Instructions for Schedule D (Form 1040) |
2003 Tax Year |
General Instructions
This is archived information that pertains only to the 2003 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
Maximum Capital Gains Tax Rates.
The 20% maximum tax rate on net capital gain (the excess of net long-term capital gain over net short-term capital
loss) has been reduced to 15%,
and the 10% rate has been reduced to 5%, for sales and other dispositions after May 5, 2003 (and installment payments received
after that date). The
25% rate on unrecaptured section 1250 gain and the 28% rate on collectibles gain and section 1202 gain have not changed.
Qualified Dividends.
Dividends paid by most domestic and foreign corporations after December 31, 2002, are eligible for the new maximum
capital gains tax rate of 15%
(5% in some cases). Qualified dividends are reported on Form 1040, line 9b. For details, see the Instructions for Form 1040,
line 9b, on page 23.
Qualified 5-Year Gain.
The 8% maximum capital gains tax rate for qualified 5-year gain has been eliminated for sales and other dispositions
after May 5, 2003 (and
installment payments received after that date). Instead, gain from these transactions will be taxed at the 5% maximum capital
gains tax rate described
above. See the instructions for line 35 on page D-10 for more details.
28% Rate Gain.
Any 28% rate gain is now figured on a worksheet and entered on Schedule D, line 20. See the instructions for line
20 beginning on page D-8 for more
details.
Capital Loss Carryover Worksheet.
The Capital Loss Carryover Worksheet has been removed from the 2003 Instructions for Schedule D to simplify the preparation
of your 2003 tax
return. To figure your capital loss carryover to 2004, you will use a worksheet in the 2004 Instructions for Schedule D. See
the instructions for line
18 on page D-7 for more details.
Other Forms You May Have To File
Use Form 4797 to report the following.
- The sale or exchange of:
- Property used in a trade or business;
- Depreciable and amortizable property;
- Oil, gas, geothermal, or other mineral property; and
- Section 126 property.
- The involuntary conversion (other than from casualty or theft) of property used in a trade or business and capital assets
held for business
or profit.
- The disposition of noncapital assets other than inventory or property held primarily for sale to customers in the ordinary
course of your
trade or business.
- Ordinary loss on the sale, exchange, or worthlessness of small business investment company (section 1242) stock.
- Ordinary loss on the sale, exchange, or worthlessness of small business (section 1244) stock.
- Ordinary gain or loss on securities held in connection with your trading business, if you previously made a mark-to-market
election. See
Traders in Securities on page D-3.
Use Form 4684 to report involuntary conversions of property due to casualty or theft.
Use Form 6781 to report gains and losses from section 1256 contracts and straddles.
Use Form 8824 to report like-kind exchanges. A like-kind exchange occurs when you exchange business or investment property for property
of a like kind.
Most property you own and use for personal purposes, pleasure, or investment is a capital asset. For example, your house,
furniture, car, stocks,
and bonds are capital assets. A capital asset is any property held by you except the following.
- Stock in trade or other property included in inventory or held mainly for sale to customers.
- Accounts or notes receivable for services performed in the ordinary course of your trade or business or as an employee, or
from the sale of
stock in trade or other property held mainly for sale to customers.
- Depreciable property used in your trade or business, even if it is fully depreciated.
- Real estate used in your trade or business.
- Copyrights, literary, musical, or artistic compositions, letters or memoranda, or similar property: (a) created by your personal
efforts; (b) prepared or produced for you (in the case of letters, memoranda, or similar property); or (c) that you received
from someone who created them or for whom they were created, as mentioned in (a) or (b), in a way (such as by gift) that
entitled you to the basis of the previous owner.
- U.S. Government publications, including the Congressional Record, that you received from the government, other than by purchase
at the
normal sales price, or that you got from someone who had received it in a similar way, if your basis is determined by reference
to the previous
owner's basis.
- Certain commodities derivative financial instruments held by a dealer. See section 1221(a)(6).
- Certain hedging transactions entered into in the normal course of your trade or business. See section 1221(a)(7).
- Supplies regularly used in your trade or business.
