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FOR LIVE PROGRAM ONLYFundamentals of Capital Gains: Identifying Section 1231,1245 and 1250 Gains, 0% Bracket and Form 4797TUESDAY, JANUARY 21, 2020, 1:00-2:50 pm EasternIMPORTANT INFORMATION FOR THE LIVE PROGRAMThis program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) – if you need to registeradditional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1).Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. To earn full credit, you must remain connected for the entire program.WHO TO CONTACT DURING THE LIVE PROGRAMFor Additional Registrations:-Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)For Assistance During the Live Program:-On the web, use the chat box at the bottom left of the screenIf you get disconnected during the program, you can simply log in using your original instructions and PIN.

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Fundamentals of Capital Gains: IdentifyingSection 1231, 1245 and 1250 Gains, 0% Bracketand Form 4797January 21, 2020Riley Adams, CPA, Senior Financial AnalystMichael Plaks, Enrolled AgentGoogleREI Tax aks.comDawn Polin, CPA, Senior ManagerCherry Bekaertdpolin@cbh.com

NoticeANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BYTHE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANYOTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THATMAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING ORRECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.You (and your employees, representatives, or agents) may disclose to any and all persons,without limitation, the tax treatment or tax structure, or both, of any transactiondescribed in the associated materials we provide to you, including, but not limited to,any tax opinions, memoranda, or other tax analyses contained in those materials.The information contained herein is of a general nature and based on authorities that aresubject to change. Applicability of the information to specific situations should bedetermined through consultation with your tax adviser.

Capital Gain Overview

Sale of AssetsSale Price –Purchase Price Loss or Gain Purchase ManufacturingEquipment for 10,000 Use it is the business for 2years Expense depreciation in theamount of 2,000 Sell in year 3 for 12,000 12,000 - 8,000 4,000Gain on Sale6

Considerations forapplication of taxrates to apply togain Capital Ordinary Long Term Short Term7

Current Tax Rates8TypeOrdinaryCapitalIndividual37%20%C Corp21%21%

Sale of Business Assets Falls into 3 Categories §1231 Assets - operatingassets of the business Capital Assets (Investments) Ordinary Income Assets(assets held for resale suchas inventory)9

It ain’t what you know that gets youinto trouble. It’s what you know forsure that just ain’t so.- Mark Twain10

Proprietary Confidential0% Capital Gains Tax Rate11

0% Capital Gains Tax Rate Long-term capital gains tax rates on taxable income: 2019Marginal tax rate12SingleMarried, filingjointly 0-78,750Head ofhousehold0% 0-39,37515% 39,376-434,550 78,751-488,850 52,751-461,700 39,376-244,42520% 434,550 488,850 0-52,750Married, filingseparately 461,700 0-39,375 244,425 Modified Adjusted Gross Income (MAGI) above 200,000 (single) and 250,000 (MFJ) is alsosubject to the 3.8% net investment income tax With planning, can harvest tax-free gains on invested capital held more than a year or qualifiedpassive income sources

How the 0% Rate WorksFor 2018-2025, 0% tax rate applies to: Married tax filers with taxable income up to 78,750Single filers with taxable income up to 39,375Most Common Tax Opportunities 13Temporarily unemployed/out of labor forceVariable income (e.g., salesperson)Between ages 55-70 and beginning to transition into retirement / arealready retired

0% Capital Gains ExamplesExample 1ItemDescriptionFiling StatusMarried Filing JointlyTaxable Income 60,000 (a)Capital Loss Carryover?No15% LTCG Threshold 78,750 (b)Max LTCG with 0% tax 18,750 [(b)-(a)]How to Take Advantage:14 If you have unrealized long-term gains in assets (e.g., stocks, mutualfunds, etc.) in a taxable account, can sell these investments andrecognize 0 in tax liability 18,750 Consider exchanging for similar investments to harvest unrealized gainwithout tax impact

0% Capital Gains ExamplesExample 2ItemDescriptionFiling StatusMarried Filing JointlyTaxable Income 80,000 (a)Capital Loss Carryover?Yes, 3,000 (b)15% LTCG Threshold 78,750 (c)Max LTCG with 0% tax 1,750 [(a)-(b)-(c)]How to Take Advantage: 15Minimal space, but loss carryover provides room to take 1,750 inrealizable gains with 0% tax impact

0% Capital Gains ExamplesExample 3ItemFiling StatusDescriptionMarried Filing JointlyTaxable IncomeLT Capital Gains15% LTCG ThresholdLTCG Tax 60,000 (a) 40,000 (b) 78,750 (c) 3,187.50 [(a) (b)-(c)]*15%How to Take Advantage: 16While taxed, still done so at second tier of long-term capital gains taxrates (15%)

What Qualifies for LTCG?17 Assets held for longer than 1 year and sold for a gain Qualified dividends received Generally considered “qualified” if the company pays a dividend on stockinvestor has held more than 60 days during the 121-day period that began60 days before the ex-dividend date

What is Not Considered Qualified Passive income?18 Master limited partnerships (MLPs) - Exists in the form of a publicly traded limited partnership.Combines the tax benefits of a private partnership—profits are taxed only when investors receivedistributions—with the liquidity of a publicly-traded company. Real estate investment trusts (REITs) - Company owning and typically operating real estate whichgenerates income. One benefit of REITs for everyday investors is that they provide the opportunityto own a portion of real estate which generates dividend-based income. Must return a minimum of90% of its taxable income in the form of shareholder dividends each year. Dividends paid on employee stock options - Considered nonqualified dividends, taxed atmarginal rate. Dividends paid by tax-exempt companies - Considered nonqualified dividends and pay tax atmarginal income tax rate. Dividends paid on savings or money market accounts - Like any other payment received froman asset.

