As a general rule, dispositions of capital property give rise to a capital gain or a capital loss. One-half of a capital gain is included in income as a taxable capital gain. One-half of a capital loss is an allowable capital loss, which serves to offset taxable capital gains but normally does not offset other sources of income.
The rules are somewhat different for dispositions of personal-use property (PUP), at least with respect to losses. In general terms, PUP is defined as property that is used by you primarily for personal purposes rather than income-earning purposes. It can include property such as your home, furniture and appliances, your car, and so on.
Losses from pup
Except for “listed personal property” (described below), any losses on the disposition of PUP are deemed to be zero. In other words, there is no capital loss allowed on the disposition of PUP. Therefore, for example, if you hold a yard sale and sell personal items such as furniture, clothing, toys, or bicycles at a loss, you cannot claim the loss for income tax purposes.
On the other hand, one-half of gains from the disposition from PUP are included in your income as taxable capital gains from PUP. The only losses that can be claimed, and only against taxable capital gains from listed personal property (LPP), are one-half of losses sustained from the disposition of LPP, which consists of the following:
- Artwork,
- Rare books or folios,
- Jewelry,
- Stamps, and
- Coins.
If your losses from LPP in a year exceed your gains from LPP in a year, half of the excess losses can be carried back up to three years or forward seven years, but only to offset taxable capital gains from LPP in those years. Otherwise, the losses cannot be used for income tax purposes.
Minimum cost and proceeds
A special rule provides that any PUP that you sell is deemed to have a minimum cost of $1,000 and minimum proceeds of disposition of $1,000. This rule is meant to simplify record-keeping and tax reporting in respect of relatively nominal gains and losses.
Example
During this year, John sold a painting for $1,500. His cost of the painting was $800.
He also sold a sculpture for $800. His cost of the sculpture was $1,100.
Lastly, he sold his dining room table for $900. His cost of the table was $2,000.
His gain from the painting will be $500, (that is, $1,500 minus the minimum cost of $1,000), and his loss from the sculpture will be $100 (that is, $1,000 minus $1,100). Half of his $400 net gain from the properties, or $200, will be included in his income.
The loss from the dining room table is denied because it is not listed personal property.