Transcript Slide 1

Module NJ 1.10
Capital Gains & Losses (Including
Sale of Home)
Pub 17 Chapters 13-16
Pub 4012 Tab 2
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Stock Sales – Schedule D
 Key elements of stock sale
 When was it bought?
 When was it sold?
 What was the sales price?
 What was the cost basis?
 Note: Use Tax Wise Capital Gain Worksheet
for entering data for each transaction
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Stock Sales – Capital Gains
 TaxWise

Determines whether long/short term

Calculates taxable gain/loss

Calculates tax liability on worksheet

Calculates capital loss carryover
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Cost Basis
 Cost basis is usually cost plus commissions (buy
and sell)
 FIFO unless specified before sale
 Original basis is adjusted by
 Stock split or non-taxable stock dividend
 Cost basis of taxable stock dividends and
Dividends Reinvestments (DRIP) is the price of the
stock on the distribution date
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Cost Basis (cont)
 The cost basis is not reported on the 1099-B
 Typical sources of the cost basis
 Year end broker activity statement may provide
information as a result of the sale
 Taxpayer records
 Average of stock price during approximate period of
purchase, if no other records are available

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Out of scope – determining basis for employee stock
options
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Sales Price
 Reported on
 1099 B - Proceeds From Broker and Barter
Exchange Transactions
 1099 Consolidated Statement
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Sales Commissions
 Commission paid will affect the basis
 If 1099B reports sale as gross, commission will
be added to basis.
 If 1099B reports sale as net, no adjustment to
basis is needed.
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Gross / Net Proceeds
2007
Gross proceeds
– Add fees to
cost to get basis
Net proceeds –
Use original
cost basis
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1099 Consolidated Statement
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Cost Basis – Question #1
 The taxpayer paid $1,000 for 100 shares of
XYZ stock. What is his basis per share in
XYZ?
 Answer - $10 per share
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Cost Basis – Question #2
 The taxpayer who paid $1,000 for 100
shares of XYZ stock received a 2 for 1 stock
split. What is his adjusted basis per share in
XYZ?
 Answer - $5 per share
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Commissions – Question #3
 The taxpayer sells all 200 shares of XYZ
stock receiving $7 per share minus a total
commission of $15. If the 1099B reports
gross proceeds, what will be the sales price
and the basis?
 Answer: $1,400 selling price minus $1,015
cost basis (gain=$385)
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Commissions – Question #4
 The taxpayer sells all 200 shares of XYZ
stock receiving $7 per share less a total
commission of $15. If the 1099B reports
net proceeds, what will be the sales price
and the basis?
 Answer: $1,385 selling price $1,000 basis
(gain is still $385)
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Long vs Short Term
 Stock held one year or less is short-term – begin
counting the day after the trade date
 If sale of all shares bought on various dates at
different prices (multiple blocks) and all were long
term

Enter “Various” in Tax Wise Purchase Date column

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This type of transaction will automatically be reported as Long
Term
Enter actual transaction date(s) if short term
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Long vs Short Term (cont)
 Shares acquired in tax-free stock dividend
or stock split have same holding period as
original shares
 Holding period for taxable stock dividends
and Dividend Reinvestments (DRIP) are the
date of declaration.
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They do not revert to the holding period of the
original stock
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Problem #1 – Stock Split
 6/01/08: 100 shares of XYZ bought at $100 per
share

