IG_C14 - CHAPTER 14 PROPERTY TRANSACTIONS CAPITAL GAINS AND...

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CHAPTER 14 PROPERTY TRANSACTIONS: CAPITAL GAINS AND LOSSES, § 1231, AND RECAPTURE PROVISIONS LECTURE NOTES OVERVIEW 1. This chapter discusses capital assets and the treatment they receive upon disposition. This chapter does not discuss the passive activity rules. It is assumed that none of the capital asset transactions involves a disposition where passive loss limitations are a factor. 2. Capital gains and losses, the netting process, and the treatment of net capital loss were discussed briefly at the end of Chapter 3. It may be useful to review that material and integrate it with the material in this chapter. 3. Capital gains and losses are reported on Schedule D of Form 1040 . 4. Section 1(h) prescribes four possible alternative tax rates on net long-term capital gain. For 2004-2007, those rates were 5%, 15%, 25%, and 28%. However, due to legislation enacted in 2003 that became effective for tax years beginning after December 31, 2007, the four possible alternative tax rates on net long-term capital gain for transactions occurring after December 31, 2007 are 0%, 15%, 25%, and 28%. RATIONALE FOR SEPARATE REPORTING OF CAPITAL GAINS AND LOSSES 5. Reasons for Separate Reporting of Capital Gains and Losses . a. Separate reporting of capital gains and losses is necessary for two reasons . (1) First, the alternative tax on net capital gain provision may generate a lower tax than the regular income tax. When a noncorporate taxpayer’s taxable income includes some net capital gain, the alternative tax computation may yield a lower tax. 14-1
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14-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes (2) Second, separate reporting is required because capital losses that exceed capital gains are only deductible to the extent of $3,000 per year . b. Exhibit 1 in these Lecture Notes summarizes the history of long-term capital gain taxation since 1913. GENERAL SCHEME OF TAXATION 6. Classification as a Capital Asset . Classification is determined based on three items : a. The tax status of the property (capital asset, § 1231 asset, or ordinary asset). b. The manner of the property’s disposition (sale, exchange, casualty, theft, or condemnation). c. The holding period of the property (short-term or long-term). d. The § 1231 asset status is explained later in this chapter. Ordinary asset status is a “default” status if the asset is neither a capital asset nor a § 1231 asset. e. The tax status of the asset is usually not particularly relevant until the asset is sold or its sale is being contemplated. Then, the tax status becomes important because the character of the gain or loss from the asset’s disposition is affected by the asset’s tax status. How and where the disposition is reported on the tax forms also is impacted by the asset’s tax status. 7. Holding Period . a. The long-term holding period is more than one year.
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