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Don, the owner of Watt Inc
Don, the owner of Watt Inc., has a building that he bought for $2,500,000. It has depreciated by $350,000. Now Don wants to sell it for $4,000,000. He has heard about ordinary losses. He has heard about capital losses. Unfortunately, Don does not know the difference between these two types of losses. To add to the confusion, he doesn't know what the difference is between a realized and a recognized loss. How would you explain these concepts to Don? What type of advice would you offer to him and did any changes brought about by the Tax Cuts and Jobs Act impact your advice?
Expert Solution
Capital losses:
These type of losses results when you sell a capital asset, such as stocks and bonds, for less than your cost.
Ordinary losses:
These losses occurs from the normal operations of a business when expenses exceed income.
A loss is realized instantly after we sell an asset for a loss. It is received when it may be applied against our taxes. Most sales create a realized and recognized loss at the same time, instantly after the sale. The IRS delays the tax impact of certain transactions.
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