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Definition and Example of Actual Cash Value

Actual cash value (ACV) is how an insurance company measures a property’s worth at a given moment in time. It accounts for depreciation. You may come across the term if you make a car insurance claim, or a claim on your homeowner’s policy.

Some policies use replacement cost instead of ACV to calculate your payout, but you must select this provision on your policy. Otherwise, ACV is the amount of money your insurer will pay if your car or home is damaged beyond repair.

If you total your car, the payout won’t be the same amount as what you paid for it. It will be for how much the vehicle was worth at the time of the accident. Your car is a depreciating asset. It loses value over time.

• Alternate name: Market value
• Acronym: stroke

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Actual cash value is the estimated value of what your car (or other asset) would be worth on the open market at a particular point in time.

How Does Actual Cash Value Work?

Actual cash value is calculated by taking the replacement cost of the insured item (how much it would cost to replace it in full at market price) and subtracting depreciation due to age and the wear and tear that builds up after purchase.

Your insurer will figure out whether your car is a total loss by comparing its value to the estimated cost of repairs. It will be a total loss if the cost to return it to its pre-damage condition exceeds the value of the car.

The threshold for a total loss occurs at a certain percentage of its fair market value, and that can vary by state. For example, your car would be a total loss in Kansas or New York if the cost to repair it were 75% of its value, but the threshold is only 50% in Iowa. Then there are states like Texas where a car must lose 100 % of its fair market value to count as a total loss. Your insurer will pay you the car’s fair market value minus any deductible in your contract in that case.

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The claim will be paid to the lender or lienholder if you still have money on the car and it’s a total loss.

How Much Value Is Lost Over Time?

A number of factors are used to figure out how much depreciation has occurred. They will vary, based on your carrier and your contract, but they often include:

• Pre-loss condition (the state your car was in before the damage)
• Mileage
• Add-ons and upgrades
• Recent sale prices of cars like yours in the same city
• “Salvage value” (the price that its parts and metal could fetch on resale)

Each insurer uses its own system to measure total loss payouts. They don’t use Kelley Blue Book to figure out these numbers, but they may use a third-party tool or resource. You can still get a ballpark figure of what you might receive by using Kelley Blue Book to help you estimate the value of your car.

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You may want to opt for a replacement cost policy instead of one that uses ACV if you own an RV. It’s common for RV awnings to suffer damage from weather, sun, and wear over time.

ACV and Gap Insurance

ACV can become more complex if you financed the purchase of your car and haven’t paid it off yet. The ACV payout might not cover what you still owe your lender. Gap insurance addresses this issue. It helps you cover the “gap” between what you get as payout and what you owe.

You may want to look into buying gap insurance if you plan to finance a new car for 60 months or longer, if you’re putting less than 20% down, or if you’re leasing your car. Many people take their chances to avoid the extra monthly bill for this type of insurance. You might want to set aside the money in an emergency fund to cover the difference between the car’s value and your loan balance instead.

Current Cash Value vs. Replacement Cost

Current Cash Value vs. Replacement Cost
Current Cash Value	Replacement Cost
Lower premium each month.	Higher premium each month.
Payouts take deflation into account.	Payouts will cover cost to replace.

Unlike ACV, replacement-cost payouts give you the money necessary to replace your car or home or another insured item, at least to a degree.

• Cars: You’ll be able to buy a new car with the payout if your car is totaled but you have replacement cost coverage.
• Homes: The replacement cost will be set at a dollar value. You’ll receive $250,000 that you can use to rebuild your home if it crumbles to the ground, and your contract is set at $250,000.

The tradeoff with replacement cost coverage is that it costs more in premiums. You might opt ​​for a current cash value plan if you want to save money now. However, a replacement cost policy could be wise if you can afford higher costs now and want to ensure that you won’t need to dip into savings in case of a tragic event later.

It’s always wise to review your options, no matter which type of insurance you choose. Read the contract in full to make sure you’re covered in the way you expect.

Key Takeaways

• “Actual cash value” is an insurance industry term for determining the value of an insured item after taking any depreciating factors into account.
• Insurers have their own methods to measure current cash value. Factors include mileage, age, and add-ons for cars.
• Actual cash value is not the same as replacement cost, which covers the cost to replace the insured item if it’s totaled.