Separate your capital gains and losses according to how long you held or owned the property. The holding period for short-term
capital gains and
losses is 1 year or less. The holding period for long-term capital gains and losses is more than 1 year. To figure the holding
period, begin counting
on the day after you received the property and include the day you disposed of it.
If you disposed of property that you acquired by inheritance, report the disposition as a long-term gain or loss, regardless
of how long you held
the property.
A nonbusiness bad debt must be treated as a short-term capital loss. See Pub. 550 for what qualifies as a nonbusiness bad
debt and how to enter it
on Schedule D.
Capital Gain Distributions
These distributions are paid by a mutual fund (or other regulated investment company) or real estate investment trust from
its net realized
long-term capital gains. Distributions of net realized short-term capital gains are not treated as capital gains. Instead,
they are included on
Form 1099-DIV as ordinary dividends.
Enter on line 13, column (f), the total capital gain distributions paid to you during the year, regardless of how long you held your
investment. This amount is shown in box 2a of Form 1099-DIV.
If there is an amount in box 2b of Form 1099-DIV, include that amount on line 13, column (g).
If there is an amount in box 2c, include that amount on line 5 of the Qualified 5-Year Gain Worksheet on page D-10 if you complete line
35 of
Schedule D.
If there is an amount in box 2d, include that amount on line 11 of the Unrecaptured Section 1250 Gain Worksheet on page D-7 if you
complete line 19 of Schedule D.
If there is an amount in box 2e, see Exclusion of Gain on Qualified Small Business (QSB) Stock on page D-4.
If there is an amount in box 2f, include that amount on line 4 of the 28% Rate Gain Worksheet on page D-8 if you complete line 20 of
Schedule D.
If you received capital gain distributions as a nominee (that is, they were paid to you but actually belong to someone else),
report on line 13
only the amount that belongs to you. Attach a statement showing the full amount you received and the amount you received as
a nominee. See the
Instructions for Schedule B for filing requirements for Forms 1099-DIV and 1096.
If you sold or exchanged your main home, do not report it on your tax return unless your gain exceeds your exclusion amount. Generally,
if you meet the two tests below, you can exclude up to $250,000 of gain. If both you and your spouse meet these tests and
you file a joint return, you
can exclude up to $500,000 of gain (but only one spouse needs to meet the ownership requirement in Test 1).
Test 1. You owned and used the home as your main home for 2 years or more during the 5-year period ending on the date you sold or
exchanged your home.
Test 2. You have not sold or exchanged another main home during the 2-year period ending on the date of the sale or exchange of your
home.
Even if you do not meet one or both of the above two tests, you still can claim an exclusion if you sold or exchanged the
home because of a change
in place of employment, health, or certain unforeseen circumstances. In this case, the maximum amount of gain you can exclude
is reduced.
See Pub. 523 for details, including how to report any taxable gain if:
- You (or your spouse if married) used any part of the home for business or rental purposes after May 6, 1997, or
- Your gain exceeds your exclusion amount.
A sale or other disposition of an interest in a partnership may result in ordinary income, collectibles gain (28% rate gain),
or unrecaptured
section 1250 gain. For details on 28% rate gain, see the instructions for line 20 beginning on page D-8. For details on unrecaptured
section 1250
gain, see the instructions for line 19 beginning on page D-7.
Capital Assets Held for Personal Use
Generally, gain from the sale or exchange of a capital asset held for personal use is a capital gain. Report it on Schedule
D, Part I or Part II.
However, if you converted depreciable property to personal use, all or part of the gain on the sale or exchange of that property
may have to be
recaptured as ordinary income. Use Part III of Form 4797 to figure the amount of ordinary income recapture. The recapture amount is
included on line 31 (and line 13) of Form 4797. Do not enter any gain for this property on line 32 of Form 4797. If you are not completing
Part III for any other properties, enter “N/A” on line 32. If the total gain is more than the recapture amount, enter “From Form 4797” in
column (a) of line 1 or line 8 of Schedule D, skip columns (b) through (e), and in column (f) (and column (g) for sales after
May 5, 2003) enter the
excess of the total gain over the recapture amount.
