There’s a couple of losses that relate to
individuals. The first one says “Loss on sale of personal asset.” This is the one I gave
you an example of earlier. What does it say? It says, for example, that I bought that car.
I used the car. Let’s say I bought a refrigerator for $1,000, and I used it, used it, and used
it. Five years later I sell it at a garage sale for 100 bucks. So I paid 1,000 bucks
for it. How much did I get? 100, I lost 900. Can I deduct that? No-no-no, why not? It is
called “consumption loss,” personal consumption loss not deductible.
Let’s say instead, I bought that refrigerator for 1,000 bucks, but it’s this rare 1947 Frigidaire
refrigerator, and it’s now worth $11,000. I have a $10,000 gain. The government says,
“Hey, Roger, buddy. We’re your friend, guess what? We’ll tax you,� as a what? It’s not
a business asset, capital gain. So the government says “You made some money, come on down. You
lost some money, pobrecito, I’m so sorry to hear that.”
Gain on personal residence. What it says is if you lived in the house for at least two
of the last five years this is kind of cool, what it says is “Your gain is tax free.” No
way, how much of it? Not all of it, but depending on how much you made if you’re single 250.
If you’re married filing joint $500,000. Half a mil!
So that means you buy a house, live in it for two of the years, and sell it, gain tax
free. Buy another house, live in it for two or five years, boom! Tax free. So that’s what
it says there. Basically it says at least two of the five years. “If you don’t meet
the two-year requirement, but you’re forced to sell to a change in place of employment,
health, or other unforeseen circumstances, a pro rata amount of the exclusion would apply,”
but otherwise, two of five years. All right, it says “The basis of stock received
is a dividend if it’s included as income, fair market value, if it’s non-taxable, then
the basis is allocated between the dividend and the stock,” kind of like a stock dividend.
Installment sales method. This has actually shown up where they actually had you prepare
part of a 6252. A 6252 is an installment sales tax return, but basically what it says is
when you make a sale, but the problem is you’re selling this asset. Normally you sell the
asset, you have a gain, and you get taxed on the gain. What is says is some of the proceeds
are going to be received over several years, so you’re going to get the money. I’m selling
you a building for a million bucks. You’re going to pay me $100,000, $100,000, $100,000,
$100,000, $100,000, that’s installment income. Remember, one of the things we had is an AMT
adjustment was the difference between accrual and installment when the installment basis
was used. That was an AMT adjustment, but we’ll cover that in another section AMT.
But what’s more important is the following. How do you calculate it? Basically, here’s
what we do. It says, “Applies to gains, not losses, but gains from the disposable of property
where at least one payment is received after the year of sale. A portion of the gain is
reported as each payment is received.” Basically what we’re going to do is we’re going to calculate
the gross profit over the contract price. So the profit over the total contract price.
That’s your gross profit percentage. So in that particular case that would be your
percentage, so let’s say, for example, it’s 70 over 100 that would be 70 percent. That
means 70 percent of every proceed received. Let’s say I got 10,000 bucks that means $7,000
would be considered a gain. It says, “For example, Steve sells property “on the basis
of 80 to Bob for a selling price of 150. As part of the purchase price Bob agrees to assume
a $50,000 mortgage on the property and pay the remaining $100,000 in ten equal annual
installments together with adequate interest. The contract price is 100, which is 150 minus
the mortgage. The gross profit is 70, and the gross profit percentage is 70 percent,
thus 7,000 of each 10,000 payment reported is gain.”
Now on the return they ask you, you’ll see here it says “What is the gross profit?” So
how much is our profit? “How much is the contract price?” So our profit is 70, the contract
price is 100. Then it says “Divide those and come up with your percentage. Then line 21
how much cash did you get?” And then the next one is “How much is your income?”
So that’s what you do, and then you enter it here, and also enter on Schedule D or on
Schedule 4797 depending on what is, you know, what the property came from. But that’s called
a 6252, “installment sales.” Again, they’ve tested that before, that’s why it’s important
to understand that. You’ll see here a loss on deposits and installments,
financial institutions. This one came out of when all these banks years ago were going
under, so they said “What do we do?” Basically it says “An individual who incurs a loss as
a result of maintaining deposits, and the financial bank then becomes insolvent, or
bankrupt made it at the loss if it can be estimated as either a casualty loss on Schedule
A, or an ordinary loss on Schedule A, but part of your miscellaneous deductions two
percent up to a maximum of $20,000.” So that was Schedule A as part of casualty, or Schedule
A, part of miscellaneous. Again, this is something that came out of when all the banks were going
insolvent. All right, let’s look at this chart that we’ve
set up here. It says “Sale of personal assets, losses.” You don’t get them. “When does it
apply?” A person sells their house. “Wash sales.” Losses, you don’t get them. “A person
acquires stock within 30 days on either side. Sale to a related party. Losses are not taxed,
gains are taxed. So if you make money, “Yay, we love you.” You lose money, “Sorry that’s
the dual basis rules.� �Like-kind exchange. You don’t get losses.
Gain recognized only the extent of cash, boot, and net debt relief and unlike property. “Involuntary
conversion.” How many years? Two, three, or four from when? Careful, you get it from when
not when the loss occurs, but when you get the proceeds December 31st of that year.
“Installment sales.” That’s your 6252. “A portion of the overall gain is recognized
only as the person collects cash. So cash collected times gross profit over contract
price. �Sale of personal residence.� What is
it? �Up to $250,000 if your married filing joint 500.� You have to live in the house
how long? �Two of five years.� All right. That is property. In a minute, we’ll do a
bunch of questions to see if it all makes sense.