© Kristina Shroyer 2011 VITA: Winter 2011 Lesson 10: Capital Gains and Losses (Stock/Mutual Fund Sales and Sale of Principal Residence ) Winter 2011 Kristina

© Kristina Shroyer 2011

VITA: Winter 2011VITA: Winter 2011Lesson 10: Lesson 10: Capital Gains and Capital Gains and Losses (Stock/Mutual Fund Sales Losses (Stock/Mutual Fund Sales and Sale of Principal Residenceand Sale of Principal Residence))

Winter 2011Winter 2011

Kristina ShroyerKristina Shroyer


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Blank Forms for this Lesson

As we go through this lesson you'll want to use some of the blank forms in Publication 4491-W for reference (blank forms start on Page 229)♦ There are also a couple of forms from the Chapter I'll point out as we go

Form 1040 (page 229)♦ Look at Line 13

Schedule D (page 260-261)♦ This is the support/backup for line 13, where the details of line 13 are

summarized Example Form 1099-B for stock/mutual fund sales (page 134) Example Form 1099-S (I couldn't find an example in your book, I'll show you

one in class, you can also get one at www.irs.gov )

Note: Cancellation of Debt was in last year's Lesson 10 but this year has been moved to an online special topic. I still have last year's slides but since it's now a Special topic only

http://www.irs.gov/


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Sales of Assets/Investment Property – Capital Gain or Loss

In general when a taxpayer sells an asset they must pay taxes on any profit (capital gain) they make on the sale♦ If they taxpayer has a loss (capital loss) on the sale they rules for the deductibility

of the loss vary based on the type of asset and the taxpayer's situation

What is in the scope of VITA for this topic? Stock/Mutual Fund Sales Sale of Principal Residence (main home) Cancellation of Mortgage Debt is a special advanced topic

♦ We won't cover it in class due to time limitations but we will post notes on it from last year for those people interested

♦ You can also learn the topic on link and learn and get a special certification in it http://www.irs.gov/app/vita/index.jsp (scroll down to the bottom of

the page and on the lower left the course is under "Optional Specialty Courses)

Any taxpayer with sales of assets/investment property other than the above types should be referred to a professional tax preparer

http://www.irs.gov/app/vita/index.jsp


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses How are Stock Sales Reported to the Taxpayer?

Form 1099-B ♦ Let's take a look at the form

I got all these forms from the IRS website- Go to http://www.irs.gov/formspubs/index.html?portlet=3 - I usually then

select "Download Forms and Publications – Form and Instruction Number"

We'll look at the form in more detail as we go but this is the general idea and the main lines you will see numbers in♦ Line 1 will show the date of the stock or mutual fund sale♦ Line 2 will show the proceeds received♦ Line 4 will show any Federal Income tax withheld from the sale proceeds

How is the Sale of a Principle Residence Reported to the Taxpayer? Generally (not always) reported on Form 1099-S

♦ If not reported on Form 1099-S you will need to get the closing papers on the sale from the taxpayer

♦ We'll look at 1099-S more closely later in the lecture

http://www.irs.gov/formspubs/index.html?portlet=3


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses How are capital gains and losses reported on the tax

return?1. First a Schedule D is filled out to determine the overall deductible

gain or loss This form is on page 260-261 of your Publication 4491-W

2. The deductible gain or excludible loss goes on line 13 of Form 1040

In the Interview/Screening process you will need to determine whether the taxpayer has sold any stock, mutual funds, or a home that is their principal residence

For the interview, first look for the Forms 1099S or 1099B – but don't assume because they don't have the Forms they haven't sold assets, make sure and ask them in the interview

If they have sold anything other than a principal residence or stock/mutual fund they should be referred to a professional

If they have forgiveness of debt on a principal residence they may be within the scope of VITA (this is the Special topic you can look at on Link and Learn if You are interested)

Page 10-1 in your Publication 4491 cites some other sources of information for these topics – you can find everything at the IRS website


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses What information is needed to report Capital Gains and Losses?

