Excluded Gain

Excluded Gain

Excluded gain is gain realized on a sale that will never be taxed. The most common situtation in which this occurs is for qualifying sales of principal residences. Other gains that may be excluded in whole or in part are gains on section 1202 stock, gains on qualified small business stock, and gains on certain property owned by businesses operating in renewal communities.
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As a result, taxpayers subject to the AMT generally did not realize much, if any, tax benefit using the QSBS exclusion, as the net income tax at a 28% tax rate on the portion of the QSBS gain included for federal tax purposes, versus the AMT rate on a portion of excluded gain being added back, was substantially similar on a net basis.
Furthermore, none of the excluded gain is subject to the alternative minimum tax.
The IRS concluded in a Chief Counsel Advice memo (CCA) that excluded gain from the sale of a former principal residence that was converted to rental property is not an item of passive activity gross income and, as such, does not offset any suspended passive losses upon disposition of the property.
MAGI does not include tax-exempt income, excluded gain on the sale of a principal residence, or veteran's benefits.
In addition, the taxpayer cannot have excluded gain on the sale of another principal residence within two years.
In determining the replacement business property's basis, excluded gain is treated as gain recognized by the taxpayer.
The following policy changes were deemed necessary: (1) help the socially excluded gain social inclusion by improving their conditions; (2) use education and training to prevent social exclusion; (3) prepare social policies to protect people from and prevent social exclusion; (4) improve existing policies on social exclusion; and (5) plan concrete measures to combat social exclusion.
The excluded gain under section 121 can be included in the basis of the replacement property.
Further, a portion of the excluded gain is a tax preference item, so the benefit of the exclusion may be further reduced; for QSB stock sales or exchanges after May 5, 2003, 7% of the excluded gain is deemed a tax preference item and added back to taxable income in calculating alternative minimum taxable income.
For purposes of IRC section 1034, this permits the taxpayer to retain that portion of the proceeds representing the excluded gain under IRC section 121 without reinvestment in qualifying replacement property.
121(c), a reduced maximum exclusion is available if a taxpayer sold or exchanged property owned and used as his principal residence for less than two of the preceding five years or excluded gain on a principal residence within the preceding two years.