Capital Asset Defined

The term "capital asset has the same meaning as given in I.R.C. Section 1221 and is limited to assets which are sold, exchanged or otherwise disposed of by a person while he or she is subject to taxation under this chapter on any Part A or Part C taxable income; provided further that certain property is treated as if it were a "capital asset" within the meaning of I.R.C. Section 1221:

For Massachusetts purposes, capital assets include:

  • all assets that are capital assets within the meaning of I.R.C. Section 1221 such as stocks and bonds;
  • depreciable property used in a trade or business within the meaning of I.R.C. Section 1231(b), without regard to the holding period requirements; and
  • depreciable property held in connection with a trade or business or transaction entered into for profit within the meaning of I.R.C. Section 1231(a) without regard to the holding period requirements.

There are no Massachusetts provisions to allow I.R.C. treatment for ordinary income or loss for the following:

  • ordinary gain or loss from the sale of I.R.C. Section 1231 assets held for less than one year;
  • Sections 1245 and 1250 recapture of depreciation as ordinary income from the sale of I.R.C. Section 1231 assets;
  • ordinary loss from the sale of I.R.C. Section 1231 assets held for more than one year;
  • ordinary loss treatment from the sale of I.R.C. Section 1244 stock.

Federal Provision, I.R.C. Section 1221 defines "capital asset" to mean property held by the taxpayer (whether or not connected with his trade or business), but does not include: 

  • stock in trade or other property which would properly be included in inventory;
  • property held primarily for sale to customers in the ordinary course of the taxpayer's trade or business;
  • notes or accounts receivable acquired in the ordinary course of trade or business for services rendered or from the sale of stock in trade or property held for sale in the ordinary course of business;
  • depreciable business property;
  • real property used in taxpayer's trade or business;
  • a copyright, a literary, musical or artistic composition held by a taxpayer who created it....;
  • US Government publication held by a taxpayer who received it other than by purchase at the price at which the publication was offered to the public.

A capital asset is any property owned and used for personal purposes or investment such as:

  • a house owned and used by you or your family;
  • household furnishings;
  • car used for pleasure or commuting;
  • stocks and bonds held in your personal account;
  • commodity futures contracts held for speculative purposes;
  • property held for investment such as land;
  • coin or stamp collection;
  • gems, jewelry;
  • gold, silver, or any other metal;
  • goodwill.

A collectible is any capital asset as defined in I.R.C. Section 408(m) which includes works of art, rugs, antiques, metals, gems, alcoholic beverages, certain coins and any other items treated as collectibles for federal tax purposes.

Gain from the sale or exchange of capital assets held for personal use or investment is a capital gain reported on Schedule D, Part I or II unless specifically excluded, i.e., personal residence exclusion amounts.

Loss from the sale of exchange of capital assets:

  • held for investment is deductible per I.R.C. Section 165(c).
  • held for personal use is not deductible per I.R.C. Section 165(c) unless the loss results from a casualty, such as a fire or hurricane or a theft.

Form 1099-S:
If a taxpayer had a loss from the sale or exchange of real estate held for personal use for which he or she received a Form 1099-S, the transaction must be reported on Schedule D even though the loss is not deductible. For example, if a taxpayer has a loss on the sale of a vacation home, the loss amount is reported on Line 1 or 8 (short or long). The taxpayer completes columns (a) through (e) but enters 0 in column (f) since the loss is not deductible.


Definitions for Computation of Gain or Loss from the Sale of a Capital Asset

Adjusted basis of property = the initial cost less depreciation, plus capital improvements.

Amount realized
= the amount received upon the sale or exchange of property, less the cost incurred to transfer the property. The amount received includes cash and the fair market value of any property or services received, plus any debt assumed by the buyer.

Capital Asset has the same meaning given in I.R.C. Section 1221...provided further that property used in a trade or business within the meaning of I.R.C. Section 1231 is treated as if such property were a "capital asset," without regard to the holding period in I.R.C. Section 1231.

Capital gain or loss = gain or loss on the sale or exchange of a capital asset determined using the Massachusetts adjusted basis: 

  • capital gain or loss is long-term if the property was held for more than one year. Long-term capital gains, except gains on collectibles and pre-1996 installment sales, are taxed at 5.25% on Schedule D. Gains from collectibles and pre-1996 installment sales are taxed at the 12% rate on Schedule B.
  • capital gain or loss is short-term if the property was held for one year or less. Short-term gains and gains from collectibles are taxed at 12% on Massachusetts Schedule B.