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Definition and Example of Tax-Loss Harvesting

Tax-loss harvesting can be valuable to an individual who invests in taxable brokerage accounts, as a means of either reducing or eliminating capital gains or reducing ordinary taxable income. The strategy isn’t appropriate for tax-deferred accounts like 401(k) or IRA accounts, because the original investment and earnings already grow tax-free in those accounts.

It’s all about balancing gains with losses. A capital gain occurs when you sell a security like a mutual fund or ETF for more than its purchase price. You would incur a capital loss if you were to sell an asset for a lower price than that at which you bought it. You don’t truly realize the gain or loss on any security as a taxable event until you sell it.

You’ll owe capital gains tax if you have a gain. Long-term capital gains on securities that are held for over one year are taxed at lower rates. A maximum rate of 20% applies, but most taxpayers will pay zero in capital gains tax or a 15% rate.

You’ll have a short-term capital gain if you sell a security you’ve held for one year or less. These are taxed at higher ordinary income tax rates.

How Tax-Loss Harvesting Works

Suppose you invested $1,000 in Fund A and $1,000 in Fund B two years ago. Fund A is now worth $1,500, and Fund B is worth $500. You’ll realize a $500 capital gain on Fund A and a $500 capital loss on Fund B when you sell. The gain and loss would offset each other, so you wouldn’t owe any tax.

Now suppose that you invested $6,000 each in Fund A and Fund B, but Fund A is worth $7,000 now, and Fund B is worth $2,000. You would have a capital gain of $1,000 and a loss of $4,000. This would result in a net loss of $3,000. You wouldn’t owe any tax on the gain. You could also reduce your taxable income by that $3,000.

What It Means for Individual Investors

Tax-loss harvesting isn’t without its potential pitfalls:

• Be aware of the “wash-sale” rule. Some investors like to buy back the same fund that they earlier harvested or sold, but the IRS rule surrounding wash sales stipulates that you can’t deduct the loss if you sell a security at a loss and buy a “substantially identical” security within 30 days before or after the sale. An exception applies if you incurred it in the course of doing ordinary business.
• Don’t confuse tax-loss harvesting with capital gain distributions, which are those that a mutual fund pays from its net realized long-term capital gains. You can use losses to offset these capital gains distributions, but you can’t use them to offset distributions of net realized short-term capital gains. These are treated as ordinary dividends rather than capital gains.
• A wise investor can also reduce taxes in a regular brokerage account by reducing income from dividend-paying mutual funds and taxes from capital gains distributions through a strategy called “asset location.” You can place tax-efficient investments that generate little to no income within taxable accounts.
• Tax-loss harvesting is a year-round activity. It’s often a year-end investment strategy. A savvy investor should be mindful of all fund purchases and sales throughout the year. Make investment decisions based on financial objectives, not market whims.

Do I Have to Pay Capital Gains Tax?

You’ll only pay capital gains tax on “net gains,” which are your gains minus your losses. You can use a capital loss to offset a capital gain if your gains exceed your losses. You can reduce your taxable income by the lesser of $3,000 or your total net losses if your losses exceed your gains during the tax year. You can only reduce your taxable income by up to $1,500 in losses if you’re married and file a separate tax return.

An investor can carry forward and apply any unused losses to future tax years if net losses exceed $3,000.

Definition and Example of a Stock Quote

Stock quotes give information about a particular stock’s recent trading activity on a given exchange. How close this data is to real time will depend on the exchange and where you are looking for the information. During the trading day, you can usually see both the prices buyers are willing to pay (bids) and the prices sellers are offering (asks), along with a range of other information. These quotes enable buyers and sellers to find each other and make trades.

For instance, if you wanted to know information about how shares of the Coca-Cola Company were trading, you’d look for the company’s stock quote. You’d see its ticker symbol, which is KO. You’d also see the price of each share, which was $64.74 on May 6, 2022. The stock quote shows you much more than just the current share price. It includes valuable data that you can use to evaluate the company’s shares as you decide whether to buy or sell.

How Stock Market Quotes Work

Both buyers and sellers require data about a particular stock to make a decision and execute a trade. At the very least, they’ll need the name of the stock, its ticker symbol, agreed upon price, and the number of shares they want to buy or sell.