Loss from the sale or exchange of a capital asset 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, you must report the transaction on Schedule D even though the loss is
not deductible. For example, you have a loss on the sale of a vacation home that is not your main home and you received a
Form 1099-S for the
transaction. Report the transaction on line 1 or 8, depending on how long you owned the home. Complete columns (a) through
(e). Because the loss is
not deductible, enter zero in column (f).
Do not deduct a loss from the direct or indirect sale or exchange of property between any of the following.
- Members of a family.
- A corporation and an individual owning more than 50% of the corporation's stock (unless the loss is from a distribution in
complete
liquidation of a corporation).
- A grantor and a fiduciary of a trust.
- A fiduciary and a beneficiary of the same trust.
- A fiduciary and a beneficiary of another trust created by the same grantor.
- An executor of an estate and a beneficiary of that estate, unless the sale or exchange was to satisfy a pecuniary bequest
(that is, a
bequest of a sum of money).
- An individual and a tax-exempt organization controlled by the individual or the individual's family.
See Pub. 544 for more details on sales and exchanges between related parties.
If you disposed of (a) an asset used in an activity to which the at-risk rules apply or (b) any part of your interest in an
activity to which the at-risk rules apply, and you have amounts in the activity for which you are not at risk, see the Instructions
for Form 6198.
If the loss is allowable under the at-risk rules, it may then be subject to the passive activity rules. See Form 8582 and its
instructions for details on reporting capital gains and losses from a passive activity.
Items for Special Treatment
- Transactions by a securities dealer. See section 1236.
- Bonds and other debt instruments. See Pub. 550.
- Certain real estate subdivided for sale that may be considered a capital asset. See section 1237.
- Gain on the sale of depreciable property to a more than 50% owned entity or to a trust of which you are a beneficiary. See
Pub.
544.
- Gain on the disposition of stock in an interest charge domestic international sales corporation. See section 995(c).
- Gain on the sale or exchange of stock in certain foreign corporations. See section 1248.
- Transfer of property to a partnership that would be treated as an investment company if it were incorporated. See Pub.
541.
- Sales of stock received under a qualified public utility dividend reinvestment plan. See Pub. 550.
- Transfer of appreciated property to a political organization. See section 84.
- In general, no gain or loss is recognized on the transfer of property from an individual to a spouse or a former spouse if
the transfer is
incident to a divorce. See Pub. 504.
- Amounts received on the retirement of a debt instrument generally are treated as received in exchange for the debt instrument.
See Pub.
550.
- Any loss on the disposition of converted wetland or highly erodible cropland that is first used for farming after March 1,
1986, is reported
as a long-term capital loss on Schedule D, but any gain is reported as ordinary income on Form 4797.
- If qualified dividends that you reported on Form 1040, line 9b, include extraordinary dividends, any loss on the sale or exchange
of the
stock is a long-term capital loss to the extent of the extraordinary dividends. An extraordinary dividend is a dividend that
equals or exceeds 10% (5%
in the case of preferred stock) of your basis in the stock.
- Amounts received by shareholders in corporate liquidations. See Pub. 550.
- Cash received in lieu of fractional shares of stock as a result of a stock split or stock dividend. See Pub. 550.
- Mutual fund load charges, which may not be taken into account in determining gain or loss on certain dispositions of stock
in mutual funds
if reinvestment rights were exercised. See Pub. 564.
- The sale or exchange of S corporation stock or an interest in a trust held for more than 1 year, which may result in collectibles
gain (28%
rate gain). See page D-8.
- Gain or loss on the disposition of securities futures contracts. See Pub. 550.
- Gain on the constructive sale of certain appreciated financial positions. See Pub. 550.
- Certain constructive ownership transactions. Gain in excess of the gain you would have recognized if you had held a financial
asset directly
during the term of a derivative contract must be treated as ordinary income. See section 1260. If any portion of the constructive
ownership
transaction was open in any prior year, you may have to pay interest. See section 1260(b) for details, including how to figure
the interest. Include
the interest as an additional tax on Form 1040, line 60. Write “Section 1260(b) interest” and the amount of the interest to the left of line 60.
This interest is not deductible.
- The sale of publicly traded securities, if you elect to postpone gain by purchasing common stock or a partnership interest
in a specialized
small business investment company during the 60-day period that began on the date of the sale. See Pub. 550.
