), of either
Part I, line 1, or Part II, line 8
Box 4, Federal income tax withheld
Form 1040, line 62
Box 5. Number of shares exchanged
Box 7, Description of the property sold
Schedule D, column (a), of either
Part I, line 1, or Part II, line 8
45
SALE OF PROPERTY
46
SALE OF PROPERTY
Schedule D
Report gains and losses on Schedule D.
1. Before completing Schedule D, you may have to
complete other forms.
 Form 4797, Sales of Business Property - for a sale,
exchange, or involuntary conversion of business property
 Form 8824, Like-Kind Exchanges - for a like-kind
exchange
 Form 6252, Installment Sale Income - for an installment
sale
 Form 4684, Casualties and Thefts - for an involuntary
conversion due to casualty or theft
 Form 6781, Gains and Losses From Section 1256
Contracts and Straddles – for reporting sale or exchange of
options and future contracts.
47
SALE OF PROPERTY
48
SALE OF PROPERTY
49
SALE OF PROPERTY
50
LONG AND SHORT-TERM
CAPITAL GAINS
Where you report capital gain or loss depends on how
long you own the asset before selling or exchanging
it. This is referred to as the holding period.
1. If capital asset is held 1 year or less, holding period
is short-term and gain or loss is considered shortterm.
2. If capital asset is held more than 1 year, holding
period is long-term and gain or loss is considered
long-term.
3. Report short-term gain or loss on Part I of Schedule
D; report long term gain or loss on Part II of
Schedule D.
51
LONG AND SHORT-TERM
CAPITAL GAINS- Problem 1
Larry bought an asset on June 18, 2007, and
would start counting on June 19, 2007. What
would the holding period be if Larry sells the
asset on June 19, 2008?
a. Short-term
b. Long-term
52
LONG AND SHORT-TERM
CAPITAL GAINS- Problem 1
Larry bought an asset on June 18, 2007, and
would start counting on June 19, 2007. What
would the holding period be if Larry sells the
asset on June 19, 2008?
a. Short-term
b. Long-term
If he sold the asset on June 18, 2008, his holding period is not
more than one year, but if he sold it on June 19, 2008 his
holding period is more than one year.
53
LONG AND SHORT-TERM
CAPITAL GAINS
4. Inherited property and patent property is considered
long-term gain or loss.
5. For an installment sale, if long-term in year of sale,
stays long-term; if short-term in year of sale, stays
short-term.
6. For a gift you received in which your basis is figured
using the donor’s basis, your holding period includes
donor’s holding period.
7. Nonbusiness bad debts are short-term capital losses.
8. Net short-term capital gain or loss is reported on line
7 of Schedule D; net long-term capital gain or loss is
reported on line 15 on Schedule D.
54
LONG AND SHORT-TERM
CAPITAL GAINS
Qualified Dividends
Qualified dividends are subject to maximum tax rates that
apply to capital gains.
1. To qualify dividends must be paid by a U.S. corporation or
a qualified foreign corporation and must meet holding
period.
 A stock that pays dividends must be held more than
60 days during 121-day period that begins 60 days
before the ex-dividend date.
 Ex-dividend date is first date following declaration
of dividend on which the buyer of a stock will not
receive the next dividend payment. Instead, seller
gets dividend.
 When counting number of days held, include the day
disposed of but not acquired.
2. Figure tax by completing Schedule D Tax Worksheet or the
Qualified Dividends and Capital Gain Tax Worksheet.
55
LONG AND SHORT-TERM
CAPITAL GAINS
Capital Gain Distributions
Capital gain distributions are reported on line 13 on
Schedule D.
1. If do not use Schedule D, use Qualified Dividends and
Capital Gain Tax Worksheet to figure tax and enter it on
line 44 of Form 1040.
56
LONG AND SHORT-TERM
CAPITAL GAINS
Example:
John is single. His taxable income on Form 1040, line
43, is $41,014. He has a Form 1099-DIV which shows
ordinary dividends of $690 in box 1a, $450 of
qualified dividends in box 1b and a $125 capital gain
distribution in box 2a.
Since John is not required to file Schedule D, he
computes his Form 1040, line 44 tax using the
Qualified Dividends and Capital Gain Tax Worksheet
shown next. His tax is $6,536. Without the
worksheet, his tax from the Tax Table would be
$6,600. Using the worksheet saved John $64.
