When you prepared your income tax returns in the past you
looked to Schedule D as the place to record capital gains
and losses. This is still the correct schedule to use but now
it has a new format
This has come about through the change in depreciation
recapture rules and the change in long term capital loss treat
ment in the 1969 Revenue Act as well as the varied kinds of
property receiving capital gain treatment There has been re
capture of depreciation as ordinary income in some form
since 1962 However, the new additional provisions create
situations that require a highly complex form to report all
potential transactions.
The problem comes home when we consider the definition
of capital assets or section 1221 property They are defined
as any property held by the taxpayer except these five cate
gories (1) property held for resale (inventory), (2) real and
depreciable property used in a trade or business, (3) accounts
receivable acquired in business, (4) copyright in the hands of
the creator, and (5) certain kinds of government securities.
Thus the definition excepts just about all assets that most
farmers might own. Most of a farmer’s assets would be in
cluded in the number 1 and 2 exceptions above. The items
that are left after these exceptions, however, are capital as
sets including personal residence, household goods, person
al share of the automobile, stocks or bonds, and speculatively
purchased commodity futures.
Transactions relating to capital assets are reported on
Schedule D These are the easy ones to take care of. Depend
ing on the period held, they are either short term or long term
capital gams or losses The schedule handles them readily
If there is a long term loss, or if you are carrying forward a
long term loss, the schedule provides the mechanics for off
setting it against gains. Long term losses that were incurred
before 1970 offset gains dollar for dollar. A new provision re
quires $2 of loss to offset $1 of gam after 1969.
This means that losses now get the same treatment for the
IRS that gams have received for the taxpayer. Being true
capital assets, no depreciation is allowed on the transactions
described Therefore, the new schedule D does not make pro
vision for any depreciation.
Some assets which farmers have commonly thought of as
capital assets are included in exception 2 —real and depre
ciable property used in a trade or business and held six
months or more. Transactions involving these assets will not
fit the new schedule D and so must be taken to a brand new
form, 4797 Supplemental Schedule of Gains and Losses.
This schedule became necessary to handle items that are
designated as 1231 assets capital-like assets on which
depreciation is allowed.
Transactions involving 1231 assets can be reported as
capital gams or losses with the appropriate treatment be
cause the statutes specifically provide for it This could mean
that any gam above the adjusted basis would be reported as
capital gam and only half of it reported in adjusted gross
income Changes were written into the law the past few years,
however, to prevent the deduction of depreciation from ad
justed gross income and the reporting of half of the gain when
sold. Section 1245 deals with personal property and section
1250 deals with depreciable real property
The effect of these sections is to recapture gain to the ex
tent of depreciation taken, or additional depreciation taken
in the case of depreciable real property What is recaptured
is treated as ordinary income Any gain above the original
Copyright 1972, THE BAHIKVERTISING COMPANY, 1300 Hagan, Champaign, 111 61820
Single Subscription via air mail $lO 00 per year
SCHEDULE D: A NEW LOOK THIS YEAR
By B A Henry, Tax Consultant To THE FARM PICTURE
basis, of course, would receive capital gain treatment but
not that which has been written off as a full depreciation
deduction. Sections 1245 and 1250 have different effective
dates, ranging from 1963 to 1970. Thus, proper provisions
had to be made for their consideration and thus schedule
4797 was designed
A major part of schedule 4797 is for the purpose of segre
gating ordinary income from potential capital gain income
when dealing with section 1245 and section 1250 property
After that has been accomplished, the schedule provides di
rection for where to carry the separate categories of gain or
loss to other sections of 4797 and to schedule D.
schedule d i Capital Gams and Losses
(F*rm 1040) I Attach ta Farm 1040 Eiamalea at praaarty ta b* reaarta* aft this Schagui* art
luxwmiui ( gam* an* taMi an stack* ban** an* similar investment* an* gains (but n*t [l(2/C I
■ u-oii iww. ]t>K « | an parsanal nun such a* a ham* ar lewclry
[QQQH Short term Capital Gains and Losses
Sup|
Sj'*j £ithm 4 sjrd In s'urtsryCtnirsio s
tf <i d« ih Form 104 Q 10 1 50 S
EQIB Sales or Exchanges ol Property Used in Trade or Business and/or Involuntary Conversions
(S ction 1231)
bEC ON A —lnvilunlary Conversion Due to Casualty an* TJicit (Sec Instru l<* i D)
C C s n (-Jin misinifif I c r ao in* Iso an t e aaprapr ate Ira s#l a«
(a) fir a rfu nj •(■tpar'nc p nturns
(I I ic2 a a n enter tm? t n mcolumn g I ne3
( 2) if ■* s rs* ala s inter % jch arr* u nt an In" 5
_( L. r, .,, rJ h ctl rn £f c ' ll,e 1 she nn n I ■> nlne 30 Schedule K (fa n ,C 65)
Gjin Frcm Disposdron of Properly Under Sec ions 1245 1250
1-51 1252—A s»ls Held Vore Than Six f'onths (See In tru'-hons)
bresiawb Id •- * I rat: jo( i » lycMj-ia -‘I f,r
10 Dfic lon cl if tors ? * 12 0 “il ji 1
The final job is to carry out the reporting of capital and
capital-hke transactions as has been done in the past The
mam difference now is that there are more special situations
provided by statute That’s why schedule D was given a new
look A format was needed to handle any transaction or com
bination of transactions, some of which take precedence over
others
Remember two things about purchased breeding livestock.
First, there are new holding period regulations. Cattle and
horses acquired after December 31, 1969 must be held at
least 24 months and all other breeding stock must be held at
least 12 months. Second, these livestock must be given the
appropriate recapture treatment.
The impoitant point of all this is that format changes
will make the use of Schedule D a new experience this year
Don’t wait until you are ready to file your return to examine
the appropriate forms Get them early so you can study them
They are designed to do the job precisely but you must be
able to apply your special situation to them If it looks too
complicated, get professional help with your income tax
return
isets Held Not Mare Than 6 Months
ichedul
>f Gains and Losses
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