Capital improvements = the cost of improvements to property if they increase the value of property, lengthen its life or adapt it to a different use. Examples: adding a new room, new plumbing or wiring, installing a new roof, etc. Capital improvements are added to the cost of the property.

Collectible
is any capital asset as defined in I.R.C. Section 408(m), as amended and in effect for the taxable year, which includes works of art, rugs, antiques, metals, gems, alcoholic beverages, certain coins and any other items treated as collectibles for federal tax purposes. 

Cost basis of property =
the amount paid in cash, debt obligations, or other property. Cost also includes amounts paid for miscellaneous items such as excise taxes, installation and testing charges, freight charges to obtain the property, etc. 

Current gain or loss
is gain or loss from a sale of property that is realized in the current taxable year. 

Depreciation:
if property is used to produce income, such as rents, the owner can recover some or all of the cost of the property through tax deductions. This is done by "depreciating" the property, i.e., reducing a portion of the cost of the property each year. Depreciation taken reduces the basis in the property. (Also see TIR 02-11.) 

Fair market value
= the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.

Gain or loss: If the amount realized from a sale of property is more than the adjusted basis of the property transferred, the difference is a gain; if the adjusted basis of the property transferred is more than the amount realized, the difference is a loss.

Holding period of capital assets sold or exchanged: For purposes of determining the length of time a capital asset is held, the Massachusetts holding period is generally the same as the holding period determined for federal tax purposes. However, for Massachusetts purposes, a capital asset acquired before January 1, 1996, is deemed to have been acquired on the later of (i) January 1, 1995 or (ii) the date of actual acquisition. 

  • capital gain or loss is long-term if the property was held for more than one year. Long-term capital gains, except gains on collectibles and pre-1996 installment sales, are taxed at 5.25% on Schedule D. Gains from collectibles and pre-1996 installment sales are taxed at the 12% rate on Schedule B.
  • capital gain or loss is short-term if the property was held for one year or less. Short-term gains and gains from collectibles are taxed at 12% on Massachusetts Schedule B.

Long-term capital gain or loss = gain or loss on the sale or exchange of a capital asset held for more than one year. Long-term capital gains, except gains on collectibles and pre-1996 installment sales, are taxed at 5.25% on Schedule D. Gains from collectibles and pre-1996 installment sales are taxed at the 12% rate on Schedule B.

Ordinary gain or loss = gain or loss from the sale or exchange of assets other than capital assets. Massachusetts does not allow the special federal provisions stated below.

Ordinary loss treatment, special federal provisions = favorable treatment of gains and losses from the sale or exchange of certain assets; the gains are given capital asset treatment, and the losses are given ordinary treatment. These provisions are for federal purposes only.

Prior year gain or loss is a sale of property that was realized in a prior taxable year.

Sale of Exchange: Any disposition that is a sale or exchange for federal tax purposes within the meaning of Code section 1222, 1231 or other relevant Code provision, or any disposition that is a compulsory or involuntary conversion for federal tax purposes within the meaning of Code section 1231(a)(3)(A)(ii), if and to the extent that gain or loss on the disposition or conversion is taken into account in determining the taxpayer's federal income tax liability under the Code. 

Selling Price =
the amount received upon the sale or exchange of property, less the cost incurred to transfer the property. The amount received includes cash and the fair market value of any property or services received, plus any debt assumed by the buyer.

Short-term capital gain or loss
= gain or loss on the sale or exchange of a capital asset held for one year or less. Taxable income attributable to short-term capital gains is taxed at 12%.

Example to show impact of depreciation: Depreciable property is sold for $280,000. Original cost of this property was $50,000, depreciation taken was $5,000 per year for 3 years and capital improvements were $25,000. 

cost of depreciable property= $50,000
3 years of depreciation claimed against other income= ($15,000)
capital improvements= $25,000
adjusted basis= $60,000
amount realized= $280,000
adjusted basis= ($60,000)
long-term gain= $220,000

Basis Adjustments to Determine Massachusetts Gain or Loss

Massachusetts provides for adjustments to federal basis in certain situations. The most common basis adjustment is to reflect the difference between Massachusetts and federal depreciation rules.

The initial basis of a capital asset (such as real estate) is generally the cost of the asset. The initial basis is decreased by amounts taken as a depreciation deduction. Because Massachusetts depreciation rules have differed from federal rules in certain tax years, the total depreciation taken for Massachusetts purposes may be different from the total depreciation taken for federal purposes and, therefore, the Massachusetts basis will be different from the federal basis.

