File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

1040x Irs Form

Military Turbotax2011 Tax Form 10401040 Short Form1040ez Free Online Filing2010 Income Tax FormsHow To Ammend A Federal Tax ReturnAmending A 2010 Tax ReturnFree Tax Filing 2010Need To File A 2011 Tax ReturnH And R Block Free1040ez 2012 Tax FormFiling 1040 EzH&r Block Taxes2011 Tax Forms 1040ezForm 1040ez More:label_form_201040ez More:taxesFile 1040ez OnlineIrs Tax Forms 1040 2010Federal Income Tax FormsFree State Tax Filing SoftwareDoes Military Pay TaxesFiling State Taxes FreeFederal Tax Income ReturnAmended 2012 Tax ReturnI Need To File My 2012 Federal Taxes2011 Taxes FormsIrs 2012 Tax Forms 1040 EzHow To File A Tax Extension 2011File 2008 TaxesHow Far Back Can I Amend A Tax ReturnCan I File My 1040x OnlineH&block ComH R Block Home 2012Tax Filing For 20122008 Taxes Online For FreeTax Credits For StudentsHr Block2011 Amended ReturnAmended Federal Tax Return FormFreetax ComIrs 1040x Instructions

1040x Irs Form

1040x irs form 8. 1040x irs form   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. 1040x irs form Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. 1040x irs form Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. 1040x irs form Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. 1040x irs form Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. 1040x irs form This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. 1040x irs form A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 1040x irs form An exchange is a transfer of property for other property or services. 1040x irs form Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. 1040x irs form If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. 1040x irs form If the adjusted basis of the property is more than the amount you realize, you will have a loss. 1040x irs form Basis and adjusted basis. 1040x irs form   The basis of property you buy is usually its cost. 1040x irs form The adjusted basis of property is basis plus certain additions and minus certain deductions. 1040x irs form See chapter 6 for more information about basis and adjusted basis. 1040x irs form Amount realized. 1040x irs form   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. 1040x irs form The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. 1040x irs form   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x irs form Amount recognized. 1040x irs form   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. 1040x irs form A recognized gain is a gain you must include in gross income and report on your income tax return. 1040x irs form A recognized loss is a loss you deduct from gross income. 1040x irs form However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. 1040x irs form See Like-Kind Exchanges next. 1040x irs form Also, a loss from the disposition of property held for personal use is not deductible. 1040x irs form Like-Kind Exchanges Certain exchanges of property are not taxable. 1040x irs form This means any gain from the exchange is not recognized, and any loss cannot be deducted. 1040x irs form Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. 1040x irs form The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040x irs form To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. 1040x irs form Qualifying property. 1040x irs form Like-kind property. 1040x irs form These two requirements are discussed later. 1040x irs form Multiple-party transactions. 1040x irs form   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. 1040x irs form Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. 1040x irs form Receipt of title from third party. 1040x irs form   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. 1040x irs form Basis of property received. 1040x irs form   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. 1040x irs form See chapter 6 for more information. 1040x irs form Money paid. 1040x irs form   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. 1040x irs form The basis of the property received is the basis of the property given up, increased by the money paid. 1040x irs form Example. 1040x irs form You traded an old tractor with an adjusted basis of $15,000 for a new one. 1040x irs form The new tractor costs $300,000. 1040x irs form You were allowed $80,000 for the old tractor and paid $220,000 cash. 1040x irs form You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). 1040x irs form If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. 1040x irs form In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. 1040x irs form Reporting the exchange. 1040x irs form   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. 1040x irs form The Instructions for Form 8824 explain how to report the details of the exchange. 1040x irs form   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. 1040x irs form You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. 1040x irs form See chapter 9 for more information. 1040x irs form Qualifying property. 1040x irs form   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. 1040x irs form Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. 1040x irs form Nonqualifying property. 1040x irs form   The rules for like-kind exchanges do not apply to exchanges of the following property. 1040x irs form Property you use for personal purposes, such as your home and family car. 1040x irs form Stock in trade or other property held primarily for sale, such as crops and produce. 1040x irs form Stocks, bonds, or notes. 1040x irs form However, see Qualifying property above. 1040x irs form Other securities or evidences of indebtedness, such as accounts receivable. 1040x irs form Partnership interests. 1040x irs form However, you may have a nontaxable exchange under other rules. 1040x irs form See Other Nontaxable Exchanges in chapter 1 of Publication 544. 1040x irs form Like-kind property. 1040x irs form   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. 