57
Form 1040, Page 1
Form 1040, Page 2
58
LONG AND SHORT-TERM
CAPITAL GAINS
Bad Debts
You have a bad debt if someone owes you
money that you cannot collect.
1. Deduct nonbusiness bad debts as shortterm capital losses on Schedule D.
59
CAPITAL LOSSES
If your losses are more than your gains, you can
claim a capital loss deduction.
1. Report on line 13 of Form 1040 and enclose in
parentheses.
2. Limit on capital loss deduction is lesser of
$3,000 ($1,500 if MFS) or your net loss as
shown on line 16 of Schedule D.
60
CAPITAL LOSSES
Capital Loss Carryover
3. If total net loss is more than yearly limit on capital
loss deductions, you can carry over unused part to
next year.
4. Amount of carryover is amount of total net loss that
is more than lesser of: allowable capital loss
deduction for year or taxable income increased by
allowable capital loss deduction and deduction for
personal exemptions.
5. Use Capital Loss Carryover Worksheet.
61
CAPITAL LOSSES
62
CAPITAL LOSSES – Problem 1
Don J. and Joanne H. Herris sold investment
property in 2008. The sale resulted in a
capital loss of $7,000. The Herris’ had no
other capital transactions. They had taxable
income of $26,000. What is the Herris’
capital loss deduction for 2008?
a. $7,000
b. $4,000
c. $3,000
63
CAPITAL LOSSES – Problem 1
Don J. and Joanne H. Herris sold investment property in
2008. The sale resulted in a capital loss of $7,000.
The Herris’ had no other capital transactions. They
had taxable income of $26,000. What is the Herris’
capital loss deduction for 2008?
c. $3,000
On their joint 2008 return, they deduct $3,000, the yearly
limit. The unused part of the loss, $4,000 ($7,000 -$3,000),
is carried over to 2009. If the Herris’ 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 2009.
64
CAPITAL GAIN TAX RATES
To find out your capital gain tax rate, refer to
Table 11-4.
1. Complete Part III of Schedule D if you have a
net capital gain and your taxable income on line
43 of Form 1040 is more than zero or you have
qualified dividends on Form 1040, line 9b.
Exception – if Form 1040, line 43, is zero, enter
zero on Form 1040, line 44, and do not complete
Part III of Schedule D.
65
CAPITAL GAIN TAX RATES
Example:
Bob has a net capital gain from selling
collectibles, so the capital gain rate would
be 28%. Because he is single and his
taxable income is $25,000, his
regular tax rate is 15%. All his taxable
income would be taxed at the 15% rate. The
28% rate does not apply.
66
CAPITAL GAIN TAX RATES
67
CAPITAL GAIN TAX RATES – Problem 1
Edmund is filing as single. The amounts on his various forms
are the following:
Form 1040, line 43
Schedule D, line 7
Schedule D, line 15
Schedule D, line 16
Taxable Income:
Net short-term capital loss
Net long-term capital gain
Combine lines 7 and 15
(transferred to Form 1040,
$65,001
($5,000)
$16,000
$11,000
line 13)
There is capital gain on Edmund’s Schedule D, lines 15 and 16,
and Form 1040, line 43, is more than zero. Part III of
Schedule D is shown later. The Qualified Dividends and
Capital Gain Tax Worksheet and lines 13 and 43 and
44 are shown on the following slides.
What is Edmund’s tax liability for 2008?
a. $12,600
b. $11,000
c. $11,500
68
CAPITAL GAIN TAX RATES – Problem 1
Edmund is filing as single. The amounts on his various forms
are the following:
Form 1040, line 43
Schedule D, line 7
Schedule D, line 15
Schedule D, line 16
Taxable Income:
Net short-term capital loss
Net long-term capital gain
Combine lines 7 and 15
(transferred to Form 1040,
$65,001
($5,000)
$16,000
$11,000
line 13)
There is capital gain on Edmund’s Schedule D, lines 15 and 16,
and Form 1040, line 43, is more than zero. Part III of
Schedule D is shown later. The Qualified Dividends and
Capital Gain Tax Worksheet and lines 13 and 43 and
44 are shown on the following slides.
