A capital asset is any property you own and use for personal purposes or investment, such as:
- A house you or your family own and use
- 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
For Massachusetts purposes, capital assets include:
- All assets that are capital assets according to I.R.C. Section 1221, such as stocks and bonds
- Depreciable property used in a trade or business, regardless of holding period requirements
- Depreciable property connected to a for-profit trade or business or transaction, regardless of holding period requirements
For federal purposes, a capital asset is property you hold (connected with your trade or business or not), 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 your trade or business
- Notes or accounts receivable acquired in the ordinary course of trade or business for services rendered or from selling stock in trade or property held for sale in the ordinary course of business
- Depreciable business property
- Real property used in your trade or business
- A copyright, a literary, musical or artistic composition you created
- U.S. 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
Report a gain from selling or exchanging capital assets on Massachusetts Schedule D, Part I or II unless specifically excluded (such as personal residence exclusion amounts).
If you received a Form 1099-S due to having a loss from selling or exchanging real estate held for personal use, report the transaction on Schedule D even though the loss isn't deductible. For example, if you have a loss on selling a vacation home, report the loss amount on Line 1 (short-term) or Line 8 (long-term). Complete columns (a) through (e), but enter 0 in column (f) since the loss is not deductible.
Massachusetts doesn't allow federal treatment for ordinary income or loss for the following:
- Ordinary gain or loss from selling I.R.C. Section 1231 assets held for less than 1 year
- Recapturing depreciation as ordinary income from selling I.R.C. Section 1231 assets
- Ordinary loss from selling I.R.C. Section 1231 assets held for more than 1 year
- Ordinary loss treatment from selling small business (I.R.C. Section 1244) stock
Adjusted basis of property - Initial cost minus depreciation, plus capital improvements.
Capital improvements - The cost of making improvements to property if they increase the property's value, lengthen its life, or adapt it to a different use. For example:
- Adding a new room
- New plumbing or wiring
- Installing a new roof
Add capital improvements to the property's cost.
Depreciation - If property is used to produce income, such as rent, the owner can recover some or all of the property cost through tax deductions. This is done by "depreciating" the property, which means reducing a part of the property cost each year. Depreciation reduces the property's basis.
Selling price (amount realized) - The amount you received upon selling or exchanging property, minus the cost to transfer the property. The amount received includes cash and the fair market value of any property or services received, plus any debt the buyer took on.
Gain - If the amount you got from selling the property is more than the adjusted basis of the transferred property, the difference is a gain.
Loss - If the adjusted basis of the transferred property is more than the amount you got for it, the difference is a loss.
Capital gain or loss - The gain or loss on selling or exchanging a capital asset while using the Massachusetts adjusted basis.
- Long-term capital gain or loss: The property was held for more than 1 year. Long-term capital gains, except gains on collectibles and pre-1996 installment sales, are taxed at 5.2% on MA Schedule D. Gains from collectibles and pre-1996 installment sales are taxed at 12% on MA Schedule B.
You're allowed a 50% deduction for long-term capital gains from selling collectibles and pre-1996 installment sales that you report in Part 2 of MA Schedule B.
If Schedule B, 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).
- Short-term capital gain or loss: The property was held for 1 year or less. Short-term gains and gains from collectibles are taxed at 12% on MA Schedule B.
Prior year gain or loss - A sale of property that happened in a previous taxable year.
Current gain or loss - Gain or loss from selling property that happened in the current taxable year.
Ordinary gain or loss - Gain or loss from selling or exchanging assets other than capital assets.
Federally, gains and losses from selling or exchanging certain assets are treated favorably. The gains are given capital asset treatment, and the losses are given ordinary treatment. These specific rules are for federal purposes only. Massachusetts does not allow this special federal treatment when it comes to Massachusetts purposes.
Collectible - Any capital asset as defined in I.R.C. Section 408(m), which includes:
- Works of art
- Alcoholic beverages
- Certain coins
- Any other items treated as collectibles for federal tax purposes
Cost basis of property - The amount paid in cash, debt obligations, or other property. This also includes amounts paid for miscellaneous items such as:
- Excise taxes
- Installation and testing charges
- Freight charges to obtain the property
Fair market value - The price at which the property is transferred between a buyer and a seller, as long as neither is forced to buy or sell and both have reasonable knowledge of all the relevant facts.
Holding period of sold or exchanged capital assets - How long a capital asset is held for. The Massachusetts holding period is generally the same as the holding period for federal tax purposes. However, for Massachusetts purposes, a capital asset you got before January 1, 1996 is considered gotten on the later of:
- January 1, 1995 or
- The date you actually got it
Sale of exchange - Any sale or exchange that is obligated or involuntary conversion for federal tax purposes, to the extent that the gain or loss on the disposition or conversion affects your federal income tax liability.
A loss from the sale of exchange of capital assets:
- Held for investment is deductible
- Held for personal use is not deductible unless the loss is from a casualty, such as a fire or hurricane or a theft
Adjustments to Massachusetts capital gain or loss
Massachusetts adjusts federal basis in certain situations. The most common basis adjustment reflects the difference between Massachusetts and federal depreciation rules.