- The sale of qualified securities, held for at least 3 years, to an employee stock ownership plan or eligible worker-owned
cooperative, if
you elect to postpone gain by purchasing qualified replacement property. See Pub. 550.
A wash sale occurs when you sell or otherwise dispose of stock or securities (including a contract or option to acquire or
sell stock or
securities) at a loss and, within 30 days before or after the sale or disposition, you directly or indirectly:
- Buy substantially identical stock or securities,
- Acquire substantially identical stock or securities in a fully taxable trade, or
- Enter into a contract or option to acquire substantially identical stock or securities.
You cannot deduct losses from wash sales unless the loss was incurred in the ordinary course of your business as a dealer in stock or
securities. The basis of the substantially identical property (or contract or option to acquire such property) is its cost
increased by the disallowed
loss. For more details on wash sales, see Pub. 550.
Report a wash sale transaction on line 1 or 8. Enter the full amount of the (loss) in column (f). Also report this amount
in column (g) if the
transaction occurred after May 5, 2003. Directly below the line on which you reported the loss, enter “Wash Sale” in column (a), and enter as a
positive amount in column (f) (and column (g) for transactions after May 5, 2003) the amount of the loss not allowed.
You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. To
be engaged in business as a trader in securities:
- You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital
appreciation.
- Your activity must be substantial.
- You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your activity is a business.
- Typical holding periods for securities bought and sold.
- The frequency and dollar amount of your trades during the year.
- The extent to which you pursue the activity to produce income for a livelihood.
- The amount of time you devote to the activity.
You are considered an investor, and not a trader, if your activity does not meet the above definition of a business. It does
not matter whether you
call yourself a trader or a “day trader.”
Like an investor, a trader must report each sale of securities (taking into account commissions and any other costs of acquiring
or disposing of
the securities) on Schedule D or D-1 or on an attached statement containing all the same information for each sale in a similar
format. However, if a
trader previously made the mark-to-market election (see below), each transaction is reported in Part II of Form 4797 instead of Schedules D
and D-1. Regardless of whether a trader reports his or her gains and losses on Schedules D and D-1 or Form 4797, the gain
or loss from the disposition
of securities is not taken into account when figuring net earnings from self-employment on Schedule SE. See the Instructions for Schedule
SE for an exception that applies to section 1256 contracts.
The limitation on investment interest expense that applies to investors does not apply to interest paid or incurred in a trading
business. A trader
reports interest expense and other expenses (excluding commissions and other costs of acquiring or disposing of securities)
from a trading business on
Schedule C (instead of Schedule A).
A trader also may hold securities for investment. The rules for investors generally will apply to those securities. Allocate
interest and other
expenses between your trading business and your investment securities.
Mark-To-Market Election for Traders
A trader may make an election under section 475(f) to report all gains and losses from securities held in connection with
a trading business as
ordinary income (or loss), including securities held at the end of the year. Securities held at the end of the year are “marked to market” by
treating them as if they were sold (and reacquired) for fair market value on the last business day of the year. Generally,
the election must be made
by the due date (not including extensions) of the tax return for the year prior to the year for which the election becomes
effective. To be effective for 2003, the election must have been made by April 15, 2003.
Starting with the year the election becomes effective, a trader reports all gains and losses from securities held in connection
with the trading
business, including securities held at the end of the year, in Part II of Form 4797. If you previously made the election,
see the Instructions for
Form 4797. For details on making the mark-to-market election for 2004, see Pub. 550 or Rev. Proc. 99-17, 1999-1 C.B. 503.
You can find Rev. Proc.
99-17 on page 52 of Internal Revenue Bulletin 1999-7 at www.irs.gov/pub/irs-irbs/irb99-07.pdf.
If you hold securities for investment, they must be identified as such in your records on the day they are acquired (for example,
by holding the
securities in a separate brokerage account). Securities held for investment are not marked-to-market.
