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.


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