What is Edmund’s tax liability for 2008?
c. $11,500
69
CAPITAL GAIN TAX RATES – Problem 1
70
The tax on line 18 minus the tax on line 17 results in a savings of $1,100
71
$12,600 – $11,500 = $1,100
CAPITAL GAIN TAX RATES – Problem 1
Form 1040, Page 1
Form 1040, Page 2
72
SALE OF STOCKS
A. Blocks: If you do not identify the specific block at
time of sale, shares sold are treated as coming from
the earliest block purchased.
Example:
In 1998, Mary bought 100 shares of Acme Corporation
stock for $2,000. In 1999, she bought another 100
shares of Acme for $2,300. In 2008, Mary sold
100 shares of Acme for $3,000. The adjusted basis of
the shares sold is $2,000. However, if Mary had told
her broker to sell the 100 shares bought in 1999, the
adjusted basis of the shares sold would have been
$2,300, reducing her gain on the sale.
73
SALE OF STOCKS
B. Stock Splits. Stock acquired in a tax-free stock
dividend or stock split has same holding period as
original stock owned.
Example:
On February 18, 2002, Rick bought 100 shares of XYZ
Corporation stock for $1,000 ($10 a share). On April
6, 2008, the stock split two-for-one. On April
9, 2008 Rick sold all his 200 shares of XYZ stock
which had a basis of $5 a share.
74
SALE OF STOCKS
C. Wash Sales. Loss on wash sale is not deductible;
disallowed loss added to basis of stock purchased.
Example:
Margaret sells 100 shares of KT stock on May 1, 2008
for a loss of $1,200. On May 26, 2008, she buys 100
shares of KT stock. She has made a wash sale and
cannot deduct her loss. The $1,200 loss from the
wash sale is added to the basis of the new KT stock
purchased.
75
T. Robert Pierce
16 Big Bucks Lane
New York, NY 10020
Payer’s Federal ID
74-1522233
Tommy B. Lee
2508 Nansemond Drive
Poughkeepsie, NY 12602
Tax Year 2008
Substitute Forms 1099
Recipient’s SSN
400-00-1001
Dividends and Distributions (1099-DIV)
1a.
1b.
2a.
2b.
2c.
2d.
3.
4.
5.
6.
7.
8.
9.
Account Number
23232525
Total
Total ordinary dividends…………………………………………… $2,850
Qualified dividends…………………………………………………
2,850
Total capital gain distributions………………………………………
250
Unrecaptured section 1250 gain…………………………………….
Section 1202 gain……………………………………………………
Collectibles (28% gain)..…………………………………………….
Nondividend distributions…………………………………………..
Federal income tax withheld…………………………………………
Investment expenses…………………………………………………
Foreign tax paid………………………………………………………
Foreign country or US possession……………………………………
Cash Liquidation Distributions………………………………………
Noncash Liquidation Distrbutions……………………………………
76
Interest Income (1099-INT)
1. Earnings from savings, loans, credit unions, bank deposits and C.D…. $4,750
2. Early withdrawal penalty……………………………………………….
3. US Savings bonds, etc………………………………………………….
4. Federal income tax withheld……………………………………………
5. Investment expenses……………………………………………………
6. Foreign tax paid (if eligible for foreign tax credit)……………………..
7. Foreign country or US possession…………………………………
8. Tax-exempt interest……………………………………………………..
9. Specified Private Activity Bond Interest………………………………..
Proceeds from Broker and Barter Exchange Transactions (1099-B)
1. 03/22/2008
Gross Proceeds
Sold 100 shs HTT …………………………………… $1,570
THIS IS IMPORTANT TAX INFORMATION AND IS BEING FURNISHED TO THE INTERNAL REVENUE SERVICE. IF YOU ARE REQUIRED
TO FILE A RETURN, A NEGLIGENCE PENALTY OR OTHER SANCTION MAY BE IMPOSED ON YOU IF THIS INCOME IS TAXABLE
AND THE IRS DETERMINES THAT IT HAS NOT BEEN REPORTED.
77
SALE OF STOCKS
Sales Price And Adjusted Basis Of Stock
Stockbroker reports sales price in box 2 of Form 1099-B
and checks appropriate square at right of box 2 to
indicate whether gross or net proceeds were
reported to IRS.