A short sale is a contract to sell property you borrowed for delivery to a buyer. At a later date, you either buy substantially
identical property
and deliver it to the lender or deliver property that you held but did not want to transfer at the time of the sale. Usually,
your holding period is
the amount of time you actually held the property eventually delivered to the lender to close the short sale. However, your
gain when closing a short
sale is short term if you (a) held substantially identical property for 1 year or less on the date of the short sale or (b)
acquired property substantially identical to the property sold short after the short sale but on or before the date you close
the short sale. If you
held substantially identical property for more than 1 year on the date of a short sale, any loss realized on the short sale
is a long-term capital
loss, even if the property used to close the short sale was held 1 year or less.
Gain or Loss From Options
Report on Schedule D gain or loss from the closing or expiration of an option that is not a section 1256 contract but is a
capital asset in your
hands. If an option you purchased expired, enter the expiration date in column (c) and enter “EXPIRED” in column (d). If an option
that was granted (written) expired, enter the expiration date in column (b) and enter “EXPIRED” in column (e). Fill in the other
columns as appropriate. See Pub. 550 for details.
Undistributed Capital Gains
Include on line 11, column (f), the amount from box 1a of Form 2439. This represents your share of the undistributed long-term capital
gains of the regulated investment company (including a mutual fund) or real estate investment trust.
If there is an amount in box 1b of Form 2439, include that amount on line 11, column (g).
If there is an amount in box 1c, include that amount on line 5 of the Qualified 5-Year Gain Worksheet on page D-10 if you complete line
35 of
Schedule D.
If there is an amount in box 1d, include that amount on line 11 of the Unrecaptured Section 1250 Gain Worksheet on page D-7 if you
complete line 19 of Schedule D.
If there is an amount in box 1e, see Exclusion of Gain on Qualified Small Business (QSB) Stock on page D-4.
If there is an amount in box 1f, include that amount on line 4 of the 28% Rate Gain Worksheet on page D-8 if you complete line 20 of
Schedule D.
Enter on Form 1040, line 67, the tax paid as shown in box 2 of Form 2439. Also on line 67, check the box for Form 2439. Add
to the basis of your
stock the excess of the amount included in income over the amount of the credit for the tax paid. See Pub. 550 for details.
If you sold property (other than publicly traded stocks or securities) at a gain and you will receive a payment in a tax year
after the year of
sale, you generally must report the sale on the installment method unless you elect not to. Use Form 6252 to report the sale on the
installment method. Also use Form 6252 to report any payment received in 2003 from a sale made in an earlier year that you
reported on the installment
method.
To elect out of the installment method, report the full amount of the gain on Schedule D on a timely filed return (including
extensions) for the
year of the sale. If your original return was filed on time, you may make the election on an amended return filed no later
than 6 months after the due
date of your return (excluding extensions). Write “Filed pursuant to section 301.9100-2” at the top of the amended return.
Demutualization of Life Insurance Companies
Demutualization of a life insurance company occurs when a mutual life insurance company changes to a stock company. If you
were a policyholder or
annuitant of the mutual company, you may have received either stock in the stock company or cash in exchange for your equity
interest in the mutual
company. The basis of your equity interest in the mutual company is considered to be zero.
If the demutualization transaction qualifies as a tax-free reorganization, no gain is recognized on the exchange of your equity
interest in the
mutual company for stock. The company can advise you if the transaction is a tax-free reorganization. Because the basis of
your equity interest in the
mutual company is considered to be zero, your basis in the stock received is zero. Your holding period for the new stock includes
the period you held
an equity interest in the mutual company. If you received cash in exchange for your equity interest, you must recognize a
capital gain in an amount
equal to the cash received. If you held the equity interest for more than 1 year, report the gain as a long-term capital gain
on line 8. If you held
the equity interest for 1 year or less, report the gain as a short-term capital gain on line 1.
If the demutualization transaction does not qualify as a tax-free reorganization, you must recognize a capital gain in an
amount equal to the cash
and fair market value of the stock received. If you held the equity interest for more than 1 year, report the gain as a long-term
capital gain on line
8. If you held the equity interest for 1 year or less, report the gain as a short-term capital gain on line 1. Your holding
period for the new stock
begins on the day after you received the stock.
Exclusion of Gain on Qualified Small Business (QSB) Stock
Section 1202 allows for an exclusion of up to 50% of the eligible gain on the sale or exchange of QSB stock. The section 1202
exclusion applies
only to QSB stock held for more than 5 years.