Whether you’re trading on the New York Stock Exchange, the Nasdaq, or another stock exchange, a given stock quote will show some or all of the following information, often in an abbreviated format:

• Open: This is the stock’s opening price. This and all prices are quoted to a hundredth of a cent.
• 52-week high and low (or range): These two numbers record the highest and lowest prices at which the stock traded during the previous 52-week period, but they do not include the previous trading day. The numbers may be adjusted for stock payouts or large dividends.
• Stock symbol (SYM): This is the stock ticker symbol. You can find the symbol for a given company on many financial websites by simply typing the name of the company.
• Dividend (DIV): A dividend is a portion of profits paid to a company’s shareholders. Unless noted in a footnote, this reflects the annual price per share based on the last regular disclosure.
• Yield percentage (Yld%): The yield percentage expresses the dividends and any other disbursements paid to stockholders as a percentage of the stock’s price.
• Earnings per share (EPS): This is a company’s net earnings divided by its total number of shares. A higher number indicates greater profitability.
• Price-to-earnings ratio (P/E): The price-to-earnings ratio is the price of the stock divided by its EPS. This number helps investors compare stock prices more directly to those of other companies.
• Sales volume (Sales 100s): This shows the total amount of stock sold that day, expressed in hundreds. In other words, sales volume is expressed with two zeros missing. For example, if the number reported is 1,959, that means sales volume for that stock was 195,900 for the day.
• High: This is the highest price paid for the stock during the previous day.
• Low: This is the lowest price paid for the stock during the previous day.
• Last (or close): This is the last price at which the stock traded on that day. It does not mean that is the price at which the stock will open the next day, however.
• Change: This describes the difference between the last trade and the previous day’s price.
• Year-to-date percentage change (YTD% CHG): This number is the stock price percentage change for the calendar year. The percentage is adjusted for stock splits and dividends of more than 10%.
• Net change (CHG): The net change is calculated from the previous day’s close, so you are comparing what the stock closed at today to what it closed at yesterday.

You may also notice some footnotes throughout the listings. These point out any number of extraordinary circumstances, including new highs or lows, the first day of trading, or unusual dividends.

What a Stock Market Quote Means for Individual Investors

Once you understand how to read a stock quote, you can begin to make educated decisions regarding investments. With the data you gather, you can learn how to value a company and even make predictions about a stock’s performance. You’ll get to know how to read a stock’s volatility and better gauge your risk when investing.

You can follow a stock’s price throughout the day, although you should be aware that the quotes you see on many free internet sites are delayed. Data providers may delay quotes by 20 minutes or more, enabling them to sell truly live quotes at a premium.

Use a watchlist to track stocks you’re interested in over time. Although past performance does not guarantee future results, tracking your picks helps you learn to identify stocks that meet your trading criteria. It also allows you to detect patterns that can help you in your trades.

A leveraged exchange-traded fund (ETF) is a type of financial product designed to track an underlying index at higher rates of return. It can offer returns as high as 2-3 times the returns of a traditional ETF, but that also makes it a riskier investment option.

Leveraged ETFs are quickly becoming one of the most popular types of ETFs. And while they are an aggressive new ETF innovation, they are also a controversial one. Before you can formulate an opinion on whether these new funds are good for you, you need to know the basics.

Definition and Examples of a Leveraged ETF

A leveraged ETF is a type of exchange-traded fund that tries to outperform the underlying asset that it tracks, usually by producing two to three times the return of the correlating asset.

• Alternate names: Geared ETF, geared ETP

For example, if the tracked index rises 1%, a 2x leveraged ETF wants to create a 2% return on investment (ROI). There are also inverse leveraged ETFs, which offer multiple positive returns if an index declines in value. They work the same as normal inverse ETFs; they are just designed for returns of two to three times the opposite of the index.

How Leveraged ETFs Work

Leveraged ETFs are designed to include the securities in the underlying index, but also include derivatives of the securities and the index itself. These derivatives include, but are not limited to:

• Options
• Forward contracts
• Swaps
• Futures

In other words, leveraged ETFs can be tied to different industry sectors, commodities, or currencies, just as regular ETFs can be. However, while they seek to present better returns than the index they track, their inclusion of riskier assets like options, forward contracts, swaps, and futures meant that leveraged ETFs present more risk than a regular ETF.

For example, over the course of a few months, an index could rise by 2% but the leveraged ETF that tracks it could fall by 6%. This is due, in part, to the fact that leveraged ETFs reset daily—the goal is to outperform the market on a daily basis. So, you could see a lot of volatility over time, whereas the index the leveraged ETF tracks will likely be far less volatile. And because leveraged ETFs reset daily, they can lead to bigger losses in volatile markets that you may not experience with the index the ETF tracks.

