4. Reporting Gains
and Losses
This chapter explains how to report capital gains and
losses and ordinary gains and losses from sales,
exchanges, and other dispositions of property.
Although this discussion refers to Schedule D (Form
1040), the rules discussed here also apply to taxpayers
other than individuals. However, the rules for property
held for personal use usually will not apply to
taxpayers other than individuals.
Topics - This
chapter discusses:
-
Information returns
-
Schedule D (Form 1040)
-
Form 4797
Useful Items - You
may want to see:
Form (and Instructions)
-
Schedule D (Form 1040)
Capital Gains and
Losses
-
1099-B
Proceeds From Broker and Barter
Exchange Transactions
-
1099-S
Proceeds From Real Estate
Transactions
-
4684
Casualties and Thefts
-
4797
Sales of Business
Property
-
6252
Installment Sale Income
-
8824
Like-Kind
Exchanges
See chapter 5 for information about getting
publications and forms.
If you sell or exchange certain assets, you should
receive an information return showing the proceeds of
the sale. This information is also provided to the
Internal Revenue Service.
Form 1099-B. If you sold stocks, bonds,
commodities, etc., you should receive Form 1099-B or an
equivalent statement. Whether or not you receive Form
1099-B, you must report all taxable sales of stocks,
bonds, commodities, etc., on Schedule D. For more
information on figuring gains and losses from these
transactions, see chapter 4 in Publication 550.
Form 1099-S. An information return must
be provided on certain real estate transactions.
Generally, the person responsible for closing the
transaction must report on Form 1099-S sales or
exchanges of the following types of property.
-
Land (improved or unimproved), including air
space.
-
An inherently permanent structure, including any
residential, commercial, or industrial building.
-
A condominium unit and its related fixtures and
common elements (including land).
-
Stock in a cooperative housing
corporation. If you sold or exchanged
any of the above types of property, the reporting person
must give you a copy of Form 1099-S or a statement
containing the same information as the Form 1099-S.
If you receive or will receive
property or services in addition to gross proceeds (cash
or notes) in this transaction, the person reporting it
does not have to value that property or those services.
In that case, the gross proceeds reported on Form 1099-S
will be less than the sales price of the property you
sold. Figure any gain or loss according to the sales
price, which is the total amount you realized on the
transaction.
Use Schedule D (Form 1040) to report sales,
exchanges, and other dispositions of capital assets.
Before completing Schedule D, you may have to complete
other forms as shown below.
-
For a sale, exchange, or involuntary conversion of
business property, complete Form 4797.
-
For a like-kind exchange, complete Form 8824. See
Reporting the
exchange under Like-Kind Exchanges in
chapter 1.
-
For an installment sale, complete Form 6252. See
Publication 537.
-
For an involuntary conversion due to casualty or
theft, complete Form 4684. See Publication 547,
Casualties, Disasters, and Thefts.
-
For a disposition of an interest in, or property
used in, an activity to which the at-risk rules apply,
complete Form 6198, At-Risk Limitations. See
Publication 925, Passive Activity and At-Risk Rules.
-
For a disposition of an interest in, or property
used in, a passive activity, complete Form 8582,
Passive Activity Loss Limitations. See Publication
925.
Personal-use property.
Report gain on the sale or exchange of
property held for personal use (such as your home) on
Schedule D. Loss from the sale or exchange of property
held for personal use is not deductible. But if you had
a loss from the sale or exchange of real estate held for
personal use for which you received a Form 1099-S,
report the transaction on Schedule D, even though the
loss is not deductible. Complete columns (a) through (e)
and enter -0- in column (f).
Where you report a capital gain or loss depends on
how long you own the asset before you sell or exchange
it. The time you own an asset before disposing of it is
the holding period.
If you hold a capital asset 1 year or less, the gain
or loss from its disposition is short term. Report it in
Part I of Schedule D. If you hold a capital asset longer
than 1 year, the gain or loss from its disposition is
long term. Report it in Part II of Schedule D (Form
1040).
| IF you hold the
property... |
THEN you have
a... |
| 1
year or less, |
Short-term capital gain or
loss.
|
| More than 1
year, |
Long-term capital gain or
loss. |
These distinctions are essential to correctly arrive
at your net capital gain or loss. Capital losses are
allowed in full against capital gains plus up to $3,000
of ordinary income. See Capital
Gains Tax Rates, later.
Holding period.
To figure if you held property longer than 1
year, start counting on the day following the day you
acquired the property. The day you disposed of the
property is part of your holding period.
