| Publication 544 |
2008 Tax Year |
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:
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Information returns
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Schedule D (Form 1040)
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Form 4797
Useful Items - You may want to see:
Form (and Instructions)
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Schedule D (Form 1040)
Capital Gains and Losses
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1099-B
Proceeds From Broker and Barter Exchange Transactions
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1099-S
Proceeds From Real Estate Transactions
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4684
Casualties and Thefts
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4797
Sales of Business Property
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6252
Installment Sale Income
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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 IRS.
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.
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An inherently permanent structure, including any residential, commercial, or industrial building.
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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.
Table 4-1. Do I Have a Short-Term or Long-Term Gain or Loss?
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IF you hold the property...
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THEN you have a...
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1 year or less,
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Short-term capital gain or
loss.
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More than 1 year,
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Long-term capital gain or
loss.
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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, 2006, you should start counting on June 20, 2006. If you sold the asset on June 19, 2007,
your holding period is
not longer than 1 year, but if you sold it on June 20, 2007, 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, 2006. On June 4, 2007, you traded this machinery for other machinery in a nontaxable exchange.
On December 5,
2007, you sold the machinery you got in the exchange. Your holding period for this machinery began on December 5, 2006. 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.
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Capital gain distributions from regulated investment companies (mutual funds) and real estate investment trusts.
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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
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Type of acquisition:
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When your holding period starts:
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Stocks and bonds bought on a securities market
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Day after trading date you bought security. Ends on trading date you sold security.
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U.S. Treasury notes and bonds
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If bought at auction, day after notification of bid acceptance. If bought through subscription, day after subscription was
submitted.
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Nontaxable exchanges
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Day after date you acquired old property.
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Gift
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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.
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Real property bought
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Generally, day after date you received title to the property.
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Real property repossessed
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Day after date you originally received title to the property, but does not include time between the original sale and date
of
repossession.
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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 41 (your taxable income without your deduction for exemptions), is less than zero.
If either of these situations applies to you for 2007, see Capital Losses under Reporting Capital Gains and Losses in
chapter 4 of Publication 550 to figure the amount you can carry over to 2008.
Example.
Bob and Gloria Sampson sold property in 2007. The sale resulted in a capital loss of $7,000. The Sampsons had no other capital
transactions. On
their joint 2007 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 2008.
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 2008.
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 2006 to 2007, use the Capital Loss Carryover Worksheet in the 2007 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.
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