Gain & Losses from Property Transactions (on the CPA Exam)

1. Must be realized vs. unrealized

2. Realized gain/loss = amount realized adjusted basis
   1. Amount realized = proceeds from sale (selling price cost of disposition)
   2. Adjusted basis = cost + capital additions - cost recovery (accum. depr.)

3. Realized gains are recognized unless nontaxable exchange provision in IRC

4. Some realized losses are recognized (deductible) and some are not
   1. Realized losses on ordinary income property are fully deductible
   2. Realized losses on investment use capital assets are deductible with limitations
   3. Realized losses on personal use capital asset property are not deductible

5. Ordinary income property = inventory, accounts receivable and depreciable property used in business

6. Capital assets are not defined by IRC all assets that are not ordinary income property generally, assets held for investment purposes and personal use

7. Gains and losses from recognized capital asset transactions must be classified by holding period
   1. Short term < or equal to one year
   2. Long term > one year

8. Netting Capital Gains and Losses If an investor sells numerous capital assets in a particular year, the end result could be a mix of short and long-term capital gains and losses. The IRS is specific as to how these gains and losses are to be netted against each other. Here are the steps:
   1. Net short-term gains against short-term losses
   2. Net long-term gains against long-term losses (deal with 25% and 28% assets separately)
   3. If both holding periods result in gains (or both in losses), they are reported separately on Schedule D
   4. If one holding period results in a gain and the other in a loss, they are then netted against each other
   5. If capital losses exceed capital gains, up to $3,000 ($1,500 MFS) can be deducted against ordinary income in any one year with the remainder carried forward indefinitely to future years
   6. Capital loss carryforwards must retain their classification as short-term or long-term for future year netting purposes
   7. Capital losses carryforwards will first be netted against the current year's capital gains, followed by the $3,000 deduction against ordinary income

Capital Gain and Qualified Dividend Tax Rates

1. Short-term capital gains are taxed at ordinary income rates = 10 37%

2. Long-term capital gains and qualified dividends are taxed at capital gains rates:
   1. Collectibles and qualified small business stock at 28%
   2. Section 1250 recapture property at 25%
   3. All other capital assets at 0%, 15% or 20% depending on the taxpayers filing status and taxable income

3. Additionally, net investment income is now subject the 3.8% Obamacare tax. Imposed only on taxpayers with MAGI greater than $200,000, $250,000 MFJ or $125,000 MFS. Tax is 3.8% of the lesser of:
   1. net investment income or
   2. excess of MAGI over $250,000 for married taxpayers ($125,000 MFS) and $200,000 for other taxpayer

Examples:

1. In 2020, single taxpayer had ST capital gains/(losses) of $10,000 and ($5,000) and LT capital gains/(losses) of $10,000 and ($8,000). The taxpayers ordinary taxable income before considering capital gains/(losses) is $100,000. Calculate the taxpayers total taxable income and tax liability?

2. In 2020, MFJ taxpayer had ST capital gains/(losses) of $10,000 and ($5,000) and LT capital gains/(losses) of ($10,000) and $8,000. The taxpayers ordinary taxable income before considering capital gains/(losses) is $500,000. Calculate the taxpayers total taxable income and tax liability?