1040x irs form Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 1040x irs form Generally, real property exchanged for real property qualifies as an exchange of like-kind property. 1040x irs form For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. 1040x irs form   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. 1040x irs form An exchange of a tractor for acreage, however, is not an exchange of like-kind property. 1040x irs form The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. 1040x irs form For example, the exchange of a bull for a cow is not a like-kind exchange. 1040x irs form An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. 1040x irs form    Note. 1040x irs form Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. 1040x irs form Personal property. 1040x irs form   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. 1040x irs form Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. 1040x irs form Property classified in any General Asset Class may not be classified within a Product Class. 1040x irs form Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. 1040x irs form General Asset Classes. 1040x irs form   General Asset Classes describe the types of property frequently used in many businesses. 1040x irs form They include, but are not limited to, the following property. 1040x irs form Office furniture, fixtures, and equipment (asset class 00. 1040x irs form 11). 1040x irs form Information systems, such as computers and peripheral equipment (asset class 00. 1040x irs form 12). 1040x irs form Data handling equipment except computers (asset class 00. 1040x irs form 13). 1040x irs form Automobiles and taxis (asset class 00. 1040x irs form 22). 1040x irs form Light general purpose trucks (asset class 00. 1040x irs form 241). 1040x irs form Heavy general purpose trucks (asset class 00. 1040x irs form 242). 1040x irs form Tractor units for use over-the-road (asset class 00. 1040x irs form 26). 1040x irs form Trailers and trailer-mounted containers (asset class 00. 1040x irs form 27). 1040x irs form Industrial steam and electric generation and/or distribution systems (asset class 00. 1040x irs form 4). 1040x irs form Product Classes. 1040x irs form   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). 1040x irs form The latest version of the manual can be accessed at www. 1040x irs form census. 1040x irs form gov/eos/www/naics/. 1040x irs form Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. 1040x irs form ntis. 1040x irs form gov/products/naics. 1040x irs form aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. 1040x irs form A CD-ROM version with search and retrieval software is also available from NTIS. 1040x irs form    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. 1040x irs form Partially nontaxable exchange. 1040x irs form   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. 1040x irs form You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. 1040x irs form A loss is not deductible. 1040x irs form Example 1. 1040x irs form You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. 1040x irs form You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). 1040x irs form However, only $10,000, the cash received, is recognized (included in income). 1040x irs form Example 2. 1040x irs form Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. 1040x irs form Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). 1040x irs form Example 3. 1040x irs form Assume in Example 1 that the FMV of the land you received was only $15,000. 1040x irs form Your $5,000 loss is not recognized. 1040x irs form Unlike property given up. 1040x irs form   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. 1040x irs form The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. 1040x irs form Like-kind exchanges between related persons. 1040x irs form   Special rules apply to like-kind exchanges between related persons. 1040x irs form These rules affect both direct and indirect exchanges. 1040x irs form Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 1040x irs form The gain or loss on the original exchange must be recognized as of the date of the later disposition. 1040x irs form The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. 1040x irs form Related persons. 1040x irs form   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. 1040x irs form ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. 1040x irs form   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. 1040x irs form Example. 1040x irs form You used a grey pickup truck in your farming business. 1040x irs form Your sister used a red pickup truck in her landscaping business. 1040x irs form In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. 1040x irs form At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. 1040x irs form The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. 1040x irs form You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). 1040x irs form Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). 1040x irs form However, because this was a like-kind exchange, you recognized no gain. 1040x irs form Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). 1040x irs form She recognized gain only to the extent of the money she received, $200. 1040x irs form Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). 1040x irs form In 2013, you sold the red pickup truck to a third party for $7,000. 1040x irs form Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 1040x irs form On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. 1040x irs form You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). 1040x irs form In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. 1040x irs form Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). 1040x irs form Exceptions to the rules for related persons. 1040x irs form   The following property dispositions are excluded from these rules. 1040x irs form Dispositions due to the death of either related person. 1040x irs form Involuntary conversions. 1040x irs form Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. 