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Published on 07/31/1995 All articles from this issue

Important things to know about capital gains

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Now that the top federal individual tax rate on ordinary income ranges up to 39.6 percent, the 28-percent maximum rate on long-term capital gains is especially attractive. Below are some basic rules you should know.

What is a long-term capital gain? It is the gain on the sale or exchange of a capital asset held for more than one year. For example, an asset acquired on Aug. 15, 1994 would yield a long-term gain if sold on or after Aug. 16, 1995. An earlier sale at a profit would yield a short-term gain, taxed at the taxpayer's ordinary income rate.

Statements from brokerage houses will usually indicate for securities transactions both a trade date (the date the order is placed) and a settlement date (the date funds change hands). Tax rules require you to use the trade date, both for purchases and for sales.

Generally, where the basis (tax cost) of property in your hands is determined by its basis in the hands of the transferor (so-called "carryover" basis), your holding period includes the holding period of the transferor. This will be the case where you have received the property as a gift, as a property settlement in a divorce or as a distribution from a partnership in your capacity as a partner.

Where your basis in property is determined with reference to your basis in other property (so-called "substituted" basis), your holding period includes your holding period in the original property. This rule will come into play where you have received property in a tax-free exchange, replaced property involuntarily converted or received nontaxable stock dividends.

The holding period of inherited property is deemed to be more than one year, regardless of the actual holding period of either the decedent or the heir.

- TAX MAM, INC. Tax Services Group of Cupertino