Benefits of Leveraged ETFs

The most attractive feature of leveraged ETFs is their potential for high returns. With the ability to outperform the underlying index by two or three times on a daily basis, the rewards can be significant. Inverse leveraged ETFs offer investors a chance at better returns even if the market is falling since they can buy short. Because there are so many types of ETF products available, there is a product for almost any investor interested in these benefits.

The Risks of Leveraged ETFs

However, as a derivative product with a high return potential, leveraged ETFs are a fairly high-risk investment.

Using a 2x leveraged ETF as an example, the simple concept is that if the index rises 1%, the leveraged ETF should create a 2% return. However, simple as that sounds, it’s not always the case.

Because a leveraged ETF is designed to create multiple returns on a daily basis, it’s not likely to generate returns that high. So, if an index has a yearly return of 2%, the leveraged ETF will probably not have a return of 4%. It will be more subject to the direction of the daily returns throughout the year.

Another risk of leveraged ETFs is that they can create multiple negative returns. People hear “multiple returns” and think multiple profitsbut a sound investor knows that reward comes at the expense of risk.

Portfolio Management With Leveraged ETFs

Every ETF investment strategy should be evaluated on a case-by-case basis. Using leveraged ETFs is an advanced investment strategy and should not be taken lightly. While ETFs offer many benefits, and leveraged ETFs could possibly increase returns, there are risks involved. You should only attempt to trade these securities with a lot of prior experience—and the help of a good broker.

To get an initial feel for this market, pay attention to how some leveraged ETFs react to market conditions and conduct thorough research. A few examples to follow include:

• DDM–ProShares Ultra Dow30 ETF
• SSO–ProShares Ultra S&P500 ETF

Definition and Examples of Series HH Savings Bonds

Series HH bonds were a type of savings bond program, offered by the US Treasury, that regularly paid out interest to investors. They worked differently from Series EE savings bonds, which instead added that interest income back to the principal value of the bond.

Investors enjoyed the passive income made possible by investing in Series HH bonds. These bonds came with face values ​​of $500, $1,000, $5,000, and $10,000.

How Do Series HH Savings Bonds Work?

When an investor bought a Series HH savings bond, they received a paper certificate that detailed their purchase. If that investor wanted to cash in the bond early, then they needed to return that paper certificate.

While an investor held Series HH bonds, they would receive interest payments every six months. The interest was deposited directly into the bondholder’s bank account, providing a steady source of investment income that could be spent while the bond was still held.

Series HH savings bonds had a minimum holding time of six months. After that, an investor could cash in their bonds for the full face value at any time.

The Interest Rate on Series HH Savings Bonds

The interest rate for the Series HH savings bonds was set every six months. When an investor bought a Series HH bond, they locked in that interest rate for 10 years, after which the rate could be adjusted for the next 10 years. Series HH savings bonds reach maturity and stop earning interest income altogether 20 years after the investor bought them. At maturity, the investor is repaid the face value.

Because the last Series HH bonds were issued in 2004, some are still paying out interest.

Like the Series I savings bond, the Series HH savings bonds could be redeemed for full face value at any time after the minimum holding period. That means investors didn’t need to wait 20 years to get their principal back. However, once an investor receives their principal back, they stop earning interest income.

What It Means for Individual Investors

Since Series HH savings bonds mature after 20 years, the last of these investment vehicles will mature in August 2024, so it’s likely that there are still Series HH savings bonds out there somewhere. However, since these bonds can be cashed early, there may be fewer bonds remaining than were originally issued back in the early 2000s. The bonds that are still held will continue paying interest until they mature 20 years after their dates of issue.

If you own a Series HH Bond, you may still be collecting interest if the bond hasn’t matured yet. You can also cash in the bond if you choose.

While your local bank can’t directly cash out the bonds for you, it can help you take the steps necessary to receive your principal back. Those include certifying your signature on documents and helping you mail bond certificates to the appropriate Treasury Department address.

Alternatives to Series HH Bonds

On September, 2004, the US Treasury Department stopped offering Series HH savings bonds to investors, officially ending the program altogether. While the Treasury Department continues to offer other kinds of bonds, there is not a Series HH replacement that perfectly replicates the features of this program.