78
SALE OF STOCKS
Reporting Stock Transactions On Schedule D
Report stock transactions in Parts I and II of Schedule
D as shown in Table 11-5.
Table 11-5. To Report Capital Gain or Loss in Part I or II, Schedule D
Short-Term
Show the first five sales
on:
Long-Term
Part I, line 1, Schedule D Part II, line 8, Schedule D
For additional sales use:
Part I, line 1, Schedule
D-1
Part II, line 8, Schedule
D-1
And transfer the total
From: Part I, line 2,
Schedule D-1
Onto: Part I, line 2,
Schedule D
From: Part II, line 9,
Schedule D-1
Onto: Part II, line 9,
Schedule D
additional sales amount:
79
SALE OF STOCKS
Example:
On August 21, 2002, Tess bought 200 shares of XYZ
Company for $1,500. On October 2, 2003, she bought
500 shares of TUV, Inc. for $8,000, and on November
18, 2003, she bought 2,000 shares of QRS, Inc., for
$5,000. Each amount includes the commission. On
June 8, 2008, Tess sold the stock in XYZ and TUV.
Form 1099-B from her broker reported gross
proceeds of $1,875 for the XYZ stock, and $6,000 for
the TUV. Tess paid commissions of $75 for selling the
XYZ, and $275 for selling the TUV. On July 25, 2008,
Tess sold the QRS stock for $10,000. She paid a $500
commission. Her broker reported net proceeds of
$9,500 on Form 1099-B.
Part II of Schedule D for Tess is as follows:
80
SALE OF STOCKS
81
SALE OF HOME
Do not report sale of home if gain on sale is less than
exclusion amount ($250,000 or $500,000 if MFJ).
1. Only gain of your main home is eligible for
exclusion
2. For sale of home not your main home, report gain
as income on Schedule D.
Main home is where you live most of time.
1. Can be house, houseboat, mobile home, trailer,
cooperative agreement, or condo.
82
SALE OF HOME
Selling price is total amount you received for home.
1. If you receive Form 1099-S, box 2 shows gross proceeds
received for home.
2. Total amount realized is selling price minus selling
expenses.
3. Selling expenses include commissions, advertising fees,
legal fees, and loan charges paid by seller.
4. Adjusted basis is used to figure gain or loss if you made
changes to your main home.
5. Loss on sale of main home cannot be deducted.
83
SALE OF HOME
Exclusion Amount
Exclusion amount of up to $250,000 if file single.
1. If married, can exclude up to $500,000 if you and
spouse:
a. File MFJ
b. Meet ownership test
c. Meet use test
d. Neither of you excluded gain in the two years
before current sale
84
SALE OF HOME
Ownership and Use Tests
Exclusion allowed each time you sell or exchange main
home but generally not more than once every two
years and the property meets:
a. Ownership test (owned by you for combined
period of at least two years out of the five year
period ending on date of sale
b. Use test (lived in as main home for at least two
years of that five year period.
85
SALE OF HOME
In 1997, Ellen Jones lived in a rented apartment. The
apartment building was later changed to a
condominium, and she bought her apartment on
December 1, 2004. In 2006, Ellen became ill and on
April 14 of that year she moved to her daughter’s
home. On July 10, 2008, while still living in her
daughter’s home, she sold her apartment.
Ellen can exclude all the gain on the sale of her
apartment because she met the ownership and use
tests. Her 5-year period is from July 11, 2003, to July
10, 2008, the date she sold the apartment. She
owned her apartment from December 1, 2004, to July
10, 2008 (over 2 years). She lived in the apartment
from July 11, 2003 (the beginning of the 5-year
period), to April 14, 2006 (over 2 years).
86
SALE OF HOME
Sale of home by surviving spouse. If your spouse died
and you did not remarry before the date of sale, you
are considered to have owned and lived in the
property as your main home during any period of
time when your spouse owned and lived in it as a
main home.
If you meet all the following requirements, you may
qualify to exclude up to $500,000 of any gain from
the sale or exchange of your main home.
 The sale or exchange took place after 2007.
 The sale or exchange took place no more than 2
years after the date of death of your spouse.
 You have not remarried.
 You and your spouse met the use test at the time of
your spouse’s death.