1040x irs form Multiple property exchanges. 1040x irs form   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. 1040x irs form However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. 1040x irs form Transfer and receive properties in two or more exchange groups. 1040x irs form Transfer or receive more than one property within a single exchange group. 1040x irs form   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x irs form Deferred exchange. 1040x irs form   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. 1040x irs form A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. 1040x irs form The property you receive is replacement property. 1040x irs form The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. 1040x irs form In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. 1040x irs form   For more information see Deferred Exchanges in chapter 1 of Publication 544. 1040x irs form Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. 1040x irs form This rule does not apply if the recipient is a nonresident alien. 1040x irs form Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. 1040x irs form Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. 1040x irs form The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 1040x irs form This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. 1040x irs form This rule applies for determining loss as well as gain. 1040x irs form Any gain recognized on a transfer in trust increases the basis. 1040x irs form For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. 1040x irs form Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). 1040x irs form You may also have a capital gain if your section 1231 transactions result in a net gain. 1040x irs form See Section 1231 Gains and Losses in  chapter 9. 1040x irs form To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). 1040x irs form Your net capital gains may be taxed at a lower tax rate than ordinary income. 1040x irs form See Capital Gains Tax Rates , later. 1040x irs form Your deduction for a net capital loss may be limited. 1040x irs form See Treatment of Capital Losses , later. 1040x irs form Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. 1040x irs form The following items are examples of capital assets. 1040x irs form A home owned and occupied by you and your family. 1040x irs form Household furnishings. 1040x irs form A car used for pleasure. 1040x irs form If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. 1040x irs form Stocks and bonds. 1040x irs form However, there are special rules for gains on qualified small business stock. 1040x irs form For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. 1040x irs form Personal-use property. 1040x irs form   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. 1040x irs form Loss from the sale or exchange of personal-use property is not deductible. 1040x irs form You can deduct a loss relating to personal-use property only if it results from a casualty or theft. 1040x irs form For information on casualties and thefts, see chapter 11. 1040x irs form Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. 1040x irs form The time you own an asset before disposing of it is the holding period. 1040x irs form If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. 1040x irs form Report it in Part I of Schedule D (Form 1040). 1040x irs form If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. 1040x irs form Report it in Part II of Schedule D (Form 1040). 1040x irs form Holding period. 1040x irs form   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. 1040x irs form The day you disposed of the property is part of your holding period. 1040x irs form Example. 1040x irs form If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. 1040x irs form If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. 1040x irs form Inherited property. 1040x irs form   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. 1040x irs form This rule does not apply to livestock used in a farm business. 1040x irs form See Holding period under Livestock , later. 1040x irs form Nonbusiness bad debt. 1040x irs form   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. 1040x irs form See chapter 4 of Publication 550. 1040x irs form Nontaxable exchange. 1040x irs form   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. 1040x irs form That is, it begins on the same day as your holding period for the old property. 1040x irs form Gift. 1040x irs form   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. 1040x irs form Real property. 1040x irs form   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. 1040x irs form   However, taking possession of real property under an option agreement is not enough to start the holding period. 1040x irs form The holding period cannot start until there is an actual contract of sale. 1040x irs form The holding period of the seller cannot end before that time. 1040x irs form Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. 1040x irs form Net short-term capital gain or loss. 1040x irs form   Combine your short-term capital gains and losses. 1040x irs form Do this by adding all of your short-term capital gains. 1040x irs form Then add all of your short-term capital losses. 1040x irs form Subtract the lesser total from the greater. 1040x irs form The difference is your net short-term capital gain or loss. 1040x irs form Net long-term capital gain or loss. 1040x irs form   Follow the same steps to combine your long-term capital gains and losses. 1040x irs form The result is your net long-term capital gain or loss. 1040x irs form Net gain. 1040x irs form   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. 1040x irs form However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. 1040x irs form See Capital Gains Tax Rates , later. 1040x irs form Net loss. 1040x irs form   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. 