Administrative Rules of Montana
Department 42 - REVENUE
Chapter 42.15 - INCOME TAX
Subchapter 42.15.2 - Montana Additions and Subtractions
Rule 42.15.218 - CAPITAL GAIN EXCLUSION FOR PRE-1987 SALES

(1) Adjusted gross income for tax years beginning after December 31, 1986, does not include 40% of the deferred capital gain on assets sold or exchanged on or before December 31, 1986.

(2) The capital gain exclusion applies only to the deferred gain on installment sales of items considered capital assets under Subchapter P, Parts I, II, III and IV of Chapter I of the IRC as it read on December 31, 1986.

(3) The capital gain from the sale or exchange of a capital asset is the sales price or fair market value less the taxpayer's adjusted basis in the asset as determined for federal purposes prior to December 31, 1986.

(4) The deferred capital gain exclusion applies only after the capital gain is netted against capital losses as set forth in Subchapter P of Chapter I of the IRC as of December 31, 1986.

(5) When the taxpayer has both pre-1987 deferred and other gains, the prorated share of net capital gain that is eligible for the exclusion is the installment sale deferred capital gain divided by the total capital gain times the net capital gain. For example, when there is $30,000 of deferred capital gain, $70,000 of other capital gain and $40,000 of capital losses the prorated share of the net capital gain is $18,000 ($30,000 divided by $100,000 times $60,000).

(6) The deferred capital gain is the total amount of principal payments received in one year times the gross profit percentage. The gross profit percentage is the sales price less the seller's adjusted basis of the capital asset divided by the contract price of the installment sale.

(7) When married filing separate returns, the deferred capital gain exclusion may be divided equally when there is jointly owned property involved. Otherwise, the exclusion must be taken by the person who owned the property.