1. Basis/Adjusted Basis2. Holding Period (Short Term or Long Term)3. Proceeds from the Sale

♦ For Stock Sales you will get the Proceeds and Sale Date on Form 1099-B♦ For Sale of Principal Residence you will get the Proceeds and Sale Date on Form 1099-S

Realized Gain or Loss = Proceeds from Sale – Basis/Adjusted Basis We're going to see there is a difference between a realized gain or loss and a

recognized gain or loss

The Schedule D basically lists each stock/mutual fund/other asset sale and calculates the gain or loss for each one, the taxpayer then pays tax on the net gain or loss from all the sales

I'm going to start out talking about stock and mutual fund sales but you're going to see these concepts also apply to sale of principle residence and foreclosures/abandonments (part 2 of this lesson)

You'll see when you start using the TaxWise software the computer does the calculations for you

You just enter the sale date, sales proceeds, purchase date and basis♦ However you need to be able to read the forms to make sure everything is calculating right –

DON'T RELY on the computer


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Basis/Adjusted Basis - What is the basis of Stock?

The basis of a stock or other property is usually it's COST. NOTE: This information MUST be provided by the taxpayer

♦ It will NOT be reported on the 1099-B♦ Sometimes the broker may give the taxpayer a year end statement that

provides this information but they are not required to (See Page 10-7 for an example)

♦ You can NOT calculate the basis for the taxpayer The best thing to do for a taxpayer that needs help calculating their basis is to

refer them to their stockbroker They may need to dig into their past financial records

IMPORTANT: If the taxpayer cannot provide the basis for their property the IRS deems the basis to be zero

There are special rules for determining the basis of a stock acquired by means other than purchase or inheritance (we'll talk about special inheritance basis rules in a second)♦ Any stock acquired by means other than purchase or inheritance is out of

the scope of VITA


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Basis/Adjusted Basis - What is the adjusted basis of Stock?

Sometimes amounts should be added or subtracted to the original cost of a stock or property to get the actual basis to use when calculating a gain or loss♦ This is called calculating the adjusted basis, adjusted basis is the result of making additions and/or

subtractions to the original cost basis

The most common addition to basis you will see is commissions or fees paid when a stock is purchased or sold Let's say the taxpayer paid $1000 for 100 shares of stock plus $25 commission on the purchase, the

taxpayer's total basis for that stock is $1025♦ If the taxpayer sold all 100 shares of the stock for $2000, the gain is $975 ($2000-1025)

Some other adjustments to basis Stock Splits

♦ A four for one stock split means every one share of the taxpayers stock is now four shares This in effect decreases price per share So if a taxpayer bought 1000 shares of $1,000 the original cost per share is $1 If there was a 4 for 1 split (so there are now 4000 shares) on the about the cost per share is now - $0.25/share

Stock Dividends♦ In this case taxpayers get additional shares of stock instead of cash dividends…as we saw above additional

shares decreases basis♦ Any stock dividends the taxpayer receives should be spread over all the shares…so if they bought 1000

shares for $1,000 (cost per share $1) but then received a 100 share stock dividend they now have 1100 shares for $1000 (cost per share is 91 cents per share)

Important Note: Cost per Share = (total cost of shares/# of shares)

Look at the Example on page 10-3 of Publication 4491

Review Question: On what form are regular cash dividends reported?


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Basis/Adjusted Basis - What is the adjusted basis of Stock? (continued)

Sometimes amounts should be added or subtracted to the original cost of a stock or property to get the actual basis to use when calculating a gain or loss♦ This is called calculating the adjusted basis, adjusted basis is the result of making additions and/or subtractions to

the original cost basis

IMPORTANT NOTE: Stock is bought and sold in various quantities, you can NOT assume the taxpayer sold all their shares at once, that's why we've been calculating cost per share The taxpayer may also by various quantities of the same stock at different times Unless the taxpayer has directed the broker to sell certain shares it is always assumed shares are sold using a

FIFO (first in first out) method

Some other adjustments to basis (continued) DRIP (Dividend Reinvestment Plan) Accounts

♦ With this kind of account instead of paying out dividends, the dividends are used to purchase additional shares of stock

Mutual Funds♦ A mutual fund pools money together from thousands of small investors and then its manager buys stocks, bonds or

other securities with it. When you contribute money to a fund, you get a stake in all its investments. This allows the investor to diversity in investments and professional management.

