Increased section 1202 exclusion for empowerment zone business stock. Section 1202 allows you to exclude up to 50% of your gain on the sale or trade of qualified small business stock. Beginning in 2005, you can exclude up to 60% of your gain if you sell or trade stock in a corporation that qualifies as an empowerment zone business during substantially all of the time you held the stock and you meet certain other conditions. For more information, see Section 1202 Exclusion in chapter 4.

Qualified dividends. Beginning in 2005, foreign personal holding companies and foreign investment companies are no longer specifically excluded from the definition of qualified foreign corporation for purposes of the qualified dividend rules. This is because the rules applicable to these companies have been repealed. Thus, ordinary dividends from a foreign corporation that would have otherwise been subject to those rules will be qualified dividends if the other requirements under Qualified Dividends in chapter 1 are met.

Repeal of special rules for FASITs. Beginning January 1, 2005, the special rules for FASITs (financial asset securitization investment trusts) are repealed. However, the special rules still apply to any FASIT in existence on October 22, 2004, to the extent that regular interests issued by the FASIT before that date continue to remain outstanding in accordance with the original terms of issuance. See FASITs under REMICs, FASITs, and other CDOs in chapter 1.

U.S. property acquired from a foreign person. If you acquire a U.S. real property interest from a foreign person or firm, you may have to withhold income tax on the amount you pay for the property (including cash, the fair market value of other property, and any assumed liability). Domestic or foreign corporations, partnerships, trusts, and estates may also have to withhold on certain distributions and other transactions involving U.S. real property interests. If you fail to withhold, you may be held liable for the tax, penalties that apply, and interest. For more information, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Foreign source income. If you are a U.S. citizen with investment income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

Alien's individual taxpayer identification number (ITIN). If you are a nonresident or resident alien and do not have and are not eligible to get a social security number (SSN), you must apply for an ITIN. For details on how to do so, see Form W-7, Application for IRS Individual Taxpayer Identification Number, and its instructions. If you already have an ITIN, enter it wherever an SSN is requested on your tax return. An ITIN is for tax use only. It does not entitle you to social security benefits or change your employment or immigration status under U.S. law.

Sale of DC Zone assets. Investments in District of Columbia Enterprise Zone (DC Zone) assets held more than 5 years will qualify for a special tax benefit. If you sell or trade a DC Zone asset at a gain, you may be able to exclude the qualified capital gain from your gross income. This exclusion applies to an interest in, or property of, certain businesses operating in the District of Columbia. For more information about the exclusion, see the Schedule D instructions. For more information about DC Zone assets, see Publication 954, Tax Incentives for Distressed Communities.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

This publication provides information on the tax treatment of investment income and expenses. It explains what investment income is taxable and what investment expenses are deductible. It explains when and how to show these items on your tax return. It also explains how to determine and report gains and losses on the disposition of investment property and provides information on property trades and tax shelters.