 You or your spouse met the ownership test at the
time of your spouse’s death.
 Neither you nor your spouse excluded gain from the
sale of another home during the last two years.
87
Basis of Property and Capital
Gains (Including Sale of Home)
KEY IDEAS
♦ To figure and properly report your gain or loss on a sale of stock,
you need to know the sales price, adjusted basis, and the holding
period.
♦ The basis of property you buy is usually its cost. Cost may be more
than just the purchase price. Adjusted basis is the basis of
property after certain adjustments have been added or subtracted.
♦ Fair market value (FMV) is the price at which the property would
change hands between a buyer and a seller, neither having to buy
or sell, and both having
reasonable knowledge of all necessary facts.
♦ The holding period determines whether the gain or loss is long-term
or short-term. Long-term capital gains are generally taxed at
lower rates than short-term capital gains.
88
Basis of Property and Capital
Gains (Including Sale of Home)
KEY IDEAS
♦ Use Schedule D to figure capital gain or loss and the correct tax.
♦ Include capital gain distributions in the computation of long-term
capital gains.
♦ Qualified dividends are eligible for capital gain tax rates.
♦ You can deduct up to $3,000 ($1,500 for MFS) in net capital loss for
the year. You can carry over any remaining loss to the next year.
♦ Generally, if you meet the ownership and use tests, you can exclude
gain up to $250,000 ($500,000 if MFJ) on the sale of your main
home.
♦ Report capital gain or loss on line 13 of Form 1040.
89
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 1: True or False.
(1) The cost of improvements to property decreases its basis.
(2) The basis of stocks and bonds is only the purchase price.
(3) If property was owned and used as a main home for less
than 2 years, you cannot take any exclusion.
(4) Legal fees incurred in acquiring property can be added to
the basis of the property in figuring the adjusted basis.
(5) The ownership test is met if you owned your main home
for at least 2 years out of a 5-year period ending on the
date of sale.
90
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 1: True or False.
(6) A loss on the sale of your main home cannot be
deducted.
(7) Fair market value is the price at which the property
would change hands between a buyer and a seller,
neither having to buy or sell, with the seller having
reasonable knowledge of all necessary facts.
(8) A condominium can be considered a main home.
(9) Generally, if you meet the ownership and use tests,
you can exclude up to $250,000 of gain on the sale
of your home if you file MFJ.
91
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 1: True or False.
(10) If the adjusted basis of your stock is greater than
its sales price, you have a gain on the sale.
(11) Your basis in property you inherit from a decedent
is the FMV of the property at the time the will is
read.
(12) To be considered a long-term sale, an asset must
be held for one year or more.
(13) If you rent your former main home the basis for
depreciation is the lesser of the FMV on the date of
change or the adjusted basis on the date of
change.
92
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 1: True or False.
(14) Business and nonbusiness bad debts can both be
deducted on Schedule D.
(15) If you sell stocks you acquired at various times
and prices, you can choose to use an average
basis.
93
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 1: True or False.
(1) The cost of improvements to property decreases its basis.
F
(2) The basis of stocks and bonds is only the purchase price.
F
(3) If property was owned and used as a main home for less
than 2 years, you cannot take any exclusion. F
(4) Legal fees incurred in acquiring property can be added to
the basis of the property in figuring the adjusted basis. T
(5) The ownership test is met if you owned your main home
for at least 2 years out of a 5-year period ending on the
date of sale. T
94
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 1: True or False.
(6) A loss on the sale of your main home cannot be
deducted. T
(7) Fair market value is the price at which the property
would change hands between a buyer and a seller,
neither having to buy or sell, with the seller having
reasonable knowledge of all necessary facts. F
(8) A condominium can be considered a main home. T
(9) Generally, if you meet the ownership and use tests,
you can exclude up to $250,000 of gain on the sale
of your home if you file MFJ. F
95
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 1: True or False.
(10) If the adjusted basis of your stock is greater than
its sales price, you have a gain on the sale. F
(11) Your basis in property you inherit from a decedent
is the FMV of the property at the time the will is
read. F
(12) To be considered a long-term sale, an asset must
be held for one year or more. F
(13) If you rent your former main home the basis for
depreciation is the lesser of the FMV on the date of
change or the adjusted basis on the date of
change. T
96
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 1: True or False.