To be QSB stock, the stock must meet all of the following tests.
- It must be stock in a C corporation (that is, not S corporation stock).
- It must have been originally issued after August 10, 1993.
- As of the date the stock was issued, the corporation was a domestic C corporation with total gross assets of $50 million or
less
(a) at all times after August 9, 1993, and before the stock was issued and (b) immediately after the stock was issued. Gross
assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary
controlled group are
treated as one corporation.
- You must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for
money or other
property or as pay for services (other than as an underwriter) to the corporation. In certain cases, you may meet the test
if you acquired the stock
from another person who met the test (such as by gift or inheritance) or through a conversion or exchange of QSB stock you
held.
- During substantially all the time you held the stock:
- The corporation was a C corporation,
- At least 80% of the value of the corporation's assets were used in the active conduct of one or more qualified businesses
(defined below),
and
- The corporation was not a foreign corporation, DISC, former DISC, regulated investment company, real estate investment trust,
REMIC, FASIT, cooperative, or a corporation that has made (or that has a subsidiary that has made) a section 936 election.
Note.
A specialized small business investment company (SSBIC) is treated as having met test 2 above.
A qualified business is any business other than a—
- Business involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science,
performing
arts, consulting, athletics, financial services, or brokerage services.
- Business whose principal asset is the reputation or skill of one or more employees.
- Banking, insurance, financing, leasing, investing, or similar business.
- Farming business (including the raising or harvesting of trees).
- Business involving the production of products for which percentage depletion can be claimed.
- Business of operating a hotel, motel, restaurant, or similar business.
For more details about limits and additional requirements that may apply, see section 1202.
If you held an interest in a pass-through entity (a partnership, S corporation, or mutual fund or other regulated investment
company) that sold QSB
stock, to qualify for the exclusion you must have held the interest on the date the pass-through entity acquired the QSB stock
and at all times
thereafter until the stock was sold.
Report in column (f) of line 8 the entire gain realized on the sale of QSB stock. Complete all other columns as indicated,
but do not
enter any amount in column (g). Directly below the line on which you reported the gain, enter in column (a) “Section 1202 exclusion” and enter as
a loss in column (f) the amount of the allowable exclusion. If you are completing line 20 of Schedule D, enter as a positive
number the amount of your
allowable exclusion on line 2 of the 28% Rate Gain Worksheet on page D-8.
Gain From Form 1099-DIV.
If you received a Form 1099-DIV with a gain in box 2e, part or all of that gain (which is also included in box 2a)
may be eligible for the section
1202 exclusion. In column (a) of line 8, enter the name of the corporation whose stock was sold. In column (f), enter the
amount of your allowable
exclusion as a loss. If you are completing line 20 of Schedule D, enter as a positive number the amount of your allowable
exclusion on line 2 of the
28% Rate Gain Worksheet on page D-8.
Gain From Form 2439.
If you received a Form 2439 with a gain in box 1e, part or all of that gain (which is also included in box 1a) may
be eligible for the section 1202
exclusion. In column (a) of line 8, enter the name of the corporation whose stock was sold. In column (f), enter the amount
of your allowable
exclusion as a loss. If you are completing line 20 of Schedule D, enter as a positive number the amount of your allowable
exclusion on line 2 of the
28% Rate Gain Worksheet on page D-8.
Gain From an Installment Sale of QSB Stock.
If all payments are not received in the year of sale, a sale of QSB stock that is not traded on an established securities
market generally is
treated as an installment sale and is reported on Form 6252. Figure the allowable section 1202 exclusion for the year by multiplying
the total amount
of the exclusion by a fraction, the numerator of which is the amount of eligible gain to be recognized for the tax year and
the denominator of which
is the total amount of eligible gain. In column (a) of line 8, enter the name of the corporation whose stock was sold. In
column (f), enter the amount
of your allowable exclusion as a loss. If you are completing line 20 of Schedule D, enter as a positive number the amount
of your allowable exclusion
on line 2 of the 28% Rate Gain Worksheet on page D-8.
Alternative Minimum Tax.