♦ Original basis of purchased mutual fund shares is purchase price plus commissions/load charges♦ The basis of mutual fund shares acquired by dividend reinvestment is the amount of the dividend distribution

used to purchase each full or fractional share. This rule applies even if the distribution used to purchase the original shares was a tax exempt dividend not reported as

income♦ There are also adjustments that may need to be made to the basis of mutual funds (more info in Publication 550)

Reminder: Cost per Share = (total cost of shares/# of shares)


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Basis Other than Cost

Sometimes cost cannot be used as basis, in these cases FMV (Fair Market Value) or another adjusted basis calculation is used, most of these cases are outside the scope of VITA and should be referred to a professional tax preparer

Property Received as a Gift Beyond the scope of VITA – refer client to a professional taxpayer

Inherited Property – for property where decedent died BEFORE 01/1/10 Basis should be the Fair Market Value of the property at the date of the decedent's death

♦ FMV at DOD rule♦ From the way I read it you can do returns for inherited stocks/mutual funds as long as the FMV at DOD

rule is used However the estate can elect to use an alternate valuation date or other acceptable method

♦ This is out of scope of VITA

Inherited Property – for property where decedent died AFTER 12/31/09 and BEFORE 01/01/11 Due to the repeal of the estate tax for decedents dying in 2010, basis for assets inherited from

decedents who died in 2010 is calculated differently This is out of scope of VITA

♦ The book does say if the taxpayer knows the basis and does not need help from the VITA volunteer in computing the basis that we may do the return

♦ However in the holding period part of the book it again says this is out of scope, I say go with this is out of scope for VITA


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Holding Period – Long Term or Short Term

Remember this is the second item you need to know to report capital gains and losses: Basis/Adjusted Basis, Holding Period, Proceeds from Sale

To determine the holding period of stock or property the taxpayer must provide the purchase date to determine the holding period of the property the sale date will be on the 1099-B

Holding Periods Short Term (a year or less) Long Term (more than a year) The holding period begins on

♦ the day after the shares were purchased The holding period ends on

♦ the day the shares were sold

If a stock or investment property is inherited its holding period is long term no matter what

If a stock has had a split or non taxable stock dividend the holding period is the same as the original stock (no new holding period) See the second example at the bottom of page 10-4

Holding periods are important because long term gains have a more favorable tax rate than short term gains


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Holding Period – Long Term or Short Term

Complicated stock situations such as wash sales, like kind exchanges or worthless securities should be referred to a professional tax preparer

What is a mutual fund? A mutual fund pools money together from thousands of small investors and then its manager buys stocks, bonds or other

securities with it. When you contribute money to a fund, you get a stake in all its investments. This allows the investor to diversity in investments and professional management.

Capital Gain Distributions vs. Sales of Investments Mutual funds can have both (and can receive both a 1099-DIV to report capital gain dist and a 1099-B to report shares they

sold themselves) Capital Gain Distributions are reported on a 1099-DIV and are a result of sales within the mutual fund (the taxpayer

themselves did not sell anything)♦ Let's look at form 1099-DIV (line 2a)♦ Always long term and go on a special place on the Schedule D

The taxpayer will only receive a 1099-B if they actually sold shares of their fund♦ In this case basis computation can be complex, Publication 550 can help in this situation

In general reinvested dividends or capital gain distributions have a holding period which begins the day after the share purchase date

Mutual fund shares also may be purchased on different dates and different times, with mutual funds there is an average basis method taxpayers may use when shares are purchased at different dates and times (don't forget reinvested dividends)

How to calculate the basis of each stock share Taxpayers may not sell all their shares in a stock or fund at once and these shares may have been

purchased at different times A taxpayer may direct a broker on which shares to sell

♦ This must be done at the time of sale NOT AFTER♦ If this is done use the specified shares to determine the basis and holding period

If the taxpayer does NOT do this (which is normally the case)♦ Use FIFO

First/Oldest shares purchased were the ones sold. See Example on Page 10-5


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses What Information to get from Form 1099-B

The taxpayer will need to provide information on the basis/adjusted basis of their stock/investment and on the purchase date

The rest of the information you will get from the 1099 – B

Sales Date – The sales date of the stock is reported in Box 1a of Form 1099-B So when you use the software you will enter the purchase date and the sales date and the computer will use this to

calculate the holding period ♦ Entering the dates correctly is very important

Sales Price – The sales price of the stock is reported in Box 2 of form 1099-B There are two boxes next to where the sales price is reported If the Gross proceeds box is checked

