Answers to your tax questions. . .On gain or loss from the sale of assets

By Lawrence Farber
Contributing Writer

The broker's check for a profitable stock sale in December 2001 didn't arrive until mid-January. Can I postpone reporting the gain until I file for 2002?

No. Even though you weren't able to use the money last year, the trading date determines when you report a gain or loss on the sale of securities.

As a wedding gift, a relative gave us $500 worth of stock, which we sold last year for $1,000. He told us the shares had cost him $1,500 when he first purchased them. Do we report a gain or a loss on our tax return?

Neither. The sale proceeds were less than the donor's cost basis, so you have no taxable gain. On the other hand, you have no loss, because the proceeds exceeded the shares' market value at the time of the gift.

My wife and I got married last year. While still single in 2000, she had a $10,000 net capital loss but was allowed to deduct only $3,000 on her return. Can her $7,000 carryover be used to offset the gain on a stock I sold in 2001?

Yes, if you file jointly; in that case you can combine carryover losses claimed earlier on separate returns. If you file separately in 2001, though, only the one who originally carried over the loss can claim it. This would be true even for losses carried over from a joint return.

I made $100,000 when I sold my home in 1990, but I postponed the tax on that gain by immediately purchasing a new, more expensive home. Last year, I sold the second one for $200,000 more than I paid for it. Do I owe any tax?

Yes, if you're filing singly. You must reduce your cost basis for the second home by the $100,000 gain on the first one. This increases your profit on the 2001 sale to $300,000. Single filers get a $250,000 home sale exclusion, so you'd owe tax on $50,000. The exclusion for married couples filing a joint return is $500,000, which would make the sale tax-free.

I bought 1,000 shares of stock at $50 apiece in April 2000. In December of that year I was offered the choice of a cash dividend or 10 additional shares worth $55 each, and I took the shares. I sold my entire holding for $60 a share in June 2001. How will the sale be taxed?

The 10-share dividend was taxable in 2000, the year you received it, since you could have opted for cash instead. That means the 2001 sale will be taxed as two transactions. Your $10-a-share gain on the first 1,000 shares qualifies for the 20 percent long-term capital gain rate, because you held them longer than a year. You owned the remaining 10 shares for only six months, so the profit on them is a short-term capital gain taxable at your regular rate. Although you sold them for $600, their $550 original value was included in your income for 2000, so you owe tax on $50 for 2001.

Several years ago, I loaned a friend $25,000 to help him start a business. He sold the business at a big loss in 2001, and I can't collect on his note. Can I deduct the amount owed as a business bad debt?

No, because the loan wasn't connected with your business. However, you can deduct a nonbusiness bad debt as a short-term capital loss and use it to offset your gains from the sale of stock or other assets. Then, if you still have a net loss, you can write off up to $3,000 of it against your other income for 2001 and carry the balance over to future years.

Attach a statement to your 2001 return describing the debt in detail, your efforts to collect it (you must show that you made a reasonable effort), and why you consider it worthless.

Two weeks after I bought 200 shares of a stock, some bad news about the company came out. I immediately sold 100 shares, taking a $1,000 loss. Since the two transactions took place within 30 days, will the wash sale rule prevent me from deducting my loss?

No. The wash sale rule applies if you buy "substantially identical" stock within 30 days before or after a sale to establish a tax loss without giving up your stake in a company. You acted to protect your capital, not for tax reasons. Accordingly, you can claim a short-term loss for 2001. The loss would be allowed even if you were to buy the shares again later, provided you wait at least 30 days after the sale to do so.

In 2001, I sold an apartment building that I'd owned since 1983. I've heard that only part of my profit is eligible for the 20 percent capital gain rate. Why?

If you depreciated the property by the straight-line method, the amount of gain equal to the depreciation is taxable at 25 percent. If you took more depreciation than that by using an accelerated method, the excess (labeled "recaptured" depreciation) is taxable at your top rate as ordinary income, not capital gain. Any profit not attributable to depreciation is taxed at 20 percent.

I paid $9,700 for a 180-day $10,000 Treasury bill, but 30 days later I sold it for $9,900. Is my $200 profit considered interest income or capital gain?

Some of each. At maturity, you'd have netted $300 ($10,000 minus your $9,700 cost), all considered interest. Because you held the bill only 30 days, your prorated interest is 30/180 of $300, or $50. The rest of your $200 profit—$150—is short-term capital gain.

List the $50 interest on Schedule B of your return and increase your cost basis to $9,750 when you report the gain on Schedule D.

My late husband and I jointly owned a vacation home that cost $90,000, of which $25,000 came from me. The house was valued at $200,000 when he died, and I sold it for that price. How much is taxable?

You owe tax on $55,000. When a married couple owns property jointly, each is considered to own half the property, regardless of the amount individually contributed to the purchase.

The cost basis for your husband's share is $100,000—half the $200,000 value at his death. The cost basis for your share is $45,000—half the $90,000 purchase price. Subtract the total cost basis, $145,000, from the $200,000 sale price to get the taxable capital gain, $55,000.

Last November, I was paid for some three-month calls I wrote. Do I have to report the payments for all the calls on my 2001 return, even though some options remained open during January?

No. Report only the payments for the calls exercised in 2001. Add them to the proceeds you received from the sale of the covered stock. This will increase your capital gain or reduce your loss on the stock.

In our next issue:
Answers to your tax questions on retirement plans and IRAs.

 

Lawrence Farber. Answers to your tax questions . . . On gain or loss from the sale of assets. Medical Economics 2002;4:42.