Answers to your tax questions

February 18, 2005

About asset sales

Q. A mutual fund I own shares in allows me to write checks against my account, and I took advantage of this a few times last year. Do the withdrawals affect my tax bill?

A. Yes. To pay the checks you issued, the fund redeemed some of your shares at their current value. The fund was required to report these transactions to you. Using the information that the fund provided, you must figure your gain or loss on each transaction, based on the amount you paid for the shares, and list it on Schedule D. If you bought fund shares at different times or reinvested your dividends automatically, you can use your average share cost to represent the amount you paid, or you can use the cost of the earliest shares you acquired. Either way, your gain or loss will be long term if you owned the shares more than a year.

Q. In 2002, I bought a $5,000 bond that was convertible into 50 shares of common stock in the same company. Last August, I exchanged the bond for stock, paying $10 per share for the privilege, and a month later I sold it for $150 a share. How do I figure my tax?

Q. Last year, I received $260,000 from a municipal redevelopment agency as compensation for the condemnation of a small commercial building I owned. I spent $220,000 of that to buy a replacement property. My cost basis for the condemned building was $190,000. How do I report my gain?

A. You have a choice. Your total gain was $70,000 ($260,000 minus $190,000), and you could report all of it on your 2004 return. But because you paid $220,000 of the $260,000 award to buy the replacement, you can opt to report only the $40,000 difference as gain for 2004, if you wish. In that case, your basis for the new property will be the same as the old one-$190,000, instead of the $220,000 you actually paid. That way, you'll defer tax on your remaining $30,000 gain until you sell the replacement property.

Q. In 2002, my father gave me some land that had cost him $50,000 but had a market value of only $40,000 at the time. I sold the land for $45,000 last year. How do I figure my capital gain?

A. You don't have a taxable gain. Normally, the recipient of a gift must use the donor's basis (in this case, $50,000) to figure either gain or loss. But because the land was worth less than that ($40,000) when you got it, a more complex rule applies: You'd owe tax only if you'd sold it for more than $50,000, and you could claim a capital loss only if you sold it for less than $40,000. Since you sold it for $45,000, the regulations say you have neither a gain nor a loss.

Q. I paid $240,000 for a rental property several years ago and sold it for $300,000 in 2004. My depreciated cost basis was $170,000. How much tax do I owe?