Three asset typesand two ratecategories? The sale of business assetscan result in the application ofthe capital gain rates or theordinary income ratesdepending on the facts andcircumstances. Sales of 1231assets slide between the taxrates20

Distinguishing and calculating 1231, 1245,and 1250 Gain21

1231 Assets Defined depreciable property used in thetaxpayer’s trade or business and heldmore than one year, other than (i)property includible in inventory, (ii)property held primarily for sale tocustomers, (iii) intangibles real property used in the trade orbusiness and held for more than oneyear, other than property that isincludible in inventory or held primarilyfor sale to customers; capital assets held for more than oneyear in connection with a trade orbusiness or a transaction entered intofor profit, and compulsorily orinvoluntarily converted; an unharvested crop on land used in thetrade or business and held for more thanone year, if the crop and land are sold,exchanged, or involuntarily converted atthe same time to the same person; certain livestock, but not poultry ( trade or business property held for more¶1750); andthan one year and compulsorily or timber, domestic iron ore, and coal (involuntarily converted (¶1748);¶1772) ( Code Sec. 1231(b); Reg.§§1.1231-1 and 1.1231-2).22

Treatment of 1231Asset Sales Gains are treated as capital innature Losses are treated as ordinaryin nature23

1231, 1245, 1250?1231 Gain Rate1231Gain1245 DepreciationRecapture(Ordinary Rate)1250 DepreciationRecapture(preferential rate)24

§1250 Real PropertyCode Sec. 1250 real property, such as a building ora structural component of a building, and mostland improvements. Residential rental property that is depreciated over 27.5 years using the straight linemethod. Nonresidential real property that is depreciated over 39 years using the straight linemethod.25

§1245 Personal PropertyCode Sec. 1245 personal property (Code Sec.1245(a)(3)(A)), which consists of items such as businessmachinery and equipment, office furniture and fixtures,and appliances that are furnished to tenants. The principalcharacteristic of Code Sec. 1245 personal property is thatit is readily moveable rather than permanently affixed.26Property of Cherry Bekaert LLP

1231 Gains in Depth A gain on the sale of the To the extent the assetcapital asset can betook prior straight-linesubject to the capital gains depreciation expense as arates, and the 1245 and1250 asset, 12501250 recapture rates.recapture will beapplicable To the extent the assettook prior accelerateddepreciation expense as a1245 asset, 1245recapture will beapplicable27

What about capital losses?Capital Losses are ordinaryin nature. However, netsection 1231 losses must berecaptured by treating thecurrent year's net section1231 gain (section 1231gain that exceeds currentyear section 1231 loss) asordinary income28to the extent of theunrecaptured net section1231 losses for the fiveprevious tax years ( CodeSec. 1231(c)).The losses are recapturedon a first-in, first-out (FIFO)basis ( IRS Pub. 544).

Example§1231 Gain (Loss) EachYear: Year 1 ( 10,000) Year 2 ( 23,000) Year 3 47,00029Looking back 5 years,this taxpayer musttreat 33,000 of thegain in year 3 asordinary. Theremaining gain of 14,000 can be treatedas capital

REI Tax Firm - Michael Plaks, EAwww.MichaelPlaks.comSection 1231 lookbackWhy is this an issue?Because Sec. 1231 offers the best of both worlds:1. Losses are ordinary and unrestricted by the 3,000 capital loss limitations2. Gains are capital at preferential ratesUnintended result: clever timing could (if not for thelookback rule) take advantage of both sides.30

REI Tax Firm - Michael Plaks, EAwww.MichaelPlaks.comSection 1231 lookbackExample: milking Sec. 1231 if we could2019: Sold business equipment at a 20k lossOrdinary loss at 24% bracket: 4,8002020: Sold business land at a 30k gainLong-term capital gain at 15%: 4,50031Net result: we’re at 10,000 gain, yet 300 taxdrop!

REI Tax Firm - Michael Plaks, EAwww.MichaelPlaks.comSection 1231 lookbackThe 5-year lookback rule:If you took Sec. 1231 ordinary losses within the last 5years – put it back!3-step process:1. Figure out how much ordinary losses to return2. Sec. 1231 gains up to that amount will be ordinarygains3. Whatever is left is capital gains32

REI Tax Firm - Michael Plaks, EAwww.MichaelPlaks.comSection 1231 lookbackExample: Sec. 1231 gains altered by lookback2019: Sold business equipment at a 20k lossOrdinary loss at 24% bracket: 4,8002020: Sold business land at a 30k gainOrdinary loss recovery - 20k at 24%: 4,800Long-term capital gain - 10k at 15%: 1,500Total: 6,300 i.e. 1,800 higher than we wished33

REI Tax Firm - Michael Plaks, EAwww.MichaelPlaks.comSection 1231 lookbackLookback challenge #1: TrackingThere’re no IRS forms or other mechanisms to keep track of theprior Sec. 1231 ordinary losses.Intuit tax preparation software – TurboTax and ProSeries – doesnot track it, either.Prior 5 years of tax returns are often unavailable or unreliable.Clients do not want to pay us to do extra work that will end uphurting them.34