Qualified 5 year gain
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Qualified 5 year gain Our club had a Five Year Capital Gain. It is listed on the Capital Gains and Losses Report available after the yearly distribution. This number does not show up on the 1065 or on the individual K-1s as a Qualified 5 year gain on line 4e(3). Why not ? Thanks, Ilze Ilze G Oredson wrote:
> This number does not show up on the 1065 or on the > individual K-1s as a Qualified 5 year gain on line 4e(3). > Why not ? I agree that this is confusing. Although you may have an entry shown as a Five Year Capital gain on the club's Capital Gains and Losses report, we are combining this value with Long Term Capital gain for 2001 taxes. Our interpretation of the IRS rules for Five Year gains is that the partnership must take a special election for investments purchased prior to 2001. The election involves reporting the gains for the investment as if you sold it and re-purchased it on Jan. 2 2001. You can find more information about Five Year gains and the special election here: http://www.fairmark.com/capgain/fiveyear.htm http://www.fairmark.com/capgain/dstop.htm If your club is interested in making the election, please contact support@bivio.com and we can give you the steps required to enter the transactions in bivio. Our software release this weekend should clear up the confusion by removing the Five Year gain from the Capital Gains and Losses report, except for the case where the amounts were received as a cash or reinvested distribution from a fund in which case they are fully qualified. Paul Moeller bivio, Inc. Paul: I find the fiveyear.htm URL applicable to what I am questioning. The dstop.htm is not what our club did or wishes to do, i.e. no interest in "making the election"... > http://www.fairmark.com/capgain/fiveyear.htm > http://www.fairmark.com/capgain/dstop.htm We acquired Home Depot stock on 8/29/1996 and sold it on 12/11/2001. That is longer than 5 years. The 2001 U.S. Return of Partnership IncomePackage 1065 state on p.23, left hand column, most of the way down... "Enter on line 4e(3) the gains (not losses) from the disposition of assets (...) held more than 5 years that are portfolio income included on line 12 of Schedule D." According to the fiveyear.htm URL article you cite, different tax rates would be applied to the capital gain depending upon each partner's tax situation. Have you had a tax accountant look at this. Or have you asked the IRS ? Thank you, ~Ilze Ilze G Oredson writes: > The 2001 U.S. Return of Partnership IncomePackage 1065 > state on p.23, left hand column, most of the way down... > "Enter on line 4e(3) the gains (not losses) from the > disposition of assets (...) held more than 5 years that are > portfolio income included on line 12 of Schedule D." The schedule D the instructions are more explicit: http://ftp.fedworld.gov/pub/irs-pdf/f1065sd.pdf "Partnerships may elect to treat certain assets held on January 1, 2001, as having been sold and then reacquired on the same date. The purpose of the election is to make future gain on the asset eligible for an 18% (instead of 20%) capital gain tax rate at the partner level. The 18% rate is applicable to the extent to gain would otherwise be taxed to the partner at 20% if the holding period of the asset begins after December 31, 2000, and the asset is held more than five years." In other words, the partnership cannot take advantage of the five-year capital gain rate until 2006. More importantly, the partnership must enter a deemed sale this year for assets which it wishes to be eligible for the 18% rate at the partner level. You may not enter deemed sale for a loss. You may enter the deemed sales yourself, and bivio will calculate your schedule D correctly. However, according to the scheduled D instructions you must "attach a statement to the return stating that the partnership is making an election under section 311 of the Taxpayer Relief Act of 1997 and listing the assets for which the election is being made." Please see the document for details on how to enter deemed sales and other restrictions including filing dates. I think part of the confusion is that the entity (investment club) must make the election, not the partner. > Have you had a tax accountant look at this. Or have you > asked the IRS ? We have discussed this at length with a tax accountant. Cheers, Rob Nagler bivio Inc. Disclaimer: statements are opinions expressed by bivio Customer Support and are not official statements from the IRS. These statements are not intended to replace professional tax or accounting advice. When in doubt, follow the advice of your local tax advisor or accountant who is familiar with your particular circumstances. Paul, You are handling this wrong, because you are addressing the wrong issue. This is not a deemed sale situation. The 5-year reduced capital gains rates apply NOW to any 5 year capital gain generated in 2001 which would normally be taxed at 10% (8% at reduced rate). The deemed sale election is only necessary to reset the holding period for potential 5-year capital gains which would be taxed at 20%. Partners who have not "filled" their 15% income bracket with regular income and who have 5-year capital gains through a partnership are entitled to an 8% capital gain rate up to the point their 15% bracket is filled. Their "qualifying" 5-year capital gains are to be reported on Sch K-1 line 4(e)3. This is not a partnership-level election. Ira Smilovitz Lakshmi Investments, LLC Paul Moeller