♦ Ask the taxpayer for the amount of commissions and fees paid on the sale and add it to the taxpayers stock BASIS If the Net Gross Proceeds less commissions and options premiums box is checked

♦ This means the broker has subtracted commissions and fees from the sale so no adjustment to the basis is needed (subtracting it from the sale has the same effect as adding it to the basis)

Look at the Example on bottom of page 10-6 Look at the Exercise on page 10-7 (make sure and read this one – this is a trick question)

NOTE: the 1099-B does NOT report purchase date or basis, the taxpayer MUST provide this (it could be done with a substitute 1099-B (see page 10-7) but no matter what you can NOT calculate the taxpayer's basis, if they do not know remember the basis is deemed to be zero)


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses How to enter Stock/Mutual Fund Sales on Schedule D

In TaxWise you will just enter the information reported in the proper places and it will be put into the correct section of the forms♦ However you should understand how it works on paper so you know it is correct♦ You should ALWAYS check all the forms on the taxpayers return and make sure each

figure is correct Before you start entering data make sure you have the sales dates/sales prices from

the 1099B's and the adjusted basis/purchase dates from the taxpayer

Sch D Part I – Short Term Sales are reported here Sch D Part II – Long Term Sales are reported here

Where are Capital Gain Distributions Reported? Again when using the software if you enter this in the correct spot it will be reported in

the correct spot If a taxpayer ONLY has Capital Gain Distributions (only a 1099-DIV) the amount is

entered directly on line 13 of form 1040♦ So in this case no Sch D is used

If a taxpayer has a 1099-DIV and a 1099-B then:♦ Capital Gain Distributions are always long term and are reported on Schedule D Part

II, Line 13 (this is the LONG TERM section)


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses How to enter Stock/Mutual Fund Sales on Schedule D

Once you have Part I and Part II of the Sch D completed1. The short term gains/losses will be combined to compute a net

short term gain/loss2. The long term gains/losses will be combined to compute a net

long term gain/loss3. The long term and short term capital gains/losses are then

combined♦ Losses cannot exceed $3000 per year ($1500 for Married Filing Separate)

If the losses for the year exceed $3000 the excess is carried forward to the next tax year where it can be used

Losses carried forward keep their ORIGINAL holding period♦ We'll talk a bit more about carryforward losses in a second

Let's look at the Exercise on Page 10-9 (Question 3)


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Capital Loss Carryovers

Taxpayers cannot take losses of more than $3,000 ($1,500 for MFS) in any one year For Schedule D you will need to know if the taxpayer had a capital loss carry foward from the

PRIOR year, you need to know this because it can be used to offset 2010 capital gains or if 2010 had a capital loss, this prior year loss still needs carried forward to 2011♦ Unused losses are carried forward until they are used up♦ A taxpayer may have an used carry forward loss from 2009 – you'll need to find this information out

If TaxWise was used in 2009 the information is on Worksheet 2 If some other tax software was used or the taxpayer had the return prepared professionally in 2009 you

may be able to find the information in a worksheet If tax software was not used to prepare the prior year return: Use the worksheet in the Sch D

instructions to compute a carry forward from 2009 to 2010- YOU WILL NEED THE 2009 RETURN TO DO THIS

IMPORTANT: If your taxpayer has capital gains and/or losses in 2010 and had a Schedule D of any type in 2009 you absolutely need the 2009 tax return in order to correctly complete the 2010 return

The 2010 carry forwards go on Part I line 6 or Part II line 14 Note that TaxWise will automatically calculate a taxpayer's capital loss and if over the limit will calculate

the carry forward.