(14) Business and nonbusiness bad debts can both be
deducted on Schedule D. F
(15) If you sell stocks you acquired at various times
and prices, you can choose to use an average
basis. F
97
Basis of Property and Capital
Gains (Including Sale of Home)
CLASSWORK 2:
1. Amy T. Nelson (SSN 044-43-4433) purchased 100
shares of ABC stock on March 10, 2006 for $2 a
share. She purchased 300 shares of DEF stock on
January 5, 2008 for $4 a share. On July 15, 2008 she
decided to buy a new car and sell all of her stock to
make the down payment. She received $14.75 a
share for her ABC stock and $18.25 a share for her
DEF stock. Her taxable income is $56,734 and her
filing status is MFJ. Her husband is Andrew R. Nelson
(SSN 066-87-9126). Complete Amy’s Schedule D and
calculate their tax.
98
Basis of Property and Capital
Gains (Including Sale of Home)
99
Basis of Property and Capital
Gains (Including Sale of Home)
100
101
102
Basis of Property and Capital
Gains (Including Sale of Home)
2. Gary buys a riding tractor for use in his mowing
business for $2,100. Over the summer, he replaces
two sets of blades for $20 a set, spends $230 for fuel
and oil, and puts a steel bumper over the headlights
for $150. What is his basis for depreciation?
103
Basis of Property and Capital
Gains (Including Sale of Home)
2. Gary buys a riding tractor for use in his mowing
business for $2,100. Over the summer, he replaces
two sets of blades for $20 a set, spends $230 for fuel
and oil, and puts a steel bumper over the headlights
for $150. What is his basis for depreciation?
$2,250
$2,100 (TRACTOR) + $150 (BUMPER)
104
Basis of Property and Capital
Gains (Including Sale of Home)
3. Juan sells 300 shares of PQR stock on
March 15, 2008 for $20 a share. He has
acquired the stock over a number of years.
His grandfather left him 50 shares worth
$1,500 when he died on August 31, 2004.
The grandfather had purchased the stock for
$5 a share on June 6, 1976. Julio’s mother
gave him 100 shares for his birthday on
March 16, 2004 when the FMV was $28 a
share. She purchased the stock on May 1,
1986 for $12 a share. On February 2, 2005
PQR announced a two-for-one split. What is
Juan’s gain or loss?
105
Basis of Property and Capital
Gains (Including Sale of Home)
3. Juan sells 300 shares of PQR stock on March 15, 2008 for
$20 a share. He has acquired the stock over a number of
years. His grandfather left him 50 shares worth $1,500
when he died on August 31, 2004. The grandfather had
purchased the stock for $5 a share on June 6, 1976. Julio’s
mother gave him 100 shares for his birthday on March 16,
2004 when the FMV was $28 a share. She purchased the
stock on May 1, 1986 for $12 a share. On February 2, 2005
PQR announced a two-for-one split. What is Julio’s gain or
loss?
$3,300
SOLD 300 SHS FOR $6,000 - $2,700 BASIS
BASIS: 50 SHS FROM GRANDFATHER (FMV at death)
100 SHS FROM MOTHER (100 x $12)
BASIS
SPLIT GAVE HIM 300 SHARES
$1,500
$1,200
$2,700
106
Basis of Property and Capital
Gains (Including Sale of Home)
4. Toby B. Lawrence (SSN 043-51-6842) has a capital
loss carryover from 2007.
107
Basis of Property and Capital
Gains (Including Sale of Home)
He sold two stocks in 2008, as summarized below:
Stock
Purchase
Date
Date Sold
Net Sales
Price
Adjusted
Basis
200 shares
FFF
5/8/2007
1/5/2008
$4,000
$3,025
50 shares
WWW
11/7/2004
3/12/2008
$8,700
$11,000
Toby’s Form 1040 for 2008, line 41, shows $59,175.
Toby is single. Complete Toby’s Schedule D and
Capital Loss Carryover Worksheet.
108
Basis of Property and Capital
Gains (Including Sale of Home)
109
Basis of Property and Capital
Gains (Including Sale of Home)
110
111
Basis of Property and Capital
Gains (Including Sale of Home)
112
Questions & Answers
113