Capital Gains & Losses (Including Sale of Home)

1. Module NJ 1.10 Capital Gains & Losses (Including Sale of Home) Pub 17 Chapters 13-16 Pub 4012 Tab 2 NJ Training TY 2008

2. 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 NJ Training TY 2008

3. Stock Sales – Capital Gains • TaxWise • Determines whether long/short term • Calculates taxable gain/loss • Calculates tax liability on worksheet • Calculates capital loss carryover NJ Training TY 2008

4. 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 NJ Training TY 2008

5. 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 • Out of scope – determining basis for employee stock options NJ Training TY 2008

6. Sales Price • Reported on • 1099 B - Proceeds From Broker and Barter Exchange Transactions • 1099 Consolidated Statement NJ Training TY 2008

7. 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. NJ Training TY 2008

8. Gross / Net Proceeds Gross proceeds – Add fees to cost to get basis 2007 Net proceeds – Use original cost basis NJ Training TY 2008

9. 1099 Consolidated Statement NJ Training TY 2008

10. 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 NJ Training TY 2008

11. 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 NJ Training TY 2008

12. 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) NJ Training TY 2008

13. 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) NJ Training TY 2008

14. 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 • This type of transaction will automatically be reported as Long Term • Enter actual transaction date(s) if short term NJ Training TY 2008

15. 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. • They do not revert to the holding period of the original stock NJ Training TY 2008

16. 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 NJ Training TY 2008

17. 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 NJ Training TY 2008

18. CAPITAL GAINS RATES FOR 2009 TAXPAYER IN: 10% or 15% Brackets Other Brackets SHORT TERM (12 months or less) ORDINARY RATE ORDINARY RATE LONG TERM (Greater than 12 months) 0% in 2009 15% QUALIFIED DIVIDENDS 0% in 2009 15% Capital Gains Tax Rates(0% new in 2008, extended thru 2010) 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) NJ Training TY 2008

19. 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 NJ Training TY 2008

20. 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 NJ Training TY 2008

21. Capital Loss Carry ForwardSchedule D – Worksheet 2 2008 Short Term Carry Forward Long Term Carry Forward Required For Next Years Returns NJ Training TY 2008

22. 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 NJ Training TY 2008

23. 1099-DIVDividends and Distributions 2008 NJ Training TY 2008

24. 1099 Consolidated Statement NJ Training TY 2008

25. 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 NJ Training TY 2008

26. 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)

27. SAMPLE SCHEDULE K-1

28. 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 • Loss is not deductible NJ Training TY 2008

29. 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? NJ Training TY 2008

30. Capital Gain/Loss Problem #3Answer 2008 NJ Training TY 2008

31. 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 NJ Training TY 2008

32. 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 NJ Training TY 2008

33. Sale Of Business/Rental Property - OUT OF SCOPE Sam's Computer Center NJ Training TY 2008

34. 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 NJ Training TY 2008

35. 1099-S May Not Be Provided If Can Exclude Total Gain 2008 NJ Training TY 2008

36. 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 NJ Training TY 2008

37. 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 NJ Training TY 2008