1040x irs form But there are limits on how much loss you can deduct and when you can deduct it. 1040x irs form See Treatment of Capital Losses next. 1040x irs form Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. 1040x irs form For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). 1040x irs form If your other income is low, you may not be able to use the full $3,000. 1040x irs form The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). 1040x irs form Capital loss carryover. 1040x irs form   Generally, you have a capital loss carryover if either of the following situations applies to you. 1040x irs form Your net loss on Schedule D (Form 1040), is more than the yearly limit. 1040x irs form Your taxable income without your deduction for exemptions is less than zero. 1040x irs form If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. 1040x irs form    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). 1040x irs form Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. 1040x irs form These lower rates are called the maximum capital gains rates. 1040x irs form The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 1040x irs form See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). 1040x irs form Also see Publication 550. 1040x irs form Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. 1040x irs form A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). 1040x irs form Property held for sale in the ordinary course of your farm business. 1040x irs form   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. 1040x irs form Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). 1040x irs form The treatment of this property is discussed in chapter 3. 1040x irs form Land and depreciable properties. 1040x irs form   Land and depreciable property you use in farming are not capital assets. 1040x irs form Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. 1040x irs form However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. 1040x irs form The sales of these business assets are reported on Form 4797. 1040x irs form See chapter 9 for more information. 1040x irs form Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. 1040x irs form Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. 1040x irs form A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. 1040x irs form The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. 1040x irs form A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. 1040x irs form Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. 1040x irs form Hedging transactions. 1040x irs form Transactions that are not hedging transactions. 1040x irs form Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. 1040x irs form There is a limit on the amount of capital losses you can deduct each year. 1040x irs form Hedging transactions are not subject to the mark-to-market rules. 1040x irs form If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. 1040x irs form They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. 1040x irs form The gain or loss on the termination of these hedges is generally ordinary gain or loss. 1040x irs form Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. 1040x irs form Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. 1040x irs form Examples include fuel and feed. 1040x irs form If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. 1040x irs form Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. 1040x irs form It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. 1040x irs form Retain the identification of each hedging transaction with your books and records. 1040x irs form Also, identify the item(s) or aggregate risk that is being hedged in your records. 1040x irs form Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. 1040x irs form For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. 1040x irs form Accounting methods for hedging transactions. 1040x irs form   The accounting method you use for a hedging transaction must clearly reflect income. 1040x irs form This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. 1040x irs form There are requirements and limits on the method you can use for certain hedging transactions. 1040x irs form See Regulations section 1. 1040x irs form 446-4(e) for those requirements and limits. 1040x irs form   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. 1040x irs form Cash method. 1040x irs form Farm-price method. 1040x irs form Unit-livestock-price method. 1040x irs form   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. 1040x irs form   Your books and records must describe the accounting method used for each type of hedging transaction. 1040x irs form They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. 1040x irs form You must make the additional identification no more than 35 days after entering into the hedging transaction. 1040x irs form Example of a hedging transaction. 1040x irs form   You file your income tax returns on the cash method. 1040x irs form On July 2 you anticipate a yield of 50,000 bushels of corn this year. 1040x irs form The December futures price is $5. 1040x irs form 75 a bushel, but there are indications that by harvest time the price will drop. 1040x irs form To protect yourself against a drop in the price, you enter into the following hedging transaction. 1040x irs form You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. 1040x irs form 75 a bushel. 1040x irs form   The price did not drop as anticipated but rose to $6 a bushel. 1040x irs form In November, you sell your crop at a local elevator for $6 a bushel. 1040x irs form You also close out your futures position by buying ten December contracts for $6 a bushel. 1040x irs form You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. 1040x irs form   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. 1040x irs form Your loss on the hedge is 25 cents a bushel. 1040x irs form In effect, the net selling price of your corn is $5. 1040x irs form 75 a bushel. 1040x irs form   Report the results of your futures transactions and your sale of corn separately on Schedule F. 1040x irs form See the instructions for the 2013 Schedule F (Form 1040). 