4491-10 Income - Capital Gain or Loss v1.0 VO.ppt
Income - Capital Gain or Loss
Form 1040 Line 13
Pub 4012 Tab 2
Pub 17 Chapters 13-16
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NJ Training TY2010 v1.0
LEVEL 2, 3 TOPIC
1
Stock Sales – Objectives
 Determine the adjusted basis of stock
 Determine if the holding period is long-
term or short-term
 Calculate the taxable gain or deductible
loss
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Stock Sales – Schedule D
 Key elements of stock sale
 When was it bought?
 When was it sold?
 What was the sales price?
 What was the cost basis?
 Note: Use Tax Wise Capital Gain Worksheet
for entering data for each transaction
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What information is needed?
 Basis / adjusted basis
 Basis is the original cost of the asset
 Adjusted Basis is the original cost less commissions and
fees
 Holding period
 Short-term is held one year or less
 Long-term is held more than 1 year
 Proceeds from the sale
 Form 1099-B or broker’s Substitute 1099-B reflects
gross or net proceeds
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What is the basis of stock?
 Usually its cost
 Need basis to calculate gain or loss
 Taxpayer must provide:
 Broker’s cost basis worksheet
 Other records
 Can use zero if no tax effect
 If taxpayer cannot provide basis: out of
scope
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Adjusted Basis
 Events can change share basis
 Stock splits



Buy 100 sh @ $10 per share, splits 2 for 1
Now have 200 sh @ $5 per share
Dividend reinvestments


Buy additional shares at current price
Example:
 100 sh @ $10
 5 sh @ $20
 3 sh @ $18
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Sales Commissions
 Commission paid will affect the basis
 If 1099-B reports sale as gross, commission will
be added to basis.
 If 1099-B reports sale as net, no adjustment to
basis is needed.
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Basis other than cost
 Inherited
 Different in 2010 – Discussed later
 Gift
 Out of scope
 Taxpayer cannot provide information
 Out of scope
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Holding period
 Holding period
 Starts day after purchase
 Ends day of sale
 Short-term: 1 year or less
 Taxed at regular tax rates
 Long-term: more than a year
 Taxed at capital gains rates
 Inherited: Discussed later
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Holding period (continued)
 Sale of shares bought on various dates at
different prices (multiple blocks)
If short-term, enter actual purchase dates
 If long-term, enter “VARIOUS” in TaxWise
Purchase Date column – total will be reported
as long-term

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PROPERTY INHERITED
PRIOR TO 2010
 Decedent died prior to 2010
 Basis is Fair Market Value at time of death
 Gain is long term
 In TaxWise, enter “INHERIT” for the date
purchased
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PROPERTY INHERITED
IN 2010
 Decedent died in 2010
 Basis is lesser of:


Decedent’s adjusted basis (in TaxWise, enter date
acquired by decedent – could be short- or longterm) OR
Fair Market Value (in TaxWise, enter date of death)
 May require professional tax preparer
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What info do I need from 1099-B?
Sale date
Sale price
# of shares
Description
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Broker’s Substitute 1099-B
Substitute 1099-B
Date of Sale
Description
Box 1a
Stocks,BondsProceeds
Box 2 (less
commission)
Box 7
Federal
Income Tax
Withheld
Box 4
2-23-10
$ 2,100.00
20 shares Tractor Co.
$0.00
5-01-10
$
100 shares Car Co.
$0.00
6-22-10
$14,000.00
500 shares Couch Co.
$0.00
9-06-10
$ 2,000.00
25 shares Technology Co.
$0.00
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900.00
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Capital gain distributions
 Reported to taxpayer on 1099-DIV
 Enter on 1099-DIV worksheet
 If Sch D required, will flow to Sch D, then to
1040 line 13
 If Sch D not required, will flow directly to 1040
line 13
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SCHEDULE K-1
CAPITAL GAINS OR LOSSES
 In TaxWise, enter directly on Sch D (do NOT
fill out K-1)
Short term – Line 5
 Long term – Line 12
 Direct entry provides proper tax treatment of
short or long term gains

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Tax Liability Net Loss
 Net loss can offset all gains, plus
 Up to $3,000 can be used to reduce other
taxable income in the current year ($1,500 if
MFS)
 The amount in excess of $3,000 (or $1,500
if MFS) is carried forward to the next year
 Note: Loss not allowed on NJ return
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Capital Loss Carry Forward
 Check prior year Schedule D or related worksheet
to determine carryover loss
 Carryover losses keep their short-term or long-term
classification
 Carryover losses are combined with the gains and
losses that actually occur in the subsequent year
 There is no limit to how many times a loss can be
carried forward but the maximum loss (i.e. $3,000)
must be used each year even if there is no tax
liability to offset. If not used, the $3,000 deduction
is lost
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LEVEL 2 STOP HERE
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CAPITAL GAINS QUIZ #1
 The taxpayer paid $1,000 for 100 shares of
XYZ stock.
 What is his cost basis per share in XYZ?