When the asset is sold, the gain or loss will generally be the difference between the basis and the sale price. Since the Massachusetts Schedule D begins with a reference to gains or losses from the federal return, an adjustment for the difference in basis must be made to arrive at the correct Massachusetts gain or loss. 

Effect of Depreciation on Basis; Modifications to Gain or Loss in Year of Disposition:
In the case of any depreciable asset where Massachusetts depreciation is different from federal depreciation as a result of decoupling from Code Section 168(k), the basis of the asset must be adjusted annually for Massachusetts tax purposes. For purposes of both the corporate excise and the personal income tax, upon disposition of depreciated property, any gain or loss must be calculated using the depreciation allowed under the Massachusetts method. In the year of disposition, adjustments to federal gains or federal losses must be made to reflect the disallowance of bonus depreciation. As a result of the difference in basis, the gain or loss reported on the federal return will be different than the gain or loss reported on the Massachusetts return.


Computation of Gain - Federal and Massachusetts Differences

 Federal GainMassachusetts Gain
Cost$50,000$50,000
Depreciation($30,000)($20,000)
Adjusted Basis$20,000$30,000
Amount Realized (Selling Price)$40,000$40,000
Less: Basis($20,000)($30,000)
Gain$20,000$10,000

Massachusetts adjusted basis is $10,000 more than Federal adjusted basis.

Reporting Capital Gains on Federal and Massachusetts Schedule D:
 
Massachusetts Schedule D, Line 3 from Federal Schedule D, Line 11$20,000
Massachusetts Schedule D, Line 9 Adjustment($10,000)
Massachusetts Gain Reported on Massachusetts Schedule D$10,000

Massachusetts Basis Adjustment:
Since the federal gain of $20,000 will be reported on Massachusetts Schedule D, an adjustment should be made on Line 8 to reflect the difference in depreciation deductions claimed prior to the sale. In this case, the Line 8 adjustment of ($10,000) would result in a Massachusetts gain of $10,000.


Capital Gain Distribution

A capital gain distribution represents the taxpayer's share of a gain realized by a mutual fund or similar entity. Generally, a mutual fund makes two capital gain distributions in the taxable year, and the 1099 usually gives the date of each of these distributions. Capital gain distributions are included in the gross dividend figure reported on Form 1099-DIV and the amount is also separately stated on the 1099.

Capital gain distributions are reported directly on U.S. Schedule D, Line 13 and on Massachusetts Schedule D, Line 5. If the taxpayer does not fill out U.S. Schedule D, the amount will be reported directly on U.S. 1040, Line 13.

Dividends declared and payable during a tax year are reportable in that year even if the dividend amounts are not received until the following year.

Nonresidents and Part-Year Residents:

Generally, exact dates of capital gain distributions are given on mutual fund statements. If the taxpayer was a resident on the date of distribution, such amount is included in Massachusetts gross income. If the exact dates are not provided, DOR has a flexible standard of "any reasonable method", including days as a resident to total days in the year, to calculate the Massachusetts related capital gain distribution. 


Gain from Sale of Principal Residence

Taxpayers eligible to exclude any portion of a gain on the sale of a principal residence for federal income tax purposes may also exclude the same portion of the gain for Massachusetts purposes. The maximum allowable amount of gain from the sale of a principal residence that may be excluded currently is:

  • $250,000 for a single, head of household or married separate filer; and
  • $500,000 for married joint filer.

Generally, a taxpayer may qualify for this exclusion repeatedly if the sale is for a principal residence owned and used by the taxpayer for at least 2 of the 5 years prior to the sale.

Massachusetts adopts the federal treatment for the exclusion for Gain on the Sale of a Principal Residence under the Internal Revenue Code, as amended and in effect on January 1, 2005 and automatically adopts any future changes to the federal provisions for this exclusion.

Multiple Dwelling:
Only that portion of a multiple residence, i.e., one unit of a two-family residence that is used as a personal residence, qualifies for this exclusion.

Massachusetts Exclusion that Cannot Be Reduced Below the Federal Exclusion:
The Massachusetts exclusion of gain from the sale of a principal residence cannot be reduced below the federal exclusion of IRC § 121 as in effect on January 1, 2002 (i.e., up to $250,000/$500,000, even if federal law subsequently reduced this amount).