If you’re still interested in owning savings bonds, you could choose Series EE bonds, which earn interest for up to 30 years, or Series I bonds, which earn interest that’s tied to the inflation rate.

You could also choose other Treasury securities, such as Treasury bills, notes, and bonds, or Treasury Inflation-Protected Securities (TIPS).

Definition and Examples of High-Value Home Insurance

High-value home insurance is a type of homeowners insurance that is designed for homes with high market value. A high-value home is defined as property worth $750,000 or more.

Homes that fall into this group might include heritage homes, or homes with special architectural or interior design elements. Of course, they may simply be a mansion. This type of insurance is a full package of coverages and is one of the most comprehensive you can buy. High-value policies provide much better coverage than a standard homeowners insurance policy.

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High-value home insurance isn’t only for houses. You can purchase this type of policy for high-value condos, as well.

How High-Value Home Insurance Works

If you have an above-average priced home, standard forms of home insurance that provide “average coverage” may not be enough to protect or replace your property if you file a claim. To ensure that your policy limits are high enough to avoid paying large amounts of money out of pocket, you may want to think about buying high-value home insurance.

Will Standard Home Insurance Be Enough?

Although the details be set according to the terms in your contract, a standard homeowners insurance policy covers a wide range of costs that might occur in the course of owning a home. At the most basic level, it pays for the cost to repair or rebuild the structure of your home if it is damaged. It will also replace the items within it if they’re taken or destroyed. (Claims of this nature will factor in depreciation in the value of your items, and any payouts will reflect this.) It funds lawsuits that a person might bring against you, due to bodily harm or damage to others’ property, so long as the cause relates to your home. Lastly, it covers any extra costs you might incur for living away from home while your home is being repaired, such as for a hotel or home rental.

How Does High-Value Home Insurance Differ?

Most high-value home insurance policies provide all of the coverage offered by a standard home insurance policy, but with higher limits and extra coverage for the unique needs of people who own expensive homes (and items within those homes).

For example, suppose that John and Jane are next-door neighbors. Both have high-end homes with period features, including ornate wall carvings. Each home has a current market value of $750,000. John has standard homeowners insurance with a structural coverage limit of that same amount. Jane has a high-value home insurance policy featuring a built-in guaranteed replacement cost coverage.

A major fire occurs on their street, and both John and Jane’s homes have to be rebuilt. Because the homes have features and materials that are hard to replace, the current cost to rebuild each is $850,000. John’s policy does not cover more than the stated limit, which leaves him $100,000 below what he needs, after his home is built back to his former glory. In contrast, Jane’s policy comes with the extra feature, so it would cover the full cost of work, even if it exceeds the coverage limit.

What Does High-Value Home Insurance Coverage?

The most common reason for choosing to purchase high-end home insurance is expanded coverage limits, compared to standard homeowners insurance policies, but it can also include a wide range of extra perks or add-on services.

Compared to standard home insurance, a high-end policy includes larger policy limits or enhanced coverage for the following:

• Structural repair or replacement: Structural coverage for standard homeowners insurance may be limited to the cost to rebuild the home. If you think the true cost to build your home back to the state it was in before damage occurred will be higher than what is stated in the contract, you’ll need to get extended or guaranteed replacement cost coverage. This is often an add-on or a rider that will cost you more each month. In contrast, many high-value home insurance policies include extended or guaranteed replacement cost coverage as part of the package. This will allow you to rebuild your home to its former state, even if the cost of doing so exceeds your stated limit.

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The guaranteed replacement cost option covers the full cost of rebuilding the property, no matter how much it exceeds the coverage limit. Extended replacement cost is a more modest option that covers any costs that exceed the limit, up to a certain percentage.

• Possessions: High-value home insurance affords higher limits for items like money, jewelry, art, antiques, or even business items kept at home. If you only have a standard policy, it often costs 10% more to insure your personal belongings at the cost to replace them, versus the true cash value. And if your claim is based on the current cash value of your items, it will pay out less for older items than you first paid for them, due to depreciation. High-value home insurance most often insures your items at the replacement cost, rather than at the current value, which will give you a bigger payout.
• Liability: High-value policies often include higher limits for personal liability, medical payments, and loss assessments. They also often cover costs if you need to defend against claims of slander, libel, or defamation.
• Additional living expenses: You’ll often enjoy much higher coverage limits for living costs you incur while waiting for your home to be restored, such as hotel stays, meals, or laundry.

