Last Min. Question - Capital Gain, Passive Loss

[Maria]

Hello,

This client owns a California C Corp and a two big rental properties and several smaller rental properties. In 2006, he sold one quarter interest of the C corp to another personal and realized close to $400K LT capital gain.

The rentals always generate huge loss (not surprised, so many people's rental income not even enough to cover mortgage interest)!

For the past so many years, he had not had federal tax liab. since he is a real estate professional and rental for Federal is not passive, the loss just offsets his wages income from the C corp; however, for CA, it is passive, so he had been paying the state but not fed. So on the state return, he has huge passive loss carry forward; he also has investment interest carryforward for both the federal and state.

Our question for this year is,

1. Can the capital gain be reduced by the investment interest expense carryforward?
2. Is there a favorable treatment for capital gain from small business stock sale?

We are looking into the codes ourselves but would appreciate it if you could point it to us, leading to a quicker solution.

Thank you.

[veritas]

You can elect

to treat capital gains as investment income to offset investment interest. But that may or may not be the best tax strategy.

[Roland Slugg]

Sec 1202

2. Is there a favorable treatment for capital gain from small business stock sale?

Yes, but it's pretty much a joke! Code §1202 allows for the exclusion of 50% (60% in some cases) of the gain on qualified small business stock. However, the portion of the gain that's not excluded is 28% gain. So, you can pay tax on the entire gain at 15%, or on half the gain at 28% ... an effective rate of 14% on the overall gain.

For more information, including a description of qualified stock, see IRC §1202 and related Regs or IRS Pub 550 (Chapter 4).

[Maria]

Capital Gain to Offset Investment Interest

Thanks for the tip. I haven't known how to make the system do that, will see.

Yes I read about the code. So it is just 1% off. Better than nothing.