Member of the Uniformed Services or the Foreign Service:
Massachusetts adopts the exclusion of gain from the sale of a principal residence allowed by IRC § 121 as in effect for the taxable year (current Code). Thus, if gain from the sale of a principal residence is excludible under § 121 from federal gross income, the gain is likewise excludible from Massachusetts gross income. Individuals can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain from the sale of their principal residence if they resided in the home for two of the five years preceding the sale.
 

Taxpayers can choose to have the 5-year test period for ownership and use suspended during any period taxpayers or spouses serve on qualified official extended duty  as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Taxpayers can choose to have the 5-year test period for ownership and use suspended during any period they or their spouses serve outside the United States either as an employee of the Peace Corps on qualified official extended duty or as an enrolled volunteer or volunteer leader of the Peace Corps. This means that they may be able to meet the 2-year use test even if, because of their service, they did not actually live in the home for at least the required 2 years during the 5-year period ending on the date of sale.

Period of suspension:
The period of suspension cannot last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. Taxpayers cannot suspend the 5-year period for more than one property at a time. Taxpayers can revoke your choice to suspend the 5-year period at any time.

Example: John bought and moved into a home in 2005. He lived in it as his main home for 2½ years. For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2013. To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. This means he can disregard those 6 years. Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period.

Example: Mary bought a home on April 1, 1997. She used it as her main home until August 31, 2000. On September 1, 2000, she went on qualified official extended duty with the Navy. She did not live in the house again before selling it on July 31, 2013. Mary chooses to use the entire 10-year suspension period. Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period.


Installment Sales Method of Reporting a Gain

Some sales are made under arrangements that provide for part or all of the selling price to be paid in more than one (1) tax year. If the seller finances the buyer's purchase of investment property, instead of having the buyer obtain a loan or mortgage from a bank, the seller has an installment sale. Generally each payment consists of both principal and interest. The seller recognizes gain on an installment sale as he or she receives the payments; the interest is reported separately.

Installment Sales, Large Sales Addition to Tax
Chapter 131 of the Acts of 2010 added a new provision effective for tax years beginning on or after January 1, 2010 which requires that interest be paid on the deferred tax of certain installment sales. An addition to tax applied to taxpayers who have deferred the gain, and the tax associated with that gain, on non-dealer installment sales with a sales price of over $150,000 if the aggregate face amount of installment obligations arising during the tax year and outstanding as of the close of the tax year exceeds $5 million. An installment sale addition to tax must also be paid on the deferred gain from the installment sale of timeshares and residential lots if the sale meets certain criteria.

Installment Sales, Large Sales Addition to Tax Calculation  

Automatic Installment Sales Treatment:
For tax years beginning on or after January 1, 2005, taxpayers who elect installment sale treatment federally will automatically follow Massachusetts installment sale treatment if the Massachusetts gain for the entire transaction is less than $1 million.

Gains Recognized by Flow-Through Entities:
In the case of flow-through entities, the $1 million threshold applies to the gain recognized by individual shareholders, beneficiaries, etc., taxable under chapter 62. Such qualifying taxpayers may not separately elect out of installment sale treatment for Massachusetts tax purposes and do not have to post security with the Commissioner. The basis adjustment provision under G.L. c. 62, s. 6F may apply whether or not the taxpayer automatically qualifies for installment sale treatment.

Gains Equal to or Greater Than One Million:
Taxpayers who are treated as electing installment sale treatment federally will be required to file a separate Massachusetts installment sale election and to post security with the Commissioner if their Massachusetts gain for the entire transaction is equal to or greater than $1 million.

To make an election and to post security, taxpayers should contact the Installment Sales Unit at (617) 887-6950 or write to:

Massachusetts Department of Revenue
Bureau of Desk Audit - Installment Sales Unit
200 Arlington Street, Room 4300
Chelsea, MA 02150

Long-Term Capital Gains Deduction

A 50% deduction is allowed for long-term capital gains from the sale of collectibles and pre-1996 installment sales that are reported in Part 2 of Massachusetts Schedule B.


Property Used in a Trade or Business (U.S. Form 4797)

Capital assets include:

  • capital assets under the Internal Revenue Code such as stocks and bonds;
  • depreciable property used in a trade or business without regard to the holding period requirements; and
  • depreciable property held in connection with a trade or business or transaction entered into for profit without regard to the holding period requirements.

Federal Ordinary Gain or Loss Treatment Does Not Apply to Massachusetts:
There is no Massachusetts provision to treat certain gains or losses reported on U.S. Form 4797 as ordinary gains and losses.

