Chapter 8 - Chapter 8 Property Transactions Capital Gains and Losses Section 1231 and Recapture Provisions Taxation of Capital Gains and Losses

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Chapter 8 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions Taxation of Capital Gains and Losses Capital gains and losses must be separated from other types of gains and losses for two reasons: o Long-term capital gains may be taxed at a lower rate than ordinary gains o The deduction of a net capital loss may be limited Proper Classification of Gains and Losses Depends on three characteristics: o The tax status of the property Capital asset, §1231 asset, or ordinary asset o The manner of the property’s disposition By sale, exchange, casualty, theft, or condemnation o The holding period of the property Short term and long term Capital Asset §1221 defines capital assets as everything except: o Inventory (stock in trade) o Notes and accounts receivables acquired from the sale of inventory or performance of services o Realty and depreciable property used in trade or business (§1231 assets) §1221 defines capital assets as everything except (cont’d): o Certain copyrights; literary, musical, or artistic compositions; or letters, memoranda, or similar property when created by taxpayer (or for which taxpayer takes a carryover basis from the creator) For tax years beginning after May 17, 2006, taxpayers may elect to treat a sale or exchange of musical compositions or copyrights in musical works as the disposition of a capital asset o Supplies of a type regularly used or consumed in the ordinary course of a business o Certain publications of U.S. government Thus, capital assets are: o Assets held for investment (e.g., stocks, bonds, land) o Personal use assets (e.g., residence, car) o Miscellaneous assets selected by Congress Dealers in securities o In general, securities are the inventory of securities dealers, thus ordinary assets o However, a dealer can identify securities as an investment and receive capital gain treatment Clear identification must be made on the day of acquisition
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Real property subdivided for sale o Taxpayer may receive capital gain treatment on the subdivision of real estate if the following requirements are met: Taxpayer is not a corporation Taxpayer is not a real estate dealer No substantial improvements made to the lots Taxpayer held the lots for at least 5 years Capital gain treatment occurs until the year in which the 6 th lot is sold Then up to 5% of the revenue from lot sales is potential ordinary income That potential ordinary income is offset by any selling expenses from the lot sales Sale or Exchange Recognition of capital gains and losses generally requires a sale or exchange of assets Sale or exchange is not defined in the Code There are some exceptions to the sale or exchange requirement Sale or Exchange–Worthless Securities A security that becomes worthless creates a deductible capital loss without being sold or exchanged o The Code sets an artificial sale date for the securities on the last day of the year in
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This note was uploaded on 03/23/2010 for the course ACC 410 taught by Professor Su during the Spring '10 term at University of Nevada, Las Vegas.

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Chapter 8 - Chapter 8 Property Transactions Capital Gains and Losses Section 1231 and Recapture Provisions Taxation of Capital Gains and Losses

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