wrote: > Ilze G Oredson wrote: > > This number does not show up on the 1065 or on the > > individual K-1s as a Qualified 5 year gain on line 4e(3). > > Why not ? > > I agree that this is confusing. Although you may have an entry shown > as a Five Year Capital gain on the club's Capital Gains and Losses > report, we are combining this value with Long Term Capital gain for > 2001 taxes. > > Our interpretation of the IRS rules for Five Year gains is that the > partnership must take a special election for investments purchased > prior to 2001. The election involves reporting the gains for the > investment as if you sold it and re-purchased it on Jan. 2 2001. You > can find more information about Five Year gains and the special > election here: > > http://www.fairmark.com/capgain/fiveyear.htm > http://www.fairmark.com/capgain/dstop.htm > > If your club is interested in making the election, please contact > support@bivio.com and we can give you the steps required to enter the > transactions in bivio. > > Our software release this weekend should clear up the confusion by > removing the Five Year gain from the Capital Gains and Losses report, > except for the case where the amounts were received as a cash or > reinvested distribution from a fund in which case they are fully > qualified. > > Paul Moeller > bivio, Inc. Ilze, You are absolutely correct. Your sale of HD "qualifies" for 5 year treatment. Whether it is taxed at 8% or 20% depends entirely on the specifics of each partner's individual tax return. The proportionate share of the 5-year gain should be shown on Sch. K-1, (but not segregated on Form 1065 Sch D). When each partner completes her/his Form 1040 Sch D, s/he will determine the appropriate tax rate through the various worksheets and tax tables. If the bivio generated Form 1065 and schedules don't reflect this then they are in error. Ira Smilovitz Lakshmi Investments, LLC Ilze G Oredson wrote: > Paul: > I find the fiveyear.htm URL applicable to what I am > questioning. The dstop.htm is not what our club did or > wishes to do, i.e. no interest in "making the election"... > > > http://www.fairmark.com/capgain/fiveyear.htm > > http://www.fairmark.com/capgain/dstop.htm > > We acquired Home Depot stock on 8/29/1996 and sold it on > 12/11/2001. That is longer than 5 years. > > The 2001 U.S. Return of Partnership IncomePackage 1065 > state on p.23, left hand column, most of the way down... > "Enter on line 4e(3) the gains (not losses) from the > disposition of assets (...) held more than 5 years that are > portfolio income included on line 12 of Schedule D." > > According to the fiveyear.htm URL article you cite, > different tax rates would be applied to the capital gain > depending upon each partner's tax situation. > > Have you had a tax accountant look at this. Or have you > asked the IRS ? > > Thank you, > ~Ilze Ira Smilovitz wrote: > Ilze, > > You are absolutely correct. Your sale of HD "qualifies" for > 5 year treatment. > > If the bivio generated Form 1065 and schedules don't reflect > this then they are in error. > At this time I totally agree with Ira Smilovitz. I do not agree with Paul Moeller and Ron Nagler. I do not think they are understanding the defined problem. Thus I will say that the currently generated Bivio Form 1065 and K-1s are incorrect for our club's 2001 tax year. Ilze Oredson Rob, You're addressing the wrong issue. 5-year capital gains rates are a reality NOW for taxpayers in the 15% tax bracket. It's only taxpayers in higher brackets who have to wait until 2006 and who need to consider the deemed sale election. The only way for 15% bracket taxpayers to know that they have qualifying gains is through the use of line 4(e)3 on Schedule K-1. Why the IRS has chosen not to segregate 5-year gains on Schedule D is beyond me, but it's not the only stupid thing they've done this year on Schedule D and the related Schedule K-1 instructions. If you read the sentence in the Schedule K-1 instructions just before the one Ilze quoted, you are instructed to include on line 4(e)2 [28% gains] both line 11 from Sch. D and any 28% gain on Sch. D line 12. If you read the instructions for Sch. D columns (f) and (g) -- col (f) contains all long-term gains/losses. Col (g) contains those long-term gains which are subject to 28% capital gains tax. The instructions for Sch. K/K-1 would have you double-count the 28% gains. I've communicated this to the IRS and they acknowledge the potential confusion. If the bivio generated Form 1065 Sch K/K-1 is not reporting 5-year capital gains on line 4(e)3, I would suggest you get your programmers back to work. They're not done yet. Ira Smilovitz Lakshmi Investments, LLC Rob Nagler wrote: > Ilze G Oredson writes: > > The 2001 U.S. Return of Partnership IncomePackage 1065 > > state on p.23, left hand column, most of the way down... > > "Enter on line 4e(3) the gains (not losses) from the > > disposition of assets (...) held more than 5 years that are > > portfolio income included on line 12 of Schedule D." > > The schedule D the instructions are more explicit: > > http://ftp.fedworld.gov/pub/irs-pdf/f1065sd.pdf > > "Partnerships may elect to treat certain assets held on January 1, > 2001, as having been sold and then reacquired on the same date. The > purpose of the election is to make future gain on the asset eligible > for an 18% (instead of 20%) capital gain tax rate at the > partner level. The 18% rate is applicable to the extent to gain would > otherwise be taxed to the partner at 20% if the holding period