Some high-value home insurance policies also provide niche coverages that are not often offered by standard policies. They include things you might not even think of if you suffer home damage, such as the cost to replace locks if your keys are stolen, or to protect against identity theft, or the cost to replace food that has been spoiled due to an electric outage. A policy might even cover the costs of a kidnapping or ransom, and legal defense fees.

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Having coverage for living expenses while your home is often a major asset. Many high-end home insurance policies cover the costs needed to meet your former comforts. If your standard of living aligns, you can even stay in a high-end hotel with all the perks while you take the time to hire the right architects and builders to restore your home after an adverse event.

Do I Need High-Value Home Insurance?

Not every dwelling needs high-end home insurance. This type of coverage is specifically designed for houses that would cost a great deal to reconstruct or repair, or if the items in the home are hard or impossible to replace.

High-value home insurance might be a good choice for you if any of the following are true.

• Your home is worth $750,000 or more
• Your home is a heritage home
• Your home has older construction features not found in common methods or practices
• Your home has unique architectural features
• Your home uses materials that are hard to replace
• You own expensive or priceless fine art, rugs, collections, jewelry, wine, or other items that are kept at home
• You chose high-end appliances or fixtures that can not be found at standard stores
• The interior and exterior design features are unique, such as luxurious outdoor living areas, guest houses, swimming pool areas, custom landscaping, or bespoke features that were created by an interior designer

How Much Does High-Value Home Insurance Cost?

High-end homeowners insurance policies will cost more than standard versions, because of their increased coverage limits and top-of-the-line personalized experience. Owners of high-value homes need to budget for higher premiums each year. In 2018 (the latest data from the Insurance Information Institute), homeowners in the US paid, on average, $1,249 in annual premiums for standard home insurance. You can bet that a high-value policy will be much higher.

There are many ways to reduce the price you pay for insurance, no matter the type you choose.

• Get multiple quotes: Shop around with the major insurers in your state to get the best rate.
• Choose a high deductible: The insurance deductible is the amount you pay before your insurance coverage kicks in. Opting to pay more out of pocket when you file a claim is a common tradeoff for lower premiums.
• Bundle your homeowners and auto insurance: Buying both policies from the same insurer can save you anywhere from 5% to 15% on premiums.
• Look for discounts: Some insurers offer discounts for retirees, or for employees or members of certain organizations.

Key Takeaways

• High-value home insurance is a special type of homeowners insurance designed for homes worth $750,000 and more.
• It provides higher limits on coverage than standard policies, plus additional types of coverage for the unique needs of people who own high-end homes.
• This type of insurance can cost more than $1,200 per year, but you can lower your costs by shopping around and looking for deals and discounts.

Definition and Examples of Loan/Lease Payoff Insurance

Standard loan/lease payoff insurance pays the amount you owe on a totaled vehicle’s loan after your insurance company has paid you because your car has been totaled in an accident or it’s been stolen. You can only purchase this type of insurance if you’re buying the most comprehensive coverage insurance on your vehicle. It typically pays up to 25% of the vehicle’s current cash value (ACV), allowing for any insurance deductible.

• Alternate name: Gap insurance

For instance, if you bought your car and still owe $20,000 on it, it may only have a Kelly Blue Book value of $15,000. You are “upside down” on your car loan. If you are then in an accident where your car is totaled, your insurance may only pay you for the value of the car, which is $15,000. That means you still owe $5,000 to the bank for the remaining balance on your car loan. Payoff or gap insurance could help you pay the bank some or all of that remaining balance.

How Loan/Lease Payoff Insurance Works

The term “loan/lease payoff” is often used in place of gap insurance. Both coverages work in a similar way, but there are some subtle differences between the two. Providers can assign their own sets of rules to loan/lease payoff insurance that separate one type of insurance from the other. Other providers might not distinguish between the two coverages at all.

Suppose that John has purchased a new Chevy truck for $28,000. He purchased the truck with a 0% down payment and an extended six-year loan to keep his payments low.

Unfortunately, the truck is stolen within a month of purchase. The insurance company determines that the ACV of John’s truck is just $21,000 due to the plunging value of these vehicles when they’re driven off the lot. That’s a difference of $7,000, compared to what John Owens on the loan.