1040x irs form   The loss on your futures transactions is $13,900, figured as follows. 1040x irs form July 2 - Sold December corn futures (50,000 bu. 1040x irs form @$5. 1040x irs form 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 1040x irs form @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. 1040x irs form   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. 1040x irs form × $6). 1040x irs form Report it on Schedule F, Part I, line 2, as income from sales of products you raised. 1040x irs form   Assume you were right and the price went down 25 cents a bushel. 1040x irs form In effect, you would still net $5. 1040x irs form 75 a bushel, figured as follows. 1040x irs form Sold cash corn, per bushel $5. 1040x irs form 50 Gain on hedge, per bushel . 1040x irs form 25 Net price, per bushel $5. 1040x irs form 75       The gain on your futures transactions would have been $11,100, figured as follows. 1040x irs form July 2 - Sold December corn futures (50,000 bu. 1040x irs form @$5. 1040x irs form 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 1040x irs form @$5. 1040x irs form 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. 1040x irs form   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. 1040x irs form Livestock This part discusses the sale or exchange of livestock used in your farm business. 1040x irs form Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. 1040x irs form However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. 1040x irs form See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. 1040x irs form The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. 1040x irs form The sale of this livestock is reported on Schedule F. 1040x irs form See chapter 3. 1040x irs form Also, special rules apply to sales or exchanges caused by weather-related conditions. 1040x irs form See chapter 3. 1040x irs form Holding period. 1040x irs form   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). 1040x irs form Livestock. 1040x irs form   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. 1040x irs form Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. 1040x irs form Livestock used in farm business. 1040x irs form   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. 1040x irs form The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. 1040x irs form An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. 1040x irs form However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. 1040x irs form Example 1. 1040x irs form You discover an animal that you intend to use for breeding purposes is sterile. 1040x irs form You dispose of it within a reasonable time. 1040x irs form This animal was held for breeding purposes. 1040x irs form Example 2. 1040x irs form You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. 1040x irs form These young animals were held for breeding or dairy purposes. 1040x irs form Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. 1040x irs form See Sales Caused by Weather-Related Conditions in chapter 3. 1040x irs form Example 3. 1040x irs form You are in the business of raising hogs for slaughter. 1040x irs form Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. 1040x irs form You sell the brood sows after obtaining the litter. 1040x irs form Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. 1040x irs form Example 4. 1040x irs form You are in the business of raising registered cattle for sale to others for use as breeding cattle. 1040x irs form The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. 1040x irs form Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. 1040x irs form Such use does not demonstrate that you are holding the cattle for breeding purposes. 1040x irs form However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. 1040x irs form The same applies to hog and sheep breeders. 1040x irs form Example 5. 1040x irs form You breed, raise, and train horses for racing purposes. 1040x irs form Every year you cull horses from your racing stable. 1040x irs form In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. 1040x irs form These horses are all considered held for sporting purposes. 1040x irs form Figuring gain or loss on the cash method. 1040x irs form   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. 1040x irs form Raised livestock. 1040x irs form   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. 1040x irs form Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. 1040x irs form The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. 1040x irs form However, see Uniform Capitalization Rules in chapter 6. 1040x irs form Purchased livestock. 1040x irs form   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. 1040x irs form Example. 1040x irs form A farmer sold a breeding cow on January 8, 2013, for $1,250. 1040x irs form Expenses of the sale were $125. 1040x irs form The cow was bought July 2, 2009, for $1,300. 1040x irs form Depreciation (not less than the amount allowable) was $867. 1040x irs form Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. 1040x irs form Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. 1040x irs form Any loss on the disposition of such property is treated as a long-term capital loss. 1040x irs form Converted wetland. 1040x irs form   This is generally land that was drained or filled to make the production of agricultural commodities possible. 1040x irs form It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. 1040x irs form   A wetland (before conversion) is land that meets all the following conditions. 1040x irs form It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. 1040x irs form It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. 1040x irs form It supports, under normal circumstances, mostly plants that grow in saturated soil. 1040x irs form Highly erodible cropland. 1040x irs form   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. 