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$10 per share
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CAPITAL GAINS QUIZ #2
 The taxpayer who paid $1,000 for 100
shares of XYZ stock received a 2 for 1 stock
split.
 What is his adjusted basis per share in XYZ?

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$5 per share
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CAPITAL GAINS QUIZ #3
 The taxpayer sells all 200 shares of XYZ
stock receiving $7 per share minus a total
commission of $15.
 If the 1099B reports gross proceeds, what
will be the sales price and the basis?
$1,400 selling price
 $1,015 cost basis (gain is $385)

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CAPITAL GAINS QUIZ #4
 The taxpayer sells all 200 shares of XYZ
stock receiving $7 per share less a total
commission of $15.
 If the 1099B reports net proceeds, what
will be the sales price and the basis?
$1,385 selling price
 $1,000 basis (gain is still $385)

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Sale Of Home -- Objectives
 Determine whether home is taxpayers
main home
 Determine if taxpayer meets the ownership
and use tests
 Determine when the 5-year ownership/use
test period is suspended
LEVEL 3 TOPIC
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What is considered a “main”
home?
 “Main” home is where the taxpayer lives
most of the time
 Only gain from the main home can be
excluded
Must meet Ownership and Use tests
 Reduced exclusion is out of scope

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Ownership And Use Tests
 Ownership Test: Owned by the taxpayer for
a combined period of at least 2 years out of
the last 5 years, ending on the date of sale
AND
 Use Test: Lived in home as the taxpayer’s
main home for at least 2 years of that 5
year period
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Calculate Exclusion
 Single homeowner can exclude up to $250,000 of
gain from sale of main home

Unmarried surviving spouse can exclude $500,000 if
sale occurs within 2 years of spouse’s death
 Married couple can exclude up to $500,000 of
gain, if:


Filed a joint return
Both individuals meet the use test



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If only one meets use test, refer to Pub 17 – Sale of Home
Either or both meet the ownership test
Neither individual excluded gain in the 2 years before
the current sale
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Gain (or loss) from sale of home
 Selling price includes total amount received
 Amount realized is selling price minus selling
expenses
 Basis:


Bought or built – actual cost
Inherited – fair market value at date of death

Except if Inherited in 2010 – treat like other stocks
 Adjusted basis (add major improvements)
 Gain/loss is amount realized minus adjusted
basis
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Where do I report gain (or loss)?
 No taxable gain, no report
 Loss on personal property is not deductible
 Report taxable gain on Schedule D
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Sale of Home Quiz #1
 Irving and Martha bought their home in
1970 for $20,000
 They added a garage in 1985 at a cost of
$30,000
 Three years ago they put in new carpets for
a cost of $6,000
 They sold the house for $555,000 in 2010
 What is their gain and how much can be
excluded?
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Sale of Home Quiz #1
Answers
 Gain = $505,000
 Sale for $555,000
 Cost Basis = $50,00 ($20,000 + $30,000)

$6,000 for carpet NOT includable
 Exclusion = $500,000
 Net Gain on taxes is $5,000
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Sale of Home Quiz #2
 Francis lived in home #1 as renter starting in
2006 for 2 years
 Francis moved to home #2 in 2008 and has
lived there ever since
 Later in 2008 Francis bought home #1 and let
her sister live there (no rent, etc.)
 Francis sold home #1 in 2010 after owning it
for 2 years
 Can Francis take the exclusion for this sale?
 Answer: Yes!
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SALE OF HOME QUIZ #3
 John purchased a condo in 2002 and lived
in it until 2008
 Jane was divorced in 2004 and has lived in
her home since
 John and Jane married in 2008 and began
living together in her home
 John sold his condo in 2010 for a $300,000
gain
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SALE OF HOME QUIZ #3
ANSWERS
 Does John qualify to exclude the gain if MFJ?
 Ownership test - yes, owned since 2002
 Use test - was not Jane’s main home for 2
years during 5 years preceding sale, so she
does NOT meet the Use test.
 Looking in Pub 17 (Sale of Home, Married
Persons), we see that they can only exclude up
to $250,000
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CANCELLATION OF DEBT
 OUT-OF-SCOPE except
 Counselors may obtain special online
training and certification to work with
Cancellation of Debt (COD)
 Mortgage forgiveness debt (foreclosure) is
no longer in Advanced certification – needs
this special COD certification
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