sale of buildings and improvements that result from 

 straight-line depreciation (generally, the rest of the 

 depreciation you have taken), limited by net §1231 

 gain [Technical correction in RRA98 to IRC 

 §l(h)(7)(B)]. Section 1231 property is those durable 

 assets used in a trade or business (not in inventory, not 

 supplies). 



3. 20% All other long term gains and losses, including 

 the gain over purchase price from selling a building. 



The 1997 Act also set complicated holding 

 periods. RRA98 has simplified matters in several 

 areas. 



1. Sales on or after January 1, 1998, of assets held more 

 than 12 months qualify for long term capital gains. 



2. The amount of gain at the 25% rate is limited to the 

 net §1231 gain. [IRC § 1(h)(7)(b)] Generally, this 

 change only becomes a concern during a year when 

 you sell some property for less than you paid for it. 

 Example: In 1998, Bruce Bullock sells a piece of land 

 for $80,000 that he had purchased for $100,000. He 

 also sold a building for $80,000 that he purchased for 

 $70,000. He had taken $40,000 of straight line 

 depreciation on the building. He had no unrecaptured 

 §1231 losses from prior years. Bruce also sold some 

 mutual fund shares for a gain of $20,000. The basis of 

 the building is $30,000 ($70,000 - $40,000). 

 Therefore, in 1998 Bruce has: 



Gain on building 

 Loss on land 

 Net §1231 gain 



$50,000 

 (20.000) 

 $30,000 



On the building alone, Bruce has $40,000 of gain taxed 

 at 25% (the straight-line depreciation) and $10,000 of 

 gain taxed at 20%. (Refer to the rate groups listed 

 above.) However, because of the loss on sale of his 

 land, the amount of gain subject to the 25% rate is only 

 $30,000. Note that the gain on sale of the mutual funds 

 offsets the loss on the sale of the land and normally 

 these would be netted out, since they are in the same 

 (20%) rate group, to give a net gain of zero for that 

 group. But the limitation described in the example is 

 done first. 



3. Netting of gains and losses. Form 4979 and the 

 worksheet on page .seven of the instructions for 

 Schedule D together perform the desired calculations. 

 If you have losses in the 28% or 20% rate group and a 



gain from selling depreciable property (25% group) 

 the worksheet will reduce the recapture amount you 



enter on line 25 of Schedule D. Details of the netting 

 are as follows: 



( 1 ) Within each group, net out the gains and losses for 

 that group. 



(2) Short term losses first reduce short-temi gains, if 

 any. 



(3) Any residue from (2) is applied first to reduce long- 

 term gains at the 28% rate, then to reduce gains at the 

 25% rate then to reduce gains at the 20% rate. 



(4) A net loss from the 28% group (including long- 

 term loss carryovers) is applied first to reduce gains at 

 the 257o rate , then to reduce gains at the 20% rate. 



(5) A net loss from the 20% group is applied first to 

 reduce gains in the 28% rate, then to reduce gains at the 

 25% rate. 



Order of computing tax on gains. For taxpayers in 

 the 15% bracket, the capital gains rate will be less than 

 the amounts given in the rate groups above. Schedule 

 D does a masterful job of figuring out the amounts 

 subject to the various rates of tax. It performs 

 computations by taking income in the following order: 

 ordinary income, taxed at 1 5%; gains in the 25% class 

 , taxed at 15%; gains in the 28% class, taxed at 15%; 

 and gains in the 20% class, taxed at the reduced rate of 

 1 0%. Once the 15% bracket has been used up, the rate 

 of the asset group is applied to the capital gains. 



Sale of Farm and Principal Residence 



TRA97 and corrections in RRA98 permit much or 

 all of the capital gain on the sale of your principal 

 residence ($250,000 if single, $500,000 if married 

 filing jointly) to be excluded from income if you meet 

 ownership and occupancy requirements (generally, to 

 have owned and occupied the house in two out of the 

 last five years). [IRC §121] Instead of the single 

 lifetime exclusion available previously, you can now 

 use the exclusion every time you .sell your home. 

 Farmers, therefore, have an even bigger incentive to 

 declare their house a principal residence and not part of 

 the farm. To get the exclusion you must show that 

 your hou.se is residential not agricultural. For 

 example, use the area around it to graze horses used for 

 plea.sure by your children; maintain the area around it 



10 



Fruit Notes, Volume 63 (Number 2), Spring, 1998 