1040x irs form Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. 1040x irs form Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. 1040x irs form Successor. 1040x irs form   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. 1040x irs form Timber Standing timber you held as investment property is a capital asset. 1040x irs form Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. 1040x irs form If you held the timber primarily for sale to customers, it is not a capital asset. 1040x irs form Gain or loss on its sale is ordinary business income or loss. 1040x irs form It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). 1040x irs form See the Instructions for Schedule F (Form 1040). 1040x irs form Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. 1040x irs form Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. 1040x irs form , are ordinary farm income and expenses reported on Schedule F. 1040x irs form Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. 1040x irs form Timber considered cut. 1040x irs form   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. 1040x irs form This is true whether the timber is cut under contract or whether you cut it yourself. 1040x irs form Christmas trees. 1040x irs form   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. 1040x irs form They qualify for both rules discussed below. 1040x irs form Election to treat cutting as a sale or exchange. 1040x irs form   Under the general rule, the cutting of timber results in no gain or loss. 1040x irs form It is not until a sale or exchange occurs that gain or loss is realized. 1040x irs form But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. 1040x irs form Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. 1040x irs form Any later sale results in ordinary business income or loss. 1040x irs form See the example below. 1040x irs form   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. 1040x irs form Making the election. 1040x irs form   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. 1040x irs form You do not have to make the election in the first year you cut the timber. 1040x irs form You can make it in any year to which the election would apply. 1040x irs form If the timber is partnership property, the election is made on the partnership return. 1040x irs form This election cannot be made on an amended return. 1040x irs form   Once you have made the election, it remains in effect for all later years unless you revoke it. 1040x irs form Election under section 631(a) may be revoked. 1040x irs form   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. 1040x irs form The prior election (and revocation) is disregarded for purposes of making a subsequent election. 1040x irs form See Form T (Timber), Forest Activities Schedule, for more information. 1040x irs form Gain or loss. 1040x irs form   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. 1040x irs form   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. 1040x irs form Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. 1040x irs form 611-3. 1040x irs form   Depletion of timber is discussed in chapter 7. 1040x irs form Example. 1040x irs form   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. 1040x irs form It had an adjusted basis for depletion of $40 per MBF. 1040x irs form You are a calendar year taxpayer. 1040x irs form On January 1, 2013, the timber had a FMV of $350 per MBF. 1040x irs form It was cut in April for sale. 1040x irs form On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. 1040x irs form You report the difference between the FMV and your adjusted basis for depletion as a gain. 1040x irs form This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. 1040x irs form You figure your gain as follows. 1040x irs form FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. 1040x irs form Outright sales of timber. 1040x irs form   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). 1040x irs form However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). 1040x irs form Cutting contract. 1040x irs form   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. 1040x irs form You are the owner of the timber. 1040x irs form You held the timber longer than 1 year before its disposal. 1040x irs form You kept an economic interest in the timber. 1040x irs form   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. 1040x irs form   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. 1040x irs form Include this amount on Form 4797 along with your other section 1231 gains or losses. 1040x irs form Date of disposal. 1040x irs form   The date of disposal is the date the timber is cut. 1040x irs form However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. 1040x irs form   This election applies only to figure the holding period of the timber. 1040x irs form It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). 1040x irs form   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. 1040x irs form The statement must identify the advance payments subject to the election and the contract under which they were made. 1040x irs form   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). 1040x irs form Attach the statement to the amended return and write “Filed pursuant to section 301. 1040x irs form 9100-2” at the top of the statement. 1040x irs form File the amended return at the same address the original return was filed. 1040x irs form Owner. 1040x irs form   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. 1040x irs form You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. 1040x irs form Tree stumps. 1040x irs form   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. 1040x irs form Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. 1040x irs form However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. 1040x irs form Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. 1040x irs form   See Form T (Timber) and its separate instructions for more information about dispositions of timber. 