If the taxpayer has carry forwards from 2010 to future years tell them to make sure to take their 2010 tax return to their 2011 tax appointment


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Sale of a Home (Principle Residence)

This is the second type of asset sale within the scope of VITA

The second capital gain/loss within the scope of VITA is the sale of a taxpayer's MAIN home

During the interview process you will determine if the taxpayer sold their principal residence ("main home") during the year If they did sell their home for a gain, all or part of it may be excludable from taxable income

Who must REPORT the sale of a home? Taxpayers must report the sale of a home if any ONE of the following is true:

♦ The taxpayer does not meet the ownership test♦ The taxpayer does not meet the use test♦ During the two year period ending on the date of sale the taxpayer has excluded the gain from the

sale of another home♦ The gain from the sale is more than the taxpayer can exclude (maximum exclusion)

The maximum exclusion is $250,000 for individual taxpayers and $500,000 for Married Filing Jointly♦ IMPORTANT: even if the taxpayer is not required to report a sale (they have a loss or a fully

excludable gain) you should still report it so the taxpayer will not get an IRS notice

IMPORTANT: Read the "Caution" at the bottom of page 10-11 More on this will come up later but it's important you ask the taxpayer if they claimed the first-

time homebuyer credit on the home they sold


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses What is a main home?

This is the first thing you must determine♦ Only the sale of a taxpayer's main home is within the scope of VITA♦ Only a gain on the sale of a taxpayer's main home may be potentially excluded from

taxable income In most cases a gain from a home that is not the taxpayer's main home will have to be

reported as income A taxpayer's main home is where the taxpayer lives most of the time

♦ It does not have to be a traditional house but must have cooking, sleeping, and bathroom facilities

♦ The main home cannot be chosen by the taxpayer (see example on 10-12)

NOTE: A taxpayer does NOT get to deduct a loss on the sale of their main home So they may have to report some or all of their gain (or none) but they never report a

loss on the sale

Once you've determined the taxpayer sold their main home you start looking at whether they meet the tests to be able to exclude the gain There will be three tests and some special situations you'll need to look at


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Ownership and Use Tests

The taxpayer must meet BOTH of these tests to be able to exclude all or part of the gain on the sale of their main home

1. Ownership Test The taxpayer must have owned the home for at least two years

♦ The two years do not have to be continuous – HOWEVER, the taxpayer must show they met the ownership test for a total of 24 months (2 years) during the five year period ending on the date of sale

2. Use Test The taxpayer must have lived in the home as their main home for at least two years

♦ The two years do not have to be continuous – HOWEVER, the taxpayer must show they met the ownership test for a total of 24 months (2 years) during the five year period ending on the date of sale

There are some exceptions for the Armed Forces, intelligences personnel and Peace Corps volunteers we will look at in a minute

Reduced Exclusion If the taxpayer doesn't meet the above tests but meets some special circumstances they

may qualify for this♦ Examples of special circumstances: health, change in place of employment, other

unforseen circumstances This is out of the scope of VITA – refer to professional taxpayer


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses3. Prior Exclusion Test

To qualify for the exclusion on the sale of a home the taxpayer cannot have claimed on exclusion on the sale of another home during the two year period ending on the sale date

Married Homeowners Individual taxpayers get an exclusion of up to $250,000 if they qualify Married Homeowners can exclude up to $500,000 if they meet ALL of the following

tests♦ They file a joint return (MFJ)♦ One or both of the spouses meet the ownership test♦ BOTH spouses meet the use test♦ NEITHER spouse excluded a gain in the two years prior on a home sale

If both spouses don't meet ALL of the above tests, another calculation is done♦ This calculation is outside the scope of VITA and they should be referred to a

professional tax preparer

Sale of Main Home by Surviving Spouse (for main home sales after 2007 only) A $500,000 exclusion is allowed for an unmarried surviving spouse if they meet all

tests (use, ownership, prior exclusion) and the sale occurs no later than 2 years after the date of the deceased spouse's death


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses Calculating the Gain/Loss from Sale of a Main Home

You do this once you have figured out the taxpayer is eligible for an exclusion on any gain on the sale (four tests)

The General Process:1. First figure out the REALIZED gain or loss

♦ This is just the gain or loss without taking the exclusion into consideration (it is calculated in a way similar to the gain or loss on stocks/mutual funds) Basically: amount realized on sale – adjusted basis = realized gain or loss

2. If there is a loss on the home sale you are finished, nothing needs to be reported on the tax return but we will report it anyway (see note below)♦ IMPORTANT NOTE: However, even though you're not required to report this on the tax return it's a

good idea to report it anyway because without it you could generate a document matching error for the taxpayer

♦ See tips at bottom of page 10-14: They have fixed this in the book from last year

