Disposing of Capital Assets

When you sell, scrap, or otherwise remove a capital asset from your business, you'll have to report the change to the IRS and pay tax on any gain from the sale.

The good news is that the gain may well be a long-term capital gain, and long-term capital gains are taxed at a lower rate than other income. If you have a loss on property used in a trade or business, you can deduct it.

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In some cases, if you trade business property for other business property of the same asset class, you do not need to recognize a taxable gain or loss.

Instead, you'll be treated as making a nontaxable like-kind exchange, in which the tax basis of the old property becomes the tax basis of the new property.

Consult your tax advisor for more details if you think you may want to arrange any other type of like-kind exchange, since there are some very complicated rules to follow.

When you dispose of a capital asset, your gain (or loss) is computed by subtracting your adjusted tax basis for the property from your amount realized on the sale.

Your proceeds from the sale include the cash you receive in the sale, the fair market value of any property or services you receive, and the value of any of your existing mortgage, loans, and other debts that are assumed by the buyer. From these proceeds you may subtract any costs you had in carrying out the sale such as brokers' commissions, advertising expenses, appraisal fees, legal fees, surveys, abstract and recording fees, title insurance, and transfer or stamp taxes.

Your adjusted tax basis is generally your original cost for the property, plus the cost of any improvements or additions, and minus any depreciation or casualty losses you've deducted.

Here's what you need to know about capital gains:

special tax rates that apply to long-term capital gains

how to calculate net capital gains, and how to deduct a loss

how the recapture rules limit the application of capital gains tax breaks

what happens in a foreclosure or involuntary conversion

installment sale rules that can save taxes in some situations

special rules for stock of qualified small business corporations

how to report sales of capital assets on your tax return

Tip

Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.