Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. The sale and purchase are two separate transactions. But see Like-Kind Exchanges under Nontaxable Trades. For more information Visit our Office or Ask to our Accountants.
Basis is a way of measuring your investment in property for tax purposes. You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, or other property or services.
Investment property you buy normally has an original basis equal to its cost. If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. For more information Visit our Office or Ask to our Accountants.
The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, or other property or services.
There are times when you must use a basis other than cost. In these cases, you may need to know the property’s fair market value or the adjusted basis of the previous owner. For more information Visit our Office or Ask to our Accountants.
This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Sales of similar property, around the same date, may be helpful in figuring fair market value. For more information Visit our Office or Ask to our Accountants.
If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent’s estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value on:
- The date of the decedent’s death, or
- The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation.
If you inherited property from someone who died before or after 2010, or from someone who died in 2010 and the executor of the decedent’s estate did not elect to file Form 8939, your capital gain or loss on any later disposition of that property is treated as long-term gain or loss, regardless of how long you held the property.
If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent’s death. For more information. or Visit our Office or Ask to our Accountants.
Your basis in certain appreciated property that you inherited is the decedent’s adjusted basis in the property immediately before death rather than its fair market value. This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. For more information Visit our Office or Ask to our Accountants.
If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Generally, a sale or trade of a capital asset results in a capital gain or loss. A sale or trade of a noncapital asset generally results in ordinary gain or loss. Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. In some situations, part of your gain or loss may be a capital gain or loss, and part may be an ordinary gain or loss. For more information Visit our Office or Ask to our Accountants.
The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner’s adjusted basis. For more information Visit our Office or Ask to our Accountants.
You need to classify your gains and losses as either ordinary or capital gains or losses. You then need to classify your capital gains and losses as either short term or long term.
The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. If your capital losses are more than your capital gains, you can claim a capital loss deduction. Visit our Office or Ask to our Accountants.
Your allowable capital loss deduction, is the lesser of:
- $3,000 ($1,500 if you are married and file a separate return), or
- Your total net loss.
You can use your total net loss to reduce your income dollar for dollar, up to the $3,000 limit.
If you have a total net loss that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up.
When you figure the amount of any capital loss carryover to the next year, you must take the current year’s allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year.
When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year’s long-term capital gains before it reduces that year’s short-term capital gains. For more information Visit our Office or Ask to our Accountants.
If you sold or traded investment property, you must determine your holding period for the property or stock. Your holding period determines whether any capital gain or loss was a short-term or a long-term capital gain or loss.
If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss.
If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss.
To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.
You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties.
- Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
- A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest.
- A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock.
- A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable.
In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties.
- A grantor and fiduciary, or the fiduciary and beneficiary, of any trust.
- Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts.
- A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust.
- A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership.
- Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.
- Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation.
- An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest).
- Two corporations that are members of the same controlled group (under certain conditions, however, these losses are not disallowed but must be deferred).
Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships. For more information Visit our Office or Ask to our Accountants.
You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical stock or securities.
- Acquire substantially identical stock or securities in a fully taxable trade.
- Acquire a contract or option to buy substantially identical stock or securities, or
- Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.
If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold. For more information Visit our Office or Ask to our Accountants.
The sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.
A business usually has many assets. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade.
The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss. The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss. The sale of inventory results in ordinary income or loss. For more information Visit our Office or Ask to our Accountants.
Intangible property is any personal property that has value but cannot be seen or touched. It includes such items as patents, copyrights, and the goodwill value of a business.
Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. For more information Visit our Office or Ask to our Accountants.
Certain exchanges of property are not taxable. This means any gain from the exchange is not recognized, and any loss cannot be deducted. Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. For more information Visit our Office or Ask to our Accountants.
If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. To be nontaxable, a trade must meet all six of the following conditions.
- The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
- The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
- The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests.
- There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. The trade of a piece of machinery for a store building is not a trade of like property. Real property located in the United States and real property located outside the United States are not like property. Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property.
- The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. If you received the replacement property before the end of the 45-day period, you automatically are treated as having met the 45-day written notice requirement.
- The property to be received must be received by the earlier of:
a. The 180th day after the date on which you transfer the property given up in the trade, or
b. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.
If you transfer property to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. This rule applies to transfers by one person and to transfers by a group.
It does not apply in the following situations:
- The corporation is an investment company.
- You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors.
- The stock is received in exchange for the corporation’s debt (other than a security) or for interest on the corporation’s debt (including a security) that accrued while you held the debt.