The following table indicates the amounts from U.S. Form 4797 that must be reported on the appropriate Massachusetts schedule:
 

U.S. Form 4797 - Part IMassachusetts Schedule DMassachusetts Schedule B
capital gains from sale of 4797 property held for more than one yearX 
U.S. Form 4797 - Part IIMassachusetts Schedule DMassachusetts Schedule B
recapture of depreciation as ordinary gain §§ 1245 and 1250X 
ordinary loss from sale of 4797 property held for more than one yearX 
gains on sale of 4797 property held for one year or less X
losses on sale of 4797 property held for one year or less X

Reacquired Assets

Federal Treatment under Section 311(e) of the Tax Relief Act of 1997:
A taxpayer other than a corporation, in a marginal federal tax bracket higher than 15%, may elect to treat certain assets as if they have been sold and reacquired. The purpose of this election is to make any future gain on the sale of the capital assets by the taxpayer eligible for the 18% capital gains rate allowed. Otherwise, the maximum federal capital gains rate for sales by such taxpayer of long-term capital assets after May 6, 1997 would be 20%.

The 18% tax rate is applicable, however, only to the extent that:

  1. the holding period of the asset begins on or after January 1, 2001; and
  2. the asset is held for more than 5 years.


The election to treat certain assets:

  • Readily tradable stock which is a capital asset held by the taxpayer on January 1, 2001, and not sold before the next business day after that date, is treated as having been sold on the next business day for an amount equal to its closing market price on that date, and as having been reacquired on that date for the same amount. The beginning holding period of any reacquired stock is January 2, 2001.
Readily tradable stock means stock which, as of January 1, 2001 is readily tradable on an established securities market.
  • Any other capital asset or property used in a trade or business held by the taxpayer on January 1, 2001, is treated as having been sold on that date for an amount equal to its fair market value on that date, and as having been reacquired on that date for the same amount. The beginning holding period of any other reacquired asset is January 1, 2001.


Federal Gain Resulting from the Deemed Sale:
Any gain on the deemed sale must be recognized and is taxed at the applicable federal rate. The gain is calculated by taking the original purchase price less the fair market value on the date of the deemed sale.

Federal Loss Resulting from the Deemed Sale:

A loss resulting from the deemed sale is not allowed for any taxable year; the loss is neither recognized nor preserved through a basis adjustment. The basis of the reacquired asset is its closing market price or fair market value, whichever applies, on the date of the deemed sale, whether the deemed sale results in a gain or a loss.

Example for Federal Treatment of Readily Tradable Stock:
On January 1, 2001, a taxpayer owns 100 shares of readily tradable stock that was purchased in 1995 for $900. On January 2, 2001, the taxpayer still owns the 100 shares and the fair market value of this stock is $2,500. The 100 shares are treated as if they were sold and repurchased on January 2, 2001 and will have a new basis of $2,500 and a new holding period of January 2, 2001. For tax year 2001, the taxpayer had a deemed gain of $1,600 ($2,500 - $900) that will be taxed at the applicable federal rate.

In 2006, the taxpayer sells the 100 shares for $3,200. The taxpayer will have a gain of $700 ($3,200-$2,500) that will be taxed at the more favorable capital gain tax rate of 18% since the new holding period begins January 2, 2001, and the shares were held for five years.

Massachusetts Does Not Adopt Section 311(e) of the Tax Relief Act of 1997:

  • Generally, in determining Massachusetts taxable personal income, Massachusetts adopts the Internal Revenue Code (the "Code") as of January 1, 1998;
  • Massachusetts residents are subject to tax on their taxable income, computed as federal gross income with certain modifications;
  • Federal gross income means federal gross income under the Code as amended and in effect on January 1, 1998;
  • Any federal provision that has not been incorporated into the Code as of that date is generally not adopted by Massachusetts for personal income tax purposes.


Section 311(e) Was Never Incorporated into the Code as of January 1, 1998:
Although the federal election was enacted by Congress as part of the Tax Relief Act of 1997 on August 5, 1997 and, thus, would have been in the Code as of January 1, 1998 and adopted by Massachusetts if it had been incorporated into the Code, it was not so incorporated. Accordingly, the provisions of Section 311(e) are not adopted by Massachusetts.

Massachusetts Treatment of Gain from Federal Deemed Sale:
Any gain from a deemed sale under 311(e) provision is not subject to tax. Although the gain is recognized federally, it is not "federal gross income" under the 1998 Code and, thus, is not included in Massachusetts gross income.