1040x irs form Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). 1040x irs form If you have a gain from the sale, you may be allowed to exclude the gain on your home. 1040x irs form For more information, see Publication 523, Selling Your Home. 1040x irs form The gain on the sale of your business property is taxable. 1040x irs form A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. 1040x irs form Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. 1040x irs form See chapter 9. 1040x irs form Losses from personal-use property, other than casualty or theft losses, are not deductible. 1040x irs form If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. 1040x irs form See chapter 10 for information about installment sales. 1040x irs form When you sell your farm, the gain or loss on each asset is figured separately. 1040x irs form The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. 1040x irs form Each of the assets sold must be classified as one of the following. 1040x irs form Capital asset held 1 year or less. 1040x irs form Capital asset held longer than 1 year. 1040x irs form Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). 1040x irs form Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). 1040x irs form Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. 1040x irs form Allocation of consideration paid for a farm. 1040x irs form   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. 1040x irs form The residual method is required only if the group of assets sold constitutes a trade or business. 1040x irs form This method determines gain or loss from the transfer of each asset. 1040x irs form It also determines the buyer's basis in the business assets. 1040x irs form For more information, see Sale of a Business in chapter 2 of Publication 544. 1040x irs form Property used in farm operation. 1040x irs form   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. 1040x irs form Recognized gains and losses on business property must be reported on your return for the year of the sale. 1040x irs form If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). 1040x irs form Example. 1040x irs form You sell your farm, including your main home, which you have owned since December 2001. 1040x irs form You realize gain on the sale as follows. 1040x irs form   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. 1040x irs form All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. 1040x irs form Treat the balance as section 1231 gain. 1040x irs form The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . 1040x irs form Partial sale. 1040x irs form   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. 1040x irs form You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. 1040x irs form For a detailed discussion on installment sales, see Publication 544. 1040x irs form Adjusted basis of the part sold. 1040x irs form   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. 1040x irs form , on the part sold. 1040x irs form If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . 1040x irs form Example. 1040x irs form You bought a 600-acre farm for $700,000. 1040x irs form The farm included land and buildings. 1040x irs form The purchase contract designated $600,000 of the purchase price to the land. 1040x irs form You later sold 60 acres of land on which you had installed a fence. 1040x irs form Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. 1040x irs form Use this amount to determine your gain or loss on the sale of the 60 acres. 1040x irs form Assessed values for local property taxes. 1040x irs form   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. 1040x irs form Example. 1040x irs form Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. 1040x irs form However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. 1040x irs form The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. 1040x irs form Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. 1040x irs form The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). 1040x irs form Sale of your home. 1040x irs form   Your home is a capital asset and not property used in the trade or business of farming. 1040x irs form If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. 1040x irs form Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. 1040x irs form   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. 1040x irs form For more information on basis, see chapter 6. 1040x irs form More information. 1040x irs form   For more information on selling your home, see Publication 523. 1040x irs form Gain from condemnation. 1040x irs form   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. 1040x irs form However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. 1040x irs form Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. 1040x irs form The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 1040x irs form This is true even if you voluntarily return the property to the lender. 1040x irs form You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. 1040x irs form Buyer's (borrower's) gain or loss. 1040x irs form   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. 1040x irs form The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 1040x irs form See Determining Gain or Loss , earlier. 1040x irs form Worksheet 8-1. 1040x irs form Worksheet for Foreclosures andRepossessions Part 1. 1040x irs form Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 1040x irs form Complete this part only if you were personally liable for the debt. 1040x irs form Otherwise, go to Part 2. 1040x irs form   1. 1040x irs form Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. 1040x irs form Enter the Fair Market Value of the transferred property   3. 1040x irs form Ordinary income from cancellation of debt upon foreclosure or repossession. 1040x irs form * Subtract line 2 from line 1. 1040x irs form If zero or less, enter -0-   Part 2. 1040x irs form Figure your gain or loss from foreclosure or repossession. 1040x irs form   4. 