The initial basis of a capital asset (such as real estate) is generally the asset's cost. Then, decrease the initial basis by depreciation deductions. Since Massachusetts depreciation rules differ 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 an asset is sold, the gain or loss is generally 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, adjust for the difference in basis to get the correct Massachusetts gain or loss.
Depreciation effects on basis
When Massachusetts depreciation is different from federal depreciation for any depreciable asset, annually adjust the asset's basis for Massachusetts tax purposes.
For both the corporate excise and personal income tax, when getting rid of depreciated property, calculate any gain or loss using the Massachusetts method. Adjust federal gains or losses to reflect the disallowance of bonus depreciation in the year it was disposed of.
As a result of the difference in basis, the gain or loss you report on your federal tax return will be different from what you report on your Massachusetts tax return.
Reporting on Massachusetts Schedule D
- Line 3: Take it from what you reported on federal Schedule D, Line 11.
- Line 8: Adjustment to reflect the difference in depreciation deductions you claimed before the sale.
- Line 9: Adjustment to reflect unallowed bonus depreciation.
The Massachusetts adjusted basis is the initial cost minus depreciation. Massachusetts gain is the selling price minus Massachusetts adjusted basis.
Additional Resources for Adjustments to Massachusetts capital gain or loss
Capital gain distribution
A capital gain distribution is your share of a gain that is realized by a mutual fund or similar entity. Generally, a mutual fund makes 2 capital gain distributions during the year, and the Form 1099 that you receive usually provides 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 Form 1099.
Report your capital gain distributions directly on U.S. Schedule D (Line 13) and on Massachusetts Schedule D (Line 5). If you don't fill out U.S. Schedule D, report the amount directly on U.S. Form 1040 (Line 13).
Report dividends declared and payable during a tax year, even if you don't receive the dividend amounts 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 selling a principal residence
If you're eligible for excluding any part of a gain on selling a principal residence for federal income tax purposes, you may also exclude the same part of the gain for Massachusetts income tax purposes as well.
The maximum amount of gain from selling a principal residence that you can exclude is:
- $250,000 for a single, head of household, or married separate filer
- $500,000 for married joint filer
You may repeatedly qualify for this exclusion if the sale is for a principal residence you owned and used for at least 2 of the 5 years before the sale.
Only the part of a multiple residence (i.e. 1 unit of a 2-family residence) that is used as a personal residence qualifies for this exclusion.
Ownership test suspension for members of the uniformed or foreign services
You can also exclude the gain from selling a principal residence from your Massachusetts gross income if you or your spouse served on qualified extended duty as a member of the U.S. uniformed services or foreign service, or as an employee of the intelligence community.
You can suspend, for a maximum of 10 years, the 5-year test for ownership and use during any period you or your spouse serves outside the U.S. either as:
- An employee of the Peace Corps on qualified official extended duty, or
- An enrolled volunteer or volunteer leader of the Peace Corps
This means that you (or your spouse) may still be able to meet the 2-year use test even if, because of service, you did not actually live in the home for at least the required 2 years during the 5-year period ending on the date you sold the property.
You can't suspend the 5-year test period for more than 1 property at a time. You can take back your choice to suspend the 5-year period anytime. If you use the entire 10-year suspension period and don't live in your house again before selling it, the 5-year test period would start 15 years before the date you sold the property.
Documents to submit with abatement/amended tax return
- Copy of U.S. Form 2119 - Sale of Your Home (for sales before 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
Additional Resources for Gain from selling a principal residence
Reporting a gain on installment sales
As a seller, you may make sales with the installment method (installments), which means that the buyer will pay part of or the whole selling price in more than 1 year. If you, instead of a loan or mortgage from a bank, finance the buyer's investment property purchase, you made an installment sale.
Generally, installments include both principal and interest. You recognize gain on an installment sale as you receive the payments. Report the interest separately.
You can choose to treat your installment sales by following either:
- Federal treatment, or
- Massachusetts treatment
If you choose to follow federal treatment and your Massachusetts gain for the entire transaction is less than $1 million, you will automatically follow Massachusetts installment sale treatment.
If you choose to follow federal treatment and your Massachusetts gain for the entire transaction is $1 million or more, you need to file a separate Massachusetts sale election and post security.
To make an election and to post security, 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
For flow-through entities, the $1 million threshold applies to taxable (under Chapter 62) gains recognized by individual shareholders, beneficiaries, etc. These taxpayers:
- Cannot separately choose to not follow Massachusetts installment sale treatment, and
- Do not have to post security
The basis adjustment provision may apply whether or not they automatically qualify for the installment sale treatment.
Large installment sales
You need to pay interest on Massachusetts deferred tax of certain installment sales. If you've deferred the gain (and the tax connected to that gain) on non-dealer installment sales with:
- A sales price of over $150,000, and
- More than $5 million in total face amount (original amount due, without interest) of installment obligations that came up during the tax year and were not paid at the end of the tax year
You also need to pay an additional tax on the deferred gain from selling timeshares and residential lots if the sale meets certain criteria.
