Rollover of Gains on the Sale of Small
Business Stock (Section 1045)
If you hold small business stock for more than six months,
then sell the stock at a gain, you may defer (or roll
over) the gain by reinvesting the proceeds, within 60
days, into new small business stock. The rolled-over gain
will reduce the basis of the new stock. And according
to Section 1045 any amounts not rolled over will be subject
to tax to the extent of the gain realized.
In order to qualify, the old and the new stocks must
meet the section 1202
definition of small business stock. In addition, the
new stock must meet the active business requirement for
the six-month period following its purchase. If all of
the requirements are met, the holding period of the new
stock, for all purposes except the six-month active business
test, will include the holding period of the old stock.
The following example illustrates the rollover of gain:
In April 2001, Sharon invested $100,000 in ABC Company,
a manufacturer of airplane parts, which is a qualified
small business. In January, 2002, Sharon sold the ABC
company stock for $135,000. She purchased XYZ stock on
February 10, 2002 for $130,000. XYZ Company is a manufacturer
of computer equipment and meets the small business requirements
of Internal Revenue code section 1202. XYZ Company is
involved in the active conduct of business for the six-months
after Sharon purchased the stock.
Sharon met all of the requirements; sold small business
stock which she held for at least 6 months, repurchased
small business stock within 60 days, and (XYZ Company)
met the active business requirement for 6 months after
the date of purchase. Because she met all of the requirements,
Sharon can roll over a portion of the gain from the sale
of ABC Company. Sharon must recognize $5,000 of the gain
on sale of ABC stock, the amount that was not rolled over.
The $30,000 rolled over gain reduces the basis of XYZ
Company stock. The holding period of the XYZ stock is
deemed to begin in April 2001, the date of the purchase
of the ABC stock.
By Intuit Inc.