Q Several years ago, I paid $10,000 for 250 shares of stock in a publicly traded company, at a price of $40 each. Recently, the stock split 3 for 2, and I received an additional 125 shares. Thereafter, I sold all my shares for $45 each. What is my total gain on this transaction, and do I report this as a short-term or long-term capital gain?
A Following the stock split, you owned 375 shares, for which you had paid a total of $10,000, so your cost basis per share is $26.67 ($10,000 divided by 375 shares). Accordingly, gain on the shares you sold is $18.33 per share, less any commission and other expenses of the sale.
Since you held the original shares for more than one year, those shares would qualify for long-term capital gain treatment at a maximum federal income tax rate of 20%. Moreover, the shares received under the stock split will also qualify for long-term capital gain treatment, so that the same favorable tax rate also applies for those shares.
Q I plan to sell my office building, but retain my practice in another location. If this office building is paid off and fully depreciated, would the entire sales price be treated as long-term capital gains, subject to federal income taxes at a maximum of 20%?
A No. The gain realized from this transaction should be somewhat less than the total sales proceeds received for two reasons. First, the tax law allows all expenses of the sale, including but not limited to, sales commissions, closing costs and fix-up expenses, to be deducted from the sales price before determining the amount of gain recognized on the transaction.
Furthermore, even though the building may have been fully depreciated, the original cost for the land was not depreciated. So that amount remains as the basis for the property, which reduces the gain at the time of the sale.
Once the amount of gain has been properly calculated, an amount equal to the original depreciation taken on the building is subject to tax at a rate of 25%. The remaining gain, measured by the appreciation of the property above its original purchase price, is subject to tax at a maximum rate of 20%.
By transferring the property to a family limited partnership (FLP) or family limited liability company (LLC) prior to the sale, significant tax savings can be realized. Alternatively, by structuring a tax-free exchange for other like-kind real estate, the gain from the sale can be deferred, or eliminated all together.