Cost basis is $100 x 100 shares = $10,000
 6/01/09: 2 for 1 (2:1) Stock Split
 All 200 shares have the $10,000 basis and all have
the same purchase date
 If sold on 6/01/09, is the transaction a short or
long term transaction.
 ANSWER: Short term i.e. 6/02/08 to 06/01/09 is
less than a year
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Problem #2 – Reinvested Taxable
Dividend
 9/20/07: 200 shares of XYZ bought at $40 per
share. Basis is $8,000
 6/20/09: 20 shares worth $30/share are received
as DRIP (20 at $30=$600)
 The cost basis of the original 200 share remains at
$8,000 with an acquisition date of 9/20/07
 The cost basis of the 20 shares received as a DRIP
is $600 and has the acquisition date of 6/20/09
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Capital Gains Tax Rates
(0% new in 2008, extended thru 2010)
CAPITAL GAINS RATES
FOR 2009
TAXPAYER IN:
10% or 15% Brackets
Other Brackets
ORDINARY RATE
ORDINARY RATE
LONG TERM
(Greater than
12 months)
0% in 2009
15%
QUALIFIED DIVIDENDS
0% in 2009
15%
SHORT TERM
(12 months or less)
NOTES: WHEN USING VA/RI/OUS OR IN/HE/RIT AS PURCHASE DATE,
TAXWISE ASSUMES THAT THE TRANSACTION IS LONG TERM (MORE THAN
ONE YEAR)
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Tax Liability Net Loss
 Net loss can offset all gains, plus
 Up to $3,000 can be used to reduce other
taxable income in the current year ($1,500 if
MFS)
 The amount in excess of $3,000 (or $1,500
if MFS) is carried forward to the next year
 Note: Loss not allowed on NJ return
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Capital Loss Carry Forward
 Check prior year Schedule D or related worksheet to
determine carryover loss
 Carryover losses keep their short-term or long-term
classification
 Carryover losses are combined with the gains and losses
that actually occur in the subsequent year
 There is no limit to how many times a loss can be carried
forward but the maximum loss (i.e. $3,000) must be used
each year even if no there is no tax liability to offset. If not
used, the $3,000 deduction is lost
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Capital Loss Carry Forward
Schedule D – Worksheet 2
2008
Short Term Carry
Forward
Long Term
Carry Forward
Required For Next Years Returns
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Capital Gain Distributions
 These distributions result when mutual funds that
sold stock pass resulting gains to TP each year
 Treated as long-term capital gain
 If these are the only capital gains, no Schedule D
required
 Reported on 1099-DIV or broker’s Consolidated
Statement
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1099-DIV
Dividends and Distributions
2008
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1099 Consolidated Statement
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Demutualization
 Demutualization occurs when insurance
company is changed from a “mutual
company” to a “stock company” and issues
stock to policy holders in the new company

Basis of stock issued is always $0.00

When sold, stock is always long term
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SCHEDULE K-1
CAPITAL GAINS AND LOSSES
 Schedule K-1
 Net short-term capital gain (loss)
 Net long-term capital gain (loss)
 Use Schedule D
 Enter short-term on line 5
 Enter long-term on line 12
 Sample K-1s (may vary)
SAMPLE SCHEDULE K-1
Wash Sales – Out Of Scope
 Wash sales – Occurs when stock is sold at a
loss, and then within 30 days, (either
before or after) substantially equivalent
stock is purchased
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Loss is not deductible
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Capital Gain/Loss Problem #3
 Jim sold a mutual fund he purchased 8/15/1983.
 The records show he reinvested capital gains
totaling $8,640, interest totaling $6,940 and
dividends of $3,298.

 All reinvestments qualify for LTCG. His purchase
price was $20,000. He sold this fund for $39,201
on 11/15/2009
 What is his capital gain?
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Capital Gain/Loss Problem #3
Answer
2008
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Sale Of Home
 Define Main Home
 Determine if taxpayer who sold a main
home this year qualifies to exclude all or
part of any gain from income
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Main Home
 Determined by facts – not by choice
 Where TP resides most of the time
 If TP is living in a rental, the rental might be
considered the main home
 Other places may qualify (house, boat,
mobile home, apt, condo, etc)
 Land sale does not qualify
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Sale Of Business/Rental Property
- OUT OF SCOPE
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Calculate Gain
 Selling price includes all monies received plus any
mortgages or other debts taken over by the buyer
 Amount Realized is the sale price minus selling expenses
 Adjusted Basis is the original cost plus any increase or
decrease to original basis
 Gain or loss is the amount realized compared to the
adjusted basis
 Loss on sale of home can not be deducted
 A lot of useful information can be gleaned from the HUD-1
form given to all buyers and sellers
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1099-S May Not Be Provided If
Can Exclude Total Gain
2008
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Calculate Exclusion
 Single homeowner can exclude up to $250,000 of
gain from sale of main home
 Married couple can exclude up to $500,000 of
gain, if:




Filed a joint return
Either or both meet the ownership test
Both individuals meet the use test
Neither individual excluded gain in the 2 years before
the current sale
 New: Sale of home within 2 years of spousal
death
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Ownership And Use Tests
 Ownership Test: Owned by the taxpayer for
a combined period of at least 2 years out of
the last 5 years, ending on the date of sale
AND
 Use Test: Lived in home as the taxpayer’s
main home for at least 2 years of that 5
year period
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