Chapter 11 Character of Gain part of recognized gain o Ordinary o Capital o Personal Use Gains are capital o Section 1231 Losses are not deductible Effects of Debt Assumptions o A buyer assuming the debt of a seller will increase the gross sales price basis o A seller assuming the debt of a buyer will reduce the gross sales price basis Net capital gains of corporations are treated as ordinary income o Get no preferential treatment o Can only be used to reduce corporate losses Capital Gain Exclusion of Qualified Small Business Stock o Qualified Small Business Stock original issue Stock originally issued after August 10 1993 by a corporation that did not have assets in excess of 50 million after August 10 1993 and before the stock issuance o If held for more than 5 years 50 excluded from taxation If acquired Between Feb 17 2009 and Sept 26 2010 75 excluded If acquired between Sept 27 2010 and Jan 1 2014 100 excluded After exclusion gain is taxed at 28 Not eligible for 15 capital gains rate o If sold before owning for 5 years Taxed at 15 capital gains rate but not eligible for exclusion Planning Strategies o Net Capital Gain Position Reduce the net capital gain by selling capital assets on which there is an unrealized loss Take losses that cancel out the net capital gain to date o Net Capital Loss Position o Worthless Securities Take unrealized capital gains to reduce the net capital loss for the year to the 3000 maximum deduction amount The loss of investment suffered when a security become worthless no longer traded or no value Taxpayers are deemed to have realized the loss on the last day of the tax year in which the security is determined to be worthless Also the date for determining holding period The realized loss is equal to the basis of the worthless security o Basis of Securities Sold When a taxpayer sells only some of the stock owned the shares being sold must be identified if the securities were purchased at different times and at different prices Use FIFO if unable to determine the specific identification of shares sold The taxpayer can designate which lot of shares is being sold This helps determine the amount of gain or loss Section 1231 Gains and Losses Essay Question o Section 1231 Property Property held for more than 12 months that is used in a trade or business timber coal and domestic iron ore livestock that is held for more than one year and horses that are held for more than 2 years and unharvested crops o Section 1231 Gain treated as a long term capital gain o Section 1231 Loss treated as an ordinary loss not capital No deduction limit Summary of 1231 1245 1250 Procedures 1 Determine if 1231 Property 2 For all 1231 property determine realized and recognized gain loss 3 For all recognized gains APPLY RECAPTURE RULES 1245 1250 ordinary income gain 4 Apply Netting Procedure Section 1231 Netting Procedure o Step 1 o Step 2 Net all business casualty gains after depreciation recapture and losses If Loss all gains and losses are ordinary o Ordinary loss deduction If Gain go to Step 2 Net all other Section 1231 gains after depreciation recapture and losses including net casualty gain If Loss all gains and losses are ordinary o Ordinary loss deduction If Gain go to Step 3 o Step 3 Apply lookback rule Nets the current year net Section 1231 gain against any Section 1231 ordinary loss deductions taken in the previous 5 years o That amount of the gain from netting is treated as ordinary income Depreciation Recapture o The rest of the 1231 gain is treated as a net long term capital gain and netted with other capital gains and losses o As an asset is depreciated the basis is reduced When the asset is disposed of the gain or loss is measured as the difference between the amt realized and the adj basis As a result some or all of the gain on the sale derives from depreciation previously deducted on the asset o Depreciation Recapture giving back the ordinary deduction that created the gain The amount that was deducted for depreciation is reclassified as ordinary income The excess is given capital gain or Section 1231 loss treatment o 2 Provisions Section 1245 Recapture Rule Full Recapture all depreciation No capital gain or Section 1231 treatment results from the sale of a Section 1245 property unless it is sold for more than its original cost Section 1245 property all depreciable tangible personal property o Eg autos trucks equipment machinery computers patents copyrights Section 1250 Recapture Rule Partial Recapture only to extent of excess depreciation Only gains that are attributable to excess depreciation above what would have been deducted using straight line depreciation are recaptured as ordinary income o Excess Depreciation the total depreciation taken to date less the allowable straight line depreciation on the asset No recapture of depreciation occurs when using the straight line method Section 1250 Property depreciable real property o Eg office buildings apartment buildings warehouses factories and low income housing Unrecaptured Section 1250 Gain o The amount of gain not otherwise treated as ordinary income that would be ordinary income if the property were Section 1245 property Problems to get to LTCG for 1231 assets 1 Recapture depreciation previously deducted Taxed at 25 Causing gain to be classified as ordinary gain 1245 Full Recapture all depreciation as ordinary gain 1250 Partial Recapture only excess depreciation over s l as ordinary 2 Gain after recapture Look back 5 years any ordinary losses deducted causes ordinary gain Any gain that is left is LTCG