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Wiley Tax Preparer: A Guide to Form 1040 by The Tax Institute at H&R Block

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CHAPTER 13

Sale of Property

Sales, exchanges, and other transfers of property enjoy special tax treatment. Gains from the sale of property may be taxed at favorable capital gains rates compared to ordinary income rates. Losses may be used to offset gains, but only $3,000 of net capital losses may be deducted against ordinary income.

Before applying the special capital gain and loss rules, it is necessary to determine whether there is a gain or loss for tax purposes. The gain or loss then must be classified as short term or long term before applying a netting process, as described later in this chapter.

In some situations, capital gains may not be immediately taxable. For example, gains are deferred when property used in a business or held for investment is exchanged in a like-kind exchange.

Special rules apply to dispositions of business assets where depreciation had been claimed. If there is a capital gain, a portion of the gain may be characterized as ordinary income to the extent of depreciation claimed on the property. In some cases, losses can be treated as ordinary losses.

Special rules govern where to report gains and losses on the tax return. These rules dictate the forms and schedules that must be used for various types of capital asset transactions.

Sales, Exchanges, and Transfers

A sale is a transfer of property by a seller for money or the buyer's promise for payment (a mortgage or a note). An exchange (trade) is a transfer of property for other property or services. ...

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