Example.
If you bought an asset on June 19, 2003, you should
start counting on June 20, 2003. If you sold the asset
on June 19, 2004, your holding period is not longer than
1 year, but if you sold it on June 20, 2004, your
holding period is longer than 1 year.
Patent property.
If you dispose of patent property, you
generally are considered to have held the property
longer than 1 year, no matter how long you actually held
it. For more information, see Patents in chapter 2.
Inherited property. If you
inherit property, you are considered to have held the
property longer than 1 year, regardless of how long you
actually held it.
Installment sale. The gain from an
installment sale of an asset qualifying for long-term
capital gain treatment in the year of sale continues to
be long term in later tax years. If it is short term in
the year of sale, it continues to be short term when
payments are received in later tax years.
The date the
installment payment is received determines the capital
gains rate that should be applied not the date the asset
was sold under an installment contract.
Nontaxable exchange.
If you acquire an asset in exchange for
another asset and your basis for the new asset is
figured, in whole or in part, by using your basis in the
old property, the holding period of the new property
includes the holding period of the old property. That
is, it begins on the same day as your holding period for
the old property.
Example.
You bought machinery on December 4, 2003. On June 4,
2004, you traded this machinery for other machinery in a
nontaxable exchange. On December 5, 2004, you sold the
machinery you got in the exchange. Your holding period
for this machinery began on December 5, 2003. Therefore,
you held it longer than 1 year.
Corporate liquidation.
The holding period for property you receive
in a liquidation generally starts on the day after you
receive it if gain or loss is recognized.
Profit-sharing plan.
The holding period of common stock withdrawn
from a qualified contributory profit-sharing plan begins
on the day following the day the plan trustee delivered
the stock to the transfer agent with instructions to
reissue the stock in your name.
Gift. If you receive a gift of
property and your basis in it is figured using the
donor's basis, your holding period includes the donor's
holding period. For more information on basis, see
Publication 551, Basis of Assets.
Real property. To
figure how long you held real property, start counting
on the day after you received title to it or, if
earlier, the day after you took possession of it and
assumed the burdens and privileges of ownership.
However, taking possession of real
property under an option agreement is not enough to
start the holding period. The holding period cannot
start until there is an actual contract of sale. The
holding period of the seller cannot end before that
time.
Repossession. If you
sell real property but keep a security interest in it
and then later repossess it, your holding period for a
later sale includes the period you held the property
before the original sale, as well as the period after
the repossession. Your holding period does not include
the time between the original sale and the repossession.
That is, it does not include the period during which the
first buyer held the property.
Nonbusiness bad debts.
Nonbusiness bad debts are short-term capital
losses. For information on nonbusiness bad debts, see
chapter 4 of Publication 550.
The totals for short-term capital gains and losses
and the totals for long-term capital gains and losses
must be figured separately.
Net short-term capital gain or
loss. Combine your short-term capital
gains and losses, including your share of short-term
capital gains or losses from partnerships, S
corporations, and fiduciaries and any short-term capital
loss carryover. Do this by adding all your short-term
capital gains. Then add all your short-term capital
losses. Subtract the lesser total from the other. The
result is your net short-term capital gain or loss.
Net long-term capital gain or loss.
Follow the same steps to combine your
long-term capital gains and losses. Include the
following items.
-
Net section 1231 gain from Part I, Form 4797, after
any adjustment for nonrecaptured section 1231 losses
from prior tax years.
-
Capital gain distributions from regulated
investment companies (mutual funds) and real estate
investment trusts.
-
Your share of long-term capital gains or losses
from partnerships, S corporations, and
fiduciaries.
-
Any long-term capital loss
carryover. The result from combining
these items with other long-term capital gains and
losses is your net long-term capital gain or loss.
Net gain. If the total
of your capital gains is more than the total of your
capital losses, the difference is taxable. However, the
part that is not more than your net capital gain may be
taxed at a rate that is lower than the rate of tax on
your ordinary income. See Capital Gains Tax Rates,
later.
Net loss. If the total
of your capital losses is more than the total of your
capital gains, the difference is deductible. But there
are limits on how much loss you can deduct and when you
can deduct it. See Treatment of
Capital Losses, next.
Treatment of
Capital Losses
If your capital losses are more than your capital
gains, you must deduct the difference even if you do not
have ordinary income to offset it. The yearly limit on
the amount of the capital loss you can deduct is $3,000
($1,500 if you are married and file a separate return).