3. If there is a realized gain, figure out the allowable exclusion ($250,000 or $500,000)♦ If the allowable exclusion is greater than the realized gain none of it is taxable and nothing needs to be

reported on the tax return but we sill report it anyway (see note below) IMPORTANT NOTE: However, even though you're not required to report this on the tax return it's a good

idea to report it anyway because without it you could generate a document matching error for the taxpayer See tips at bottom of page 10-14: They have fixed this in the book from last year

♦ If the allowable exclusion is less than the realized gain the sale must be reported on Schedule D


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses1. Figuring out the Realized Gain or Loss

First determine the Selling Price♦ This is basically the gross proceeds received from the sale♦ If the taxpayer receives 1099-S:

Box 1 shows the sales date Box 2 shows the gross proceeds from the sale

♦ If the taxpayer doesn't receive a 1099-S You will need to use the closing papers on the loan – if the taxpayer is showing a

taxable gain you should request the closing papers even if they did not receive a 1099-S

Next determine the Amount Realized♦ This is the selling price minus any selling expenses ♦ This means the amount realized in most cases will not equal the selling price

Look back at our formula for realized gain: amount realized on sale – adjusted basis = realized gain or loss

♦ Selling Expenses: commissions, advertising fees, legal fees, loan charges, points There is a worksheet in TaxWise that will help you do this Or you can use Worksheet 2 of Publication 523 (get at www.irs.gov)

- Page 13

http://www.irs.gov/


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses1. Figuring out the Realized Gain or Loss (cont.)

Next Determine the Basis This is the cost if the taxpayer purchased or built the home If the taxpayer inherited the home the basis is FMV at DOD (unless the property was inherited in 2010

in which case you should refer the taxpayer to a professional tax preparer) If the taxpayer got the home as a gift or inherited it and needs to use a method other than FMV at DOD

refer them to a professional tax preparer

Finally Determine the Adjusted Basis As with stocks basis can be increased or decreased by certain amounts Increases

♦ Improvements to the home The improvements should have a useful life of more than one year

Decreases♦ Deductible casualty losses, depreciation

Adjusted Basis = Basis + Increases – Decreases Worksheet 1 in Publication 523 can also be used for Adjusted Basis

♦ Page 12

REALIZED Gain/Loss on Home Sale = Amount Realized – Adjusted Basis

Worksheet 2 of Publication 523 also does all this Page 13 of Publication 523

The realized gain or loss is not the same as the recognized gain or loss, realized is the actual gain or loss and recognized is the amount reported on the tax return


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses

2. If there is a realized LOSS The loss is NOT deductible If the taxpayer received a 1099-S you should still record the sale on the tax return but NONE

of it is deductible, make sure after entering it in Taxwise that the recognized gain or loss is ZERO

3. IF THERE IS A REALIZED GAIN: How much of the REALIZED gain from a main home sale can the taxpayer exclude?

If all requirements are met the an individual taxpayer can exclude up to $250,000 of the gain and married taxpayers can exclude up to $500,000 of the gain

♦ If not out of VITA scope

Where to report any taxable (recognized) gain? Gains on the sales of main homes do NOT need to be reported if the gain is less than the

taxpayer's exclusion Though as I said earlier I recommend reporting them anyway to avoid document matching errors – if

the taxpayer received a 1099-S REPORT THE TRANSACTION EVEN IF THERE IS NO TAXABLE GAIN

Gains in excess of the taxpayer's exclusion must be reported on Schedule D So if the taxpayer's gain is over $250,000/$500,000 the excess amount needs to be reported It is going to be reported in the long term section of the Schedule D

♦ See Page 10-16 for an example The entire gain is reported and the exclusion is then subtracted


Lesson 10: Capital Gains and Lesson 10: Capital Gains and LossesLosses

Five Year Test Period Suspension If the taxpayer served on "qualified official extended duty"

as a member of the Armed Forces, an employee of the intelligence community or a Peace Corps employee or volunteer they can choose to have their five year test period suspended (for ownership and use)♦ Read through the page 10-18 on this for more, we don't

generally get many members from the Armed Forces at our site but if we do the information is here

♦ If this comes up with a taxpayer more information can be found in Publication 523

Documents

© Kristina Shroyer 2011 VITA: Winter 2011 Lesson 10: Capital Gains and Losses (Stock/Mutual Fund Sales and Sale of Principal Residence ) Winter 2011 Kristina