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Lesson 12

Lesson 12. Sale of Stock & Other Investment Property. Objectives. Compute adjusted basis of stock or other investment property Determine if an asset’s holding period is long-term or short-term Calculate the taxable gain or deductible loss using the Schedule D

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Lesson 12

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  1. Lesson 12 Sale of Stock & Other Investment Property

  2. Objectives • Compute adjusted basis of stock or other investment property • Determine if an asset’s holding period is long-term or short-term • Calculate the taxable gain or deductible loss using the Schedule D • Calculate the correct tax liability

  3. Intake/Interview Process Form 13614 – Intake and Interview Sheet - Income Section

  4. Investment Property Property that produces investment income • Stocks • Bonds • Mutual Funds • Treasury Bills & Notes

  5. Basis of Investment Property • The basis of an asset is usually its cost • Basis is +/- by certain events, resulting in adjusted basis • Adjustments Include: • Brokerage commissions paid (buying & selling) • Stock splits & tax-fee stock dividends • Reinvested dividends • Reinvested capital gain distributions

  6. Sale of Investment Property Capital gains or losses are only reported when a sale, exchange, or other disposition of investment property occurs. • Redemption of Stock or Bonds • Sale/Exchange of Mutual Fund Shares • Worthless Securities • Other Sales & Trades

  7. Identifying Shares Sold • Specific Identification • Identification Not Possible • Mutual Fund Shares • Cost Basis • Average Basis

  8. Holding Period • Stock held for more than 12 months is considered long-term property • Stock held for 1 year or less has a short-term holding period • Inherited property (long-term property) • Nontaxable stock dividends and stock splits (same holding period as the original stock)

  9. Determining Gain or Loss • Amount realized – adjusted basis = gain/loss reported on Schedule D • What You Will Need • Form 1099-B, Proceeds From Broker and Barter Exchange Transactions or consolidated brokerage statement • Date property was acquired • Taxpayer’s records of basis

  10. Commissions and Fees • Commissions paid when investment property is purchased - add to basis • Commissions paid at the time of sale may increase basis • If 1099-B shows gross proceeds, add the commission to the basis • If 1099-B shows net proceeds, no adjustment to basis is necessary

  11. Reporting Transactions on the Tax Return • Capital gains & losses are reported on Schedule D • Schedule D has three sections • Part I - Short-term transactions • Part II - Long-term transactions • Part III – Summary • If space is needed to report additional transactions, use Schedule D-1

  12. Reporting Transactions on the Tax Return - cont’d Combine net S-T capital gain/loss with net L-T capital gain/loss (Part III) • If losses exceed gains, the taxpayer has a total net capital loss • If gains exceed losses, the taxpayer has a total net capital gain;

  13. Capital Gain Distributions • Reported on Form 1099-DIV, box 2a • If taxpayer received only capital gain distributions, Schedule D not required • If taxpayer sold investment property or had unused capital loss carryovers, report capital gain distributions on line 13 of Schedule D 13

  14. Total Net Capital Loss • If taxpayer has a net capital loss, claim the lesser of: • The total net loss or • $3,000 ($1,500 – if MFS) • Capital Loss Carryovers • Carryover until used up • Retain character

  15. Total Net Capital Gain • If taxpayer has a net capital gain, apply capital gains tax rates • Capital Gains Tax Rates: 5% - 28% • To figure Capital Gains Tax use: • Schedule D Tax Worksheet or • Qualified Dividends & Capital Gains Tax Worksheet

  16. Quality Review (QR) Form 8158 – Quality Review Checklist - Income Section

  17. Lesson Summary • Basis of investment property is cost • Adjusted basis is cost +/- adjustments such as commissions • Holding period is classified as either • Short-term (one year or less) or • Long-term (more than one year)

  18. Lesson Summary – cont’d • Capital gain or loss is computed as: Amount Realized minus Adjusted Basis • Capital Gains/Losses are reported on Schedule D, Form 1040 • Net capital losses are deductible up to a yearly limitation, the lesser of: • the loss amount or • $3,000 ($1,500 if MFS)

  19. Lesson Summary – cont’d • Net capital gains are taxed at a lower, capital gains tax rates computed on • Schedule D Tax Worksheet, or • Qualified Dividends & Capital Gains Tax Worksheet • Schedule D is not required if the taxpayer has only capital gain distributions from 1099-DIV to report

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