Table 4-2. Holding Period for
Different Types of Acquisitions
| Type of acquisition: |
When your holding period
starts: |
| Stocks
and bonds bought on a securities market |
Day after
trading date you bought security. Ends on trading
date you sold security. |
| U.S.
Treasury notes and bonds |
If bought
at auction, day after notification of bid
acceptance. If bought through subscription, day
after subscription was submitted. |
| Nontaxable
exchanges |
Day after
date you acquired old property. |
| Gift
|
If your
basis is giver's adjusted basis, same day as
giver's holding period began. If your basis is
FMV, day after date of gift. |
| Real
property bought |
Generally,
day after date you received title to the property.
|
| Real
property repossessed |
Day after date you originally received title
to the property, but does not include time between
the original sale and date of repossession.
|
Capital loss carryover.
Generally, you have a capital loss carryover
if either of the following situations applies to you.
-
Your net loss on Schedule D, line 16, is more than
the yearly limit.
-
The amount shown on Form 1040, line 40 (your
taxable income without your deduction for exemptions),
is less than zero. If either of
these situations applies to you for 2004, see Capital Losses under
Reporting Capital Gains and
Losses in chapter 4 of Publication 550 to
figure the amount you can carry over to 2005.
Example.
Bob and Gloria Sampson sold property in 2004. The
sale resulted in a capital loss of $7,000. The Sampsons
had no other capital transactions. On their joint 2004
return, the Sampsons deduct $3,000, the yearly limit.
They had taxable income of $2,000. The unused part of
the loss, $4,000 ($7,000 - $3,000), is carried over to
2005.
If the Sampsons' 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 2005.
Short-term and long-term losses.
When you carry over a loss, it retains its
original character as either long term or short term. A
short-term loss you carry over to the next tax year is
added to short-term losses occurring in that year. A
long-term loss you carry over to the next tax year is
added to long-term losses occurring in that year. A
long-term capital loss you carry over to the next year
reduces that year's long-term gains before its
short-term gains.
If you have both short-term and
long-term losses, your short-term losses are used first
against your allowable capital loss deduction. If, after
using your short-term losses, you have not reached the
limit on the capital loss deduction, use your long-term
losses until you reach the limit.
To
figure your capital loss carryover from 2003 to 2004,
use the Capital Loss Carryover Worksheet in the 2004
Instructions for Schedule D (Form 1040).
Joint and separate returns.
On a joint return, the capital gains and
losses of a husband and wife are figured as the gains
and losses of an individual. If you are married and
filing a separate return, your yearly capital loss
deduction is limited to $1,500. Neither you nor your
spouse can deduct any part of the other's loss.
If you and your spouse once filed
separate returns and are now filing a joint return,
combine your separate capital loss carryovers. However,
if you and your spouse once filed jointly and are now
filing separately, any capital loss carryover from the
joint return can be deducted only on the return of the
spouse who actually had the loss.
Death of taxpayer.
Capital losses cannot be carried over after
a taxpayer's death. They are deductible only on the
final income tax return filed on the decedent's behalf.
The yearly limit discussed earlier still applies in this
situation. Even if the loss is greater than the limit,
the decedent's estate cannot deduct the difference or
carry it over to following years.
Corporations. A
corporation can deduct capital losses only up to the
amount of its capital gains. In other words, if a
corporation has a net capital loss, it cannot be
deducted in the current tax year. It must be carried to
other tax years and deducted from capital gains
occurring in those years. For more information, see
Publication 542.
The tax rates that apply to a net capital gain are
generally lower than the tax rates that apply to other
income. These lower rates are called the maximum capital
gains rates.
The term �net capital gain�
means the amount by which your net long-term capital
gain for the year is more than your net short-term
capital loss.
See the Schedule D (Form 1040) Instructions.
Unrecaptured section 1250 gain.
This is the part of any long-term capital
gain on section 1250 property (real property) that is
due to depreciation. Unrecaptured section 1250 gain
cannot be more than the net section 1231 gain or include
any gain otherwise treated as ordinary income. Use the
worksheet in the Schedule D instructions to figure your
unrecaptured section 1250 gain. For more information
about section 1250 property and net section 1231 gain,
see chapter 3.
Use Form 4797 to report gain or loss from a sale,
exchange, or involuntary conversion of property used in
your trade or business or that is depreciable or
amortizable. You can use Form 4797 with Forms 1040,
1065, 1120, or 1120S.