Additional Resources for Reporting a gain on installment sales
Property used in a trade or business (U.S. Form 4797)
For property used in a trade or business (4797 property), include:
- Capital assets under the Internal Revenue Code such as stocks and bonds
- Depreciable property used in a trade or business regardless of holding period requirements, and
- Depreciable property connected to a for-profit trade or business or transaction regardless of holding period requirements
Federal treatment of ordinary gain or loss does not apply to Massachusetts. Do not treat certain gains or losses reported on U.S. Form 4797 as ordinary gains and losses.
Report on Massachusetts Schedule D:
- Capital gains from selling 4797 property held for more than 1 year (take from U.S. Form 4797 - Part I)
- Recapture of depreciation as ordinary gain (take from U.S. Form 4797 - Part II)
- Ordinary loss from selling 4797 property held for more than 1 year (take from U.S. Form 4797 - Part II)
Report on Massachusetts Schedule B:
- Gains on selling 4797 property held for 1 year or less (take from U.S. Form 4797 - Part II)
- Losses on selling 4797 property held for 1 year or less (take from U.S. Form 4797 - Part II)
Documents to submit with abatement/amended tax return
When reporting disposing property you used in a trade or business, attach:
- 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
Additional Resources for Property used in a trade or business (U.S. Form 4797)
If you're a taxpayer:
- In a marginal federal tax bracket higher than 15%, and
- Not a corporation
You can choose to treat certain assets as if you sold and then reacquired them. These assets are:
- Readily tradeable stock - Stock that is readily tradeable on an established securities market. This stock is a capital asset you held on January 1, 2001, and did not sell before the next business day. This is treated as having been sold on the next business day for its closing market price on that date, and as having been reacquired on that date for the same amount. The beginning holding period for reacquired stock is January 2, 2001.
- Any other capital asset or property used in a trade or business that you held on January 1, 2001. This is treated as having been sold for its fair market value that day, and as having been reacquired that day for the same amount. The beginning holding period for these assets is January 1, 2001.
Treating those assets this way makes any future gain on selling your capital assets eligible for the allowed 18% capital gains tax rate. However, the 18% tax rate only applies if:
- The holding period of the asset begins on or after January 1, 2001, and
- You've held the asset for more than 5 years
Otherwise, the maximum federal capital gains rate for your sales of long-term capital assets is 20%.
Federal treatment of deemed sales
Any gain from the deemed sale is taxed at the federal rate. Calculate the gain by taking the original purchase price and then subtracting its fair market value on the sale date.
Any loss from the deemed sale is not recognized or preserved through a basis adjustment for any taxable year. Whether the sale is a gain or a loss, the basis of the reacquired asset is its:
- Closing market price on the sale date, or
- Fair market value on the sale date
Massachusetts treatment of deemed sales
Any gain from a deemed sale is not taxable. Though the gain is federally recognized, it is not federal gross income. Therefore, do not include it in your Massachusetts gross income.
Any loss from a deemed sale is not allowed. Losses are generally only taken into account if they're federally recognized.
The Massachusetts initial basis for a reacquired asset is the date you first got the asset. Massachusetts does not follow Section 311(e) of the Tax Relief Act of 1997.
Small business stock
Small business stock (I.R.C. section 1244 stock) is defined as a capital asset, which means any gain or loss in small business stock is treated as selling or exchanging a capital asset.
Capital gains on small business stock
Gains from selling investments which meet certain requirements are taxed at 3% instead of 5.2%. To qualify for the 3% rate:
- Investments must have been made within 5 years of the corporation's date of incorporation
- Investments must be in stock that generally defined as "qualified small business stock" under I.R.C. section 1202 (c), other than the requirement that the stock be stock of a C corporation, and
- The stock must be held for 3 years or more, and the investments must be in a corporation which:
- Is legally based in Massachusetts
- Is incorporated on or after January 1, 2011
- Has less than $50 million in assets at the time of investment, and
- Meets certain "active business" requirements. These are:
- You must have acquired the stock at its original issue (directly or through an underwriter) in exchange for money, property, or as compensation for services you provided the corporation with
- During your entire holding period, at least 80% of the corporation's assets' value must be used in actively conducting 1 or more qualified businesses
Capital losses on small business stock
For federal purposes, losses on selling or exchanging small business stock issued to an individual or to a partnership would normally be treated as an ordinary loss. The maximum amount you can deduct as an ordinary loss is:
- $50,000 (individual tax returns), or
- $100,000 (if filing joint)
The rest of the loss is treated as a capital loss.
For Massachusetts purposes, treat small business stock losses as capital losses, because the stock itself is a capital asset. Income that comes from the same class of property must be taxed at the same rate, so you can't treat a loss as both ordinary and capital.
If you're a shareholder, report these losses on:
- MA Schedule D (if you held the stock for more than 1 year), or
- MA Schedule B (if you held the stock for less than 1 year)