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A capital asset is any property you own and use for personal purposes or investment, such as:
For Massachusetts purposes, capital assets include:
For federal purposes, a capital asset is property you hold (connected with your trade or business or not), but does not include:
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:
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:
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.
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:
Cost basis of property - The amount paid in cash, debt obligations, or other property. This also includes amounts paid for miscellaneous items such as:
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:
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:
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.
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.
The Massachusetts adjusted basis is the initial cost minus depreciation. Massachusetts gain is the selling price minus Massachusetts adjusted basis.
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 usually gives the date of each of these distributions.
Include capital gain distributions in the gross dividend figure on Form 1099-DIV and separately state the amount 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.
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.
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:
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.
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:
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.
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:
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:
The basis adjustment provision may apply whether or not they automatically qualify for the installment sale treatment.
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:
You must pay this interest by following the calculation here.
You also need to pay an additional tax on the deferred gain from selling timeshares and residential lots if the sale meets certain criteria.
For property used in a trade or business (4797 property), include:
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:
Report on Massachusetts Schedule B:
When reporting disposing property you used in a trade or business, attach:
If you're a taxpayer:
You can choose to treat certain assets as if you sold and then reacquired them. These assets are:
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:
Otherwise, the maximum federal capital gains rate for your sales of long-term capital assets is 20%.
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:
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 (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.
Gains from selling investments which meet certain requirements are taxed at 3% instead of 5.2%. To qualify for the 3% rate:
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:
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: