Frequently Asked Tax Questions And Answers
Keyword: Holding Period
10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)
What is the amount of capital gains from the sale of a home that can be
excluded if sold in less than the two year waiting period?
If you owned and lived in the property as your main home for less than 2 years,
you may still be able to claim an exclusion in some cases. The maximum amount you
can exclude will be reduced.
You can claim this reduced exclusion if either of the following is true.
(1) You did not meet the ownership and use tests on a home you sold due to:
. health reasons
. a change in place of employment
. to the extent provided by regulations, unforeseen circumstances. (see below)
(2) Your exclusion would have been disallowed because of the rule on selling more
than one home in a two year period, except you sold the home due to:
. health reasons
. a change in place of employment
. to the extent provided by regulations, unforeseen circumstances. (see below)
Use the worksheet in Publication 523, Selling Your Home, to figure
your reduced exclusion.
The IRS has issued temporary regulations. These regulations provide guidelines
for taxpayers with reduced maximum exclusion circumstances. Temp: reg. 1.121-3T (e)
details the "unforeseen circumstances" guidelines. See Temp reg 1.121-3T and Publication 523, Selling Your Home.
References:
I lived in a home as my principal residence for the first 2 of the last
5 years. For the last 3 years, the home was a rental property before selling it. Can
I still avoid the capital gains tax and, if so, how should I deal with the depreciation
I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for
at least 2 years and lived in it as your main home for at least 2 years, you can exclude
up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you
cannot exclude the portion of the gain equal to depreciation allowed or allowable
for periods after May 6, 1997. This gain is reported on Form 4797. If you can show
by adequate records or other evidence that the depreciation allowed was less than
the amount allowable, the amount you cannot exclude is the amount allowed. Refer toPublication 523 , Selling Your Main Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and
reporting the amount of the eligible exclusion.
References:
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
When I sell shares of stock in a company that merged with the company I
originally invested in, do I use the basis and holding periods based on the purchase
of shares in the original company?
When you trade stock in one corporation for stock in another as part of a merger
or other qualifying reorganization, you may have a nontaxable exchange. The basis
of the stock you received is generally the same as the basis of the old stock, increased
by any gain recognized on the exchange (including gain that is treated as a dividend)
and decreased by the value of property or money received.
You may receive cash or something of value instead of a fractional share if the
number of shares of new stock doesn't divide evenly into the number of shares of the
old stock. You treat this as a sale of the fractional share.
Your basis in the new stock is determined, in whole or in part, by your basis in
the old stock. Your holding period for the new stock will include the holding period
for the old stock, provided that the old stock was held as a capital asset at the
time of the exchange. For special basis rules relating to incentive stock options
and options granted under employee stock purchase plan see Revenue Ruling 80-244,
in IRS 1980-2 Cumulative Bulletin at page 235.
Refer to Publication 550, Investment Income and Expenses.
References:
Would shares in mutual fund acquired through dividend reinvestment in prior
years be long-term capital gains while shares acquired through dividend reinvestment
in the year of sale be treated as short-term capital gains?
Any shares or fractional shares purchased and sold during the current tax year
are short-term capital assets. For shares purchased in the year previous to the tax
year to be considered long-term, the holding period must be more than one year.
References:
Does the holding period for new shares I received as a result of a stock
split start on the purchase date of the original stock or on the date of the stock
split?
The holding period of the stock you received as a result of the stock split begins
on the same day as the holding period of the original stock.
References:
I purchased stock through an employee stock purchase plan at my work which
split three months later. Three months after that, I sold the stock at a gain. How
does the split affect how I report the stock sale on my tax return?
With either of the two types of statutory employee stock option plans, there is
no income as a result of the granting of the option or the exercising of the option
(purchasing stock). These two types of plans are the employee stock purchase plan
and the incentive stock option plan. However, if you don't hold the stock long enough
to meet the holding period requirements, when the stock is sold you may have to report
compensation income (wages). The split will affect the computation of capital gain
and compensation income, if any.
For the stock purchased under an employee stock purchase plan to receive favorable
tax treatment, it must be held for at least two years after the stock is granted and
at least one year after the stock is transferred to you. If the holding periods are
not met, the lesser of the fair market value of the stock on the grant date minus
the option price or the fair market value on the sale date minus the amount you paid
for the stock is compensation income (wages). To the extent that the gain is being
taxed as wages on your return, it becomes part of your adjusted basis in the stock
sold. When determining basis, the amount you paid for the stock is divided equally
among the shares received in the split.
For information on incentive stock option plans and nonstatutory stock options,
or more information on employee stock purchase plans, refer to Publication 525, Taxable
and Nontaxable Income
References:
10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
If I own some mutual fund shares less than a year and other shares more
than a year, do I need to do two separate computations for an average basis method?
If you are electing or have previously elected to use the double-category method
for that mutual fund, you need to do two separate computations; one for long-term
and one for short-term-only. The single-category method requires only one computation
of average basis.
For more information, refer to Publication 564, Mutual Fund Distributions, Sales, Exchanges, and Redemptions.
References:
If I use an average basis method for computing basis of mutual fund shares
upon sale, how do I determine the holding period for those shares?
How you determine the holding period of mutual fund shares you sold depends on
which of the two average basis methods you are electing to use. Once you have elected
a method, you must use that method for determining the basis of any shares sold in
the future from that fund.
You may specify top your broker the category from which the deemed shares are sold.
Shares will be deemed sold from that category so long as your broker provides you
with confirmation of the sale. If you do not specify or if the broker fails to provide
confirmation shares will be deemed sold first from the long-term category.
References:
11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges
Can we move into our rental property, live there as our main home
for two years, and sell it without having to pay capital gains tax?
You may be able to exclude your gain from the sale of your main home that
you have also used for business or to produce rental income if you meet the
ownership and use tests, detailed in Publication 523, Sale of Your
Home.
However, if you were entitled to take depreciation deductions because you
used your home for business purposes or as rental property, you cannot exclude
the part of your gain equal to any depreciation allowed or allowable as a
deduction for periods after May 6, 1997. (Note: If you can show by adequate
records or other evidence that the depreciation deduction allowed (did deduct)
was less than the amount allowable (could have deducted), the amount you cannot
exclude is the smaller of those two figures.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses,
as described in Publication 523, Selling Your Home.
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