of the > asset begins after December 31, 2000, and the asset is held more than > five years." > > In other words, the partnership cannot take advantage of the five-year > capital gain rate until 2006. More importantly, the partnership must > enter a deemed sale this year for assets which it wishes to be > eligible for the 18% rate at the partner level. You may not enter > deemed sale for a loss. You may enter the deemed sales yourself, and > bivio will calculate your schedule D correctly. However, according to > the scheduled D instructions you must "attach a statement to the > return stating that the partnership is making an election under > section 311 of the Taxpayer Relief Act of 1997 and listing the assets > for which the election is being made." Please see the document for > details on how to enter deemed sales and other restrictions including > filing dates. > > I think part of the confusion is that the entity (investment club) > must make the election, not the partner. > > > Have you had a tax accountant look at this. Or have you > > asked the IRS ? > > We have discussed this at length with a tax accountant. > > Cheers, > Rob Nagler > bivio Inc. > > Disclaimer: statements are opinions expressed by bivio Customer > Support and are not official statements from the IRS. These > statements are not intended to replace professional tax or > accounting advice. When in doubt, follow the advice of your > local tax advisor or accountant who is familiar with your > particular circumstances. Ira Smilovitz writes: > return. The proportionate share of the 5-year gain should be > shown on Sch. K-1, (but not segregated on Form 1065 Sch D). > When each partner completes her/his Form 1040 Sch D, s/he > will determine the appropriate tax rate through the various > worksheets and tax tables. To be clear, the returns we're generating are perfectly legal. We've taken a conservative approach after consultation with our tax accountant. We are discussing this internally. We will keep you posted via this message board. Cheers, Rob Nagler bivio Inc. Rob, If I've implied in any way that the current returns are illegal, please accept my apology. That was certainly not my intention. I believe the returns are wrong, but not illegal. At worst, some partners may pay more tax than they are required to pay. Ira Smilovitz Lakshmi Investments, LLC Rob Nagler wrote: > Ira Smilovitz writes: > > return. The proportionate share of the 5-year gain should be > > shown on Sch. K-1, (but not segregated on Form 1065 Sch D). > > When each partner completes her/his Form 1040 Sch D, s/he > > will determine the appropriate tax rate through the various > > worksheets and tax tables. > > > To be clear, the returns we're generating are perfectly legal. We've > taken a conservative approach after consultation with our tax > accountant. > > We are discussing this internally. We will keep you posted via this > message board. > > Cheers, > Rob Nagler > bivio Inc. We will be fixing the five-year capital gains problem this week. There will be a midweek release to correct problem. I apologize to Ilze and Ira. You are correct. The five-year capital gains should always be reported on the K1s. The 1040 schedule D worksheet automatically excludes the gains for anybody in the higher brackets. We originally were concerned that club members (most of whom do not qualify for five-year gains) would report the gains, and end up with potential audit problems. It is also important for clubs which wish to take advantage of qualified five-year capital gains for all members in 2006 to enter deemed sales this year before they file their taxes. Please read the previous post on the subject: http://www.bivio.com/club_cafe/mail-msg?t=23828500003 Again, thank you Ira and Ilze for your persistence in helping us understand the problem. Cheers, Rob Nagler bivio Inc. Just wanted to clarify Rob's post. If your club had a 5+ year capital gain, AND, one or more of your club members is in the 15% or lower tax bracket, then you should use the corrected bivio forms when they become available. Otherwise, the current forms are just fine. --Ion Thank you Bivio for fixing the reporting of "five-year capital gains" on the K-1s. Some years there have been mid length capital gains ! This year there are five+ year gains. Who knows what there may be next year. Tax laws keep changing and thus READING and filling out, as correctly as possible, the forms is a requirement for least possible tax consequences. Thus the following paragraph does not sit well. As I am the one who is signing my name to the 1065 for our club, I want to be able to explain, and believe, that what is on the forms is correct. Rob Nagler wrote: > >The 1040 schedule D worksheet automatically excludes the gains for >anybody in the higher brackets. We originally were concerned that >club members (most of whom do not qualify for five-year gains) would >report the gains, and end up with potential audit problems. > ---------- Ion Yadigaroglu wrote: > > If your club had a 5+ year capital gain, AND, one or more of > your club members is in the 15% or lower tax bracket, then > you should use the corrected bivio forms when they become > available. > Our club has 20 members in various economic stratas - retired, working, part time etc. I do not care to ask them what their tax brackets are. Correctly filled out K-1 forms solve the problem. Guess I'm a hard core perfectionist.... Keep up the good work Bivio !!! Ilze Oredson |
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