On line 12 of Form 6251 you must enter 42% of your allowable exclusion for dispositions before May 6, 2003 (7% for dispositions after
May 5, 2003).
Rollover of Gain From QSB Stock
If you sold QSB stock
(defined on page D-4) that you held for more than 6 months, you may elect to postpone gain if you purchase other QSB stock
during the 60-day
period that began on the date of the sale. A pass-through entity also may make the election to postpone gain. The benefit
of the postponed gain
applies to your share of the entity's postponed gain if you held an interest in the entity for the entire period the entity
held the QSB stock. If a
pass-through entity sold QSB stock held for more than 6 months and you held an interest in the entity for the entire period
the entity held the stock,
you also may elect to postpone gain if you, rather than the pass-through entity, purchase the replacement QSB stock within
the 60-day period.
You must recognize gain to the extent the sale proceeds exceed the cost of the replacement stock. Reduce the basis of the
replacement stock by any
postponed gain.
You must make the election no later than the due date (including extensions) for filing your tax return for the tax year in
which the QSB stock was
sold. If your original return was filed on time, you may make the election on an amended return filed no later than 6 months
after the due date of
your return (excluding extensions). Write “Filed pursuant to section 301.9100-2” at the top of the amended return.
To make the election, report the entire gain realized on the sale in column (f) of line 1 or 8. If the sale occurred after
May 5, 2003, also report
the gain in column (g) (unless the gain also qualifies for the section 1202 exclusion discussed on page D-4). Directly below
the line on which you
reported the gain, enter in column (a) “Section 1045 rollover”, and enter the amount of the postponed gain as a (loss) in column (f) (and column
(g) for sales after May 5, 2003, unless the gain also qualifies for the section 1202 exclusion discussed on page D-4).
Rollover of Gain From Empowerment Zone Assets
If you sold a qualified empowerment zone asset that you held for more than 1 year, you may be able to elect to postpone part
or all of the gain
that you would otherwise include on Schedule D. If you make the election, the gain on the sale generally is recognized only
to the extent, if any,
that the amount realized on the sale exceeds the cost of qualified empowerment zone assets (replacement property) you purchased
during the 60-day
period beginning on the date of the sale. The following rules apply.
- No portion of the cost of the replacement property may be taken into account to the extent the cost is taken into account
to exclude gain on
a different empowerment zone asset.
- The replacement property must qualify as an empowerment zone asset with respect to the same empowerment zone as the asset
sold.
- You must reduce the basis of the replacement property by the amount of postponed gain.
- This election does not apply to any gain (a) treated as ordinary income or (b) attributable to real property, or an
intangible asset, which is not an integral part of an enterprise zone business.
- The District of Columbia enterprise zone is not treated as an empowerment zone for this purpose.
- The election is irrevocable without IRS consent.
See Pub. 954 for the definition of empowerment zone and enterprise zone business. You can find out if your business is located within
an
empowerment zone by using the RC/EZ/EC Address Locator at http://hud.esri.com/locateservices/ezec.
Qualified empowerment zone assets
are:
- Tangible property, if:
- You acquired the property after December 21, 2000,
- The original use of the property in the empowerment zone began with you, and
- Substantially all of the use of the property, during substantially all of the time that you held it, was in your enterprise
zone business;
and
- Stock in a domestic corporation or a capital or profits interest in a domestic partnership, if:
- You acquired the stock or partnership interest after December 21, 2000, solely in exchange for cash, from the corporation
at its original
issue (directly or through an underwriter) or from the partnership;
- The business was an enterprise zone business (or a new business being organized as an enterprise zone business) as of the
time you acquired
the stock or partnership interest; and
- The business qualified as an enterprise zone business during substantially all of the time during which you held the stock
or partnership
interest.
How To Report.
Report the entire gain realized from the sale as you otherwise would without regard to the election. On Schedule
D, line 8, enter “ Section 1397B
Rollover” in column (a) and enter as a loss in column (f) (and column (g) for sales after May 5, 2003) the amount of gain included
on Schedule D
that you are electing to postpone. If you are reporting the sale directly on Schedule D, line 8, use the line directly below
the line on which you are
reporting the sale.
See section 1397B for more details.
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