Massachusetts Treatment of Loss from Federal Deemed Sale:
Any loss resulting from the deemed sale is not allowed. Losses are generally taken into account, if at all, only if they are recognized federally under the 1998 Code.

Massachusetts Holding Period and Basis for Federally Reacquired Asset:
The beginning Massachusetts holding period of any asset reacquired pursuant to Section 311(e) will continue to be the date the asset was acquired or January 1, 1995, whichever is later, not the date the asset was reacquired for federal tax purposes.

The Massachusetts initial basis of any asset reacquired under Section 311(e) will not be its closing market price or fair market value, whichever applies, on the date of the deemed sale, whether the deemed sale results in a gain or a loss, but will continue to be determined as of the date the asset was first acquired.


Small Business Stock Sales 

Capital Loss - Shareholders of Qualifying "Small" Companies, Loss on I.R.C. § 1244 Stock:
The term "capital asset" has the same meaning given in I.R.C. § 1221. Since I.R.C. § 1244 Small Business stock falls under the "capital asset" definition of I.R.C. § 1221, any gain or loss is treated as a sale or exchange of a capital asset and is reported on Massachusetts Schedule D provided the stock was held for more than one year, or on Massachusetts Schedule B if the stock was held for less than one year.

Ordinary Loss Treatment by the IRS:
A loss on I.R.C. § 1244 stock issued to an individual or to a partnership which would normally be treated as a loss from the sale or exchange of a capital asset is treated as an ordinary loss. The maximum amount allowed to be deducted as an ordinary loss is $50,000 or $100,000 if filing joint; the remainder of the loss is treated as a capital loss.

Article 44 of the Amendments to the Massachusetts Constitution:
For Massachusetts purposes, I.R.C. § 1244 stock losses are treated as capital losses because the stock itself is a capital asset. Article 44 requires that income derived from the same class of property be taxed at the same rate. The I.R.C. § 1244 treatment of loss as both ordinary and capital is unconstitutional for Massachusetts purposes.

Capital Gain - Act Relative to Economic Development Reorganization (St. 2010, c. 240), Section 111:
Effective for tax years beginning on or after January 1, 2011, gains derived from the sale of investments which meet certain requirements are taxed at a rate of 3% instead of 5.25% (5.3% for tax year 2011). In order to qualify for the 3% rate:

  1. investments must have been made within five years of the corporation's date of incorporation;
  2. investments must be in stock that generally satisfies the definition of "qualified small business stock" under I.R.C. § 1202 (c), other than the requirement that the stock be stock of a C corporation;
  3. the stock must be held for three years or more and the investments must be in a corporation which:
a. is domiciled in Massachusetts,
b. is incorporated on or after January 1, 2011,
c. has less than $50 million in assets at the time of investment, and
d. complies with certain of the "active business" requirements of I.R.C. § 1202 of the Internal
Revenue.

To be eligible as "qualified small business stock" under I.R.C. § 1202(c), the stock must be acquired by the taxpayer at its original issue (directly or through an underwriter) in exchange for money, property, or as compensation for services provided to the corporation. During substantially all of the taxpayer's holding period, at least 80 percent of the value of the corporation's assets must be used in the active conduct of one or more qualified businesses. 


Documentation to Submit with Abatement/Amended Tax Return:

Gain from sale of personal residence if applicable

  • Copy of U.S. Form 2119 - Sale of Your Home, for sales prior to 1998;
  • Copy of U.S. 1040, Schedule D;
  • Copy of Form 1040X - Amended U.S. Individual Income Tax Return and amended Schedule D;
  • Massachusetts Form 1 or 1-NR/PY, amended Schedule D.

Disposition of property used in a trade or business

  • Copy of original and amended U.S. Form 4797 - Sales of Business Property;
  • Massachusetts Form 1 or 1-NR/PY, amended Schedule B and/or D;
  • Copy of U.S. Form 1040, amended Schedule D.

Long-term capital gains deduction

  • If Schedule B, Lines 11 and 26 are greater than "0." If line 11 shows a gain, enter 50% of line 11 minus 50% of losses in Lines 16 - 18 and 25., but not less than "0."

Massachusetts References:

Federal References:

  • I.R.C. §§ 1(h), (h)(2)(B); 121(a), (d)(9); 165(c); 1001; 1011; 1012 1221; 1231(a), (b); 1244; 1245; 1250
  • Military Family Relief Act of 2003 (Public Law 108-121)
  • Tax Relief Act of 1997, s. 311(e), Pub. L. No. 105-34 (the "Act") 

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