Section 1231 gains and losses.
Show any section 1231 gains and losses in
Part I. Carry a net gain to Schedule D (Form 1040) as a
long-term capital gain. Carry a net loss to Part II of
Form 4797 as an ordinary loss.
If you had any nonrecaptured net
section 1231 losses from the preceding 5 tax years,
reduce your net gain by those losses and report the
amount of the reduction as an ordinary gain in Part II.
Report any remaining gain on Schedule D (Form 1040). See
Section 1231 Gains and Losses
in chapter 3.
Ordinary gains and losses.
Show any ordinary gains and losses in Part
II. This includes a net loss or a recapture of losses
from prior years figured in Part I of Form 4797. It also
includes ordinary gain figured in Part III.
Ordinary income from depreciation.
Figure the ordinary income from depreciation
on personal property and additional depreciation on real
property (as discussed in chapter 3) in Part III. Carry
the ordinary income to Part II of Form 4797 as an
ordinary gain. Carry any remaining gain to Part I as
section 1231 gain, unless it is from a casualty or
theft. Carry any remaining gain from a casualty or theft
to Form 4684.
Jane Smith is single. At the beginning of 2004, she
owned and operated Jane's Dress Shop at 25 Main Street,
Smalltown, Virginia. On March 16, she traded the land
and building where she operated her dress shop for other
land and a building around the corner at 97 Oak Street.
She then opened the J. Smith Hardware Store. Jane also
sold all the equipment she had used in her dress shop,
as well as a vacant lot across the street from the shop
used for customer parking. She reports these
transactions as shown in the filled-in Form 4797 and
Form 8824 at the end of this chapter.
Jane sold the equipment she used in her dress shop
for $3,000. She originally paid $6,000 for it on January
20, 1986, and had fully depreciated it. She realized a
gain of $3,000. The gain was less than the $6,000
depreciation taken, so all her gain is ordinary income
from depreciation. This amount is reported in Part III
of Form 4797 and entered in Part II on line 13.
The adjusted basis of the customer parking lot
(acquired in 1980) was $6,000 and its sales price was
$8,000. Jane reports her $2,000 gain from the sale in
Part I of Form 4797.
Jane had a nonrecaptured net section 1231 loss of
$1,200. She shows this loss in Part I on line 8. The net
section 1231 gain of $2,000 is more than the
nonrecaptured loss, so that gain is treated as ordinary
gain only up to the loss. Therefore, the loss of $1,200
on line 8 is entered as an ordinary gain in Part II on
line 12. The loss is also subtracted from the $2,000
gain on line 7. The $800 balance is entered on line 9.
Jane entered into a like-kind exchange by trading her
business real property for other business real property,
so she must report the transaction on Form 8824 and
attach the form to her tax return.
On lines 16 and 17 of Form 8824, Jane enters the fair
market value of her new property, $120,000, consisting
of $95,000 for the building and $25,000 for the land. On
line 18, she enters the adjusted basis of the old
property, $100,000, consisting of $17,687 for the
building and $82,313 for the land. Her realized gain on
line 19 is $20,000. Under the like-kind exchange rules,
this gain is not recognized. Jane enters �-0-� on line 20.
However, because there is additional depreciation of
$4,405 on the old building, Jane must determine whether
any of her gain has to be recognized as ordinary income
under the recapture rules. The old building has an FMV
of $90,000. Had the transaction been a cash sale, Jane's
realized gain on the building would have been $72,313
($90,000 - $17,687). The additional depreciation is less
than that amount, so her ordinary income due to the
additional depreciation would have been $4,405. That
amount is less than the $95,000 fair market value of the
new building, so there is no ordinary income recognized
on the exchange. The $4,405 ordinary income that does
not have to be reported is carried over to the new
building as additional depreciation. Jane enters �-0-� on Form 8824, line 21 and Form
4797, line 16.
All of Jane's $20,000 gain is deferred (line 24). The
basis of her new property (line 25) is $100,000, the
same as the adjusted basis of her old property. Of that
amount, $79,167 [($95,000 � $120,000) � $100,000] is
allocated to the building and $20,833 [($25,000 �
$120,000) � $100,000] is allocated to the land.
The entries in Part II, Form 4797, show an ordinary
gain of $4,200 that is carried to Form 1040, line 14.
The entries in Part I, Form 4797, result in a
long-term capital gain of $800 from section 1231
transactions. This is carried to Schedule D (Form 1040),
line 11, column (f).
|