Luckily, John purchased loan/lease payoff coverage through his car insurance provider. This insurance will cover 25% of his ACV. It works out like this:

• 25% of $21,000 is $5,250.
• The insurance company will therefore pay $26,150 after subtracting a $100 deductible.
• John is responsible for paying for the remaining $1,850 balance.

John must pay out of pocket to meet his obligation, but he’s still better off than he would have been without the loan/lease payoff coverage, even though his loan wasn’t paid off in full. This is an extreme example of depreciation and no down payment, and it’s an unlikely scenario.

Loan/Lease Insurance vs. Gap Insurance

Gap insurance tends to be a bit more generous and flexible than loan/lease payoff coverage and in some critical ways. You can often avoid out-of-pocket costs at all with gap insurance. You won’t be forced to come up with a portion of the balance in order to retire the loan against the destroyed or stolen vehicle.

Loan/Lease Payoff Insurance	Gap Insurance
Does not cover deductibles	May cover deductibles
Pays only up to 25% of the vehicle’s current cash value	Pays the difference between the vehicle’s current cash value and the loan balance against it

Do I Need to Buy This Coverage?

It’s always best to discuss this type of coverage with your insurance agent rather than deciding on your own whether you need it. Make sure you understand all the details and restrictions that apply to loan/lease payoff agreements.

It can provide helpful coverage even if it doesn’t pay 100% of what you owe, and it will certainly come in handy compared to not having any access to coverage when you know you’re underwater on your car loan. However, some consumer advocates argue that the premiums for these coverages are often too high given that claim payouts are fairly infrequent.

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Definition and Example of an Unrecaptured Section 1250 Gain

Section 1250 of the Internal Revenue Code (IRC) kicks in when you sell a Section 1231 real estate asset for financial gain after claiming a depreciation tax break for it in previous years. The IRS says the gain is taxable at a pretty significant rate—higher than those for most long-term capital gains.

Section 1231 property is typically business or trade real estate, so unrecaptured Section 1250 gains usually only come into play for non-business owners if they have rental property.

Let’s say you purchased a rental property for $200,000 in 2020. You’re entitled to depreciate it over five years. That works out to $40,000 per year: $200,000 divided by five. You claim $80,000 in depreciation in 2020 and 2021. This brings your cost basis down to $120,000 ($200,000 minus $80,000) in claimed depreciation.

You sell the property for $250,000 in 2022. Under Section 1250 rules, you’ve realized a gain of $130,000 ($250,000 minus your $120,000 basis adjusted for depreciation), not $50,000 ($250,000 minus your $200,000 purchase price). The $80,000 you claimed as depreciation is recaptured and taxed at a maximum of 25%. Only the remaining $50,000 is taxed at the most favorable long-term capital gains tax rate of just 15%.

How an Unrecaptured Section 1250 Gain Works

Section 1250 tags the gain you get from selling property as “unrecaptured” when the sales price exceeds your initial cost basis in the asset, which is the total of what you paid for it and spent on maintaining it. It adjusts this basis by adding back the depreciation you claimed.

An unrecaptured Section 1250 gain effectively prevents you from taking a double-dip tax break. It changes the rate at which realized gains are taxed with the intention of offsetting that depreciation you claimed. It prohibits you from claiming advantageous long-term capital gains rates on the entirety of your profit.

But “offset” is the key word here in another respect. The IRC allows you to offset Section 1250 gains with Section 1231 capital losses, provided both assets were held for more than a year so both your loss and your gain are long term. This means you can subtract your loss from the amount of your gain, and pay tax on the difference.

How To Report Uncaptured Section 1250 Gains

You report uncaptured Section 1250 earnings on Form 4797, then transfer that total to Schedule D. The instructions for Schedule D include detailed explanations and worksheets to help you make your calculations. Enter the resulting tax amount on line 16 of your Form 1040 tax return.

How Much Are Taxes on Unrecaptured Section 1250 Gains?

The tax on unrecaptured Section 1250 gains tops out at 25%, which is considerably higher than two of the three tax rates for long-term capital gains, which ranges from 0% to 20%, depending on your income. Most taxpayers pay a 0% or 15% rate on long-term capital gains, which is at least 10% less than the unrecaptured Section 1250 rate.

The 25% rate applies to money received in the first through fourth years if you accepted installment payments after 1999. Some gains can be taxed at 20% after the first four years, but this is still higher than the long-term capital gains tax rate for most taxpayers.