Table of Contents
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.
Publication
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550 Investment Income and Expenses
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537 Installment Sales
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954 Tax Incentives for Distressed Communities
Form (and Instructions)
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Schedule D (Form 1040)
Capital Gains and Losses -
1099-B
Proceeds From Broker and Barter Exchange Transactions -
1099-S
Proceeds From Real Estate Transactions -
4684
Casualties and Thefts -
4797
Sales of Business Property -
6252
Installment Sale Income -
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.
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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).
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Stock in a cooperative housing corporation.
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.
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For a sale, exchange, or involuntary conversion of business property, complete Form 4797.
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For a like-kind exchange, complete Form 8824. See Reporting the exchange under Like-Kind Exchanges in chapter 1.
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For an installment sale, complete Form 6252. See Publication 537.
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For an involuntary conversion due to casualty or theft, complete Form 4684. See Publication 547, Casualties, Disasters, and Thefts.
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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.
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For a disposition of an interest in, or property used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations. See Publication 925.
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.
IF you hold the property... | THEN you have a... |
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1 year or less, |
Short-term capital gain or
loss. |
More than 1 year, |
Long-term capital gain or
loss. |
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.
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.
The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately.
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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.
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Any long-term capital loss carryover.
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
Type of acquisition: | When your holding period starts: |
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Stocks and bonds bought on a securities market | Day after trading date you bought security. Ends on trading date you sold security. |
U.S. Treasury notes and bonds | If bought at auction, day after notification of bid acceptance. If bought through subscription, day after subscription was submitted. |
Nontaxable exchanges | Day after date you acquired old property. |
Gift | 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. |
Real property bought | Generally, day after date you received title to the property. |
Real property repossessed | 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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Your net loss on Schedule D, line 16, is more than the yearly limit.
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The amount shown on Form 1040, line 41 (your taxable income without your deduction for exemptions), is less than zero.
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.
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).
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.
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.
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