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Chapter 8 Property Transactions: Capital Gains and Losses, § 1231, and Recapture Provisions ©2013 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 800 248 3248 CCHGroup.com
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Capital Transactions – General Remarks The code makes a distinction between personal-use capital assets and business- use capital assets, giving preferential tax treatment to transactions involving business-use capital assets. Personal-use capital assets are commonly referred to as simply “Capital Assets.” Business-use capital assets are commonly referred to as “1231 Property.” General Rules: Capital Asset Transactions (personal-use): Gains : either ordinary income (short-term) or capital gains (subject to lower tax rates). Losses : capital losses (only first $3,000 can be used each year with the carried forward indefinitely). 1231 Property Transactions (business-use): Gains : capital gains (subject to lower tax rates). Losses : ordinary losses (can be deducted against ordinary income without limits).
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Capital Assets (Personal)
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Capital Assets—Defined Code Sec. 1221 defines capital assets by stating what they are not. “Capital assets” generally refer to any property other than: 1. Ordinary income property (inventory, receivables, creative works created by the taxpayer) 2. Depreciable business property (buildings and machinery) (this is a 1231 asset) 3. Non-depreciable business property (land) (this is a 1231 asset) Thus, capital assets would include investment property such as stocks and bonds, and personal use assets such as cars, principal residences, household furnishings and jewelry. (Note: Paintings, manuscripts, and other creative works are capital assets if created by someone other than the taxpayer). Chapter 12, Exhibit 1
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Determination of Capital Gains and Losses square6 Long-term capital gains are taxed up to 20% for taxpayers in the 39.6% bracket (otherwise they are taxed at 0% for individuals in the 15% and 10% tax brackets and 15% for everyone else), except for: rhombus6 Collectibles gains, which are taxed up to 28% rhombus6 Section 1202 gains, which are taxed up to 28% (sale of small business stock held more than 5 years). rhombus6 Section 1250 gains (depreciable real property), which are taxed up to 25%. Chapter 12, Exhibit 2a
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Step One square6 Group gains or losses into 4 baskets and determine the net amount in each basket. 1) Short-term gains/losses. 2) 28% long-term gains/losses. Determination of Capital Gains and Losses 3) 25% long-term gains (IRC 1250, you will not be tested on this) 4) 0/15/20% long-term gains/losses (including 1231 LT capital gains) Chapter 12, Exhibit 2b
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Step Two square6 Long-term net losses from the 28% basket are netted first against gains from the 25% basket and then against gains from the 0/15/20% basket. square6 Long-term net losses from the 0/15/20% basket are netted first Determination of Capital Gains and Losses against gains from the 28% basket and then against gains from the 25% basket.
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