1040x irs form If you completed Part 1, enter the smaller of line 1 or line 2. 1040x irs form If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. 1040x irs form Enter any proceeds you received from the foreclosure sale   6. 1040x irs form Add lines 4 and 5   7. 1040x irs form Enter the adjusted basis of the transferred property   8. 1040x irs form Gain or loss from foreclosure or repossession. 1040x irs form Subtract line 7  from line 6   * The income may not be taxable. 1040x irs form See Cancellation of debt . 1040x irs form    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. 1040x irs form Amount realized on a nonrecourse debt. 1040x irs form   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. 1040x irs form The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. 1040x irs form Example 1. 1040x irs form Ann paid $200,000 for land used in her farming business. 1040x irs form She paid $15,000 down and borrowed the remaining $185,000 from a bank. 1040x irs form Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. 1040x irs form The bank foreclosed on the loan 2 years after Ann stopped making payments. 1040x irs form When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. 1040x irs form The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. 1040x irs form She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). 1040x irs form She has a $20,000 deductible loss. 1040x irs form Example 2. 1040x irs form Assume the same facts as in Example 1 except the FMV of the land was $210,000. 1040x irs form The result is the same. 1040x irs form The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. 1040x irs form Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. 1040x irs form Amount realized on a recourse debt. 1040x irs form   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. 1040x irs form   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. 1040x irs form The amount realized does not include the canceled debt that is your income from cancellation of debt. 1040x irs form See Cancellation of debt , later. 1040x irs form Example 3. 1040x irs form Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). 1040x irs form In this case, the amount she realizes is $170,000. 1040x irs form This is the canceled debt ($180,000) up to the FMV of the land ($170,000). 1040x irs form Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). 1040x irs form She has a $30,000 deductible loss, which she figures on Form 4797, Part I. 1040x irs form She is also treated as receiving ordinary income from cancellation of debt. 1040x irs form That income is $10,000 ($180,000 − $170,000). 1040x irs form This is the part of the canceled debt not included in the amount realized. 1040x irs form She reports this as other income on Schedule F, line 8. 1040x irs form Seller's (lender's) gain or loss on repossession. 1040x irs form   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. 1040x irs form For more information, see Repossession in Publication 537, Installment Sales. 1040x irs form Cancellation of debt. 1040x irs form   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. 1040x irs form This income is separate from any gain or loss realized from the foreclosure or repossession. 1040x irs form Report the income from cancellation of a business debt on Schedule F, line 8. 1040x irs form Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 1040x irs form    You can use Worksheet 8-1 to figure your income from cancellation of debt. 1040x irs form   However, income from cancellation of debt is not taxed if any of the following apply. 1040x irs form The cancellation is intended as a gift. 1040x irs form The debt is qualified farm debt (see chapter 3). 1040x irs form The debt is qualified real property business debt (see chapter 5 of Publication 334). 1040x irs form You are insolvent or bankrupt (see  chapter 3). 1040x irs form The debt is qualified principal residence indebtedness (see chapter 3). 1040x irs form   Use Form 982 to report the income exclusion. 1040x irs form Abandonment The abandonment of property is a disposition of property. 1040x irs form You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. 1040x irs form Business or investment property. 1040x irs form   Loss from abandonment of business or investment property is deductible as a loss. 1040x irs form Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 1040x irs form If your adjusted basis is more than the amount you realize (if any), then you have a loss. 1040x irs form If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 1040x irs form This rule also applies to leasehold improvements the lessor made for the lessee. 1040x irs form However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . 1040x irs form   If the abandoned property is secured by debt, special rules apply. 1040x irs form The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). 1040x irs form For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). 1040x irs form The abandonment loss is deducted in the tax year in which the loss is sustained. 1040x irs form Report the loss on Form 4797, Part II, line 10. 1040x irs form Personal-use property. 1040x irs form   You cannot deduct any loss from abandonment of your home or other property held for personal use. 1040x irs form Canceled debt. 1040x irs form   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. 1040x irs form This income is separate from any loss realized from abandonment of the property. 1040x irs form Report income from cancellation of a debt related to a business or rental activity as business or rental income. 1040x irs form Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 1040x irs form   However, income from cancellation of debt is not taxed in certain circumstances. 1040x irs form See Cancellation of debt earlier under Foreclosure or Repossession . 1040x irs form Forms 1099-A and 1099-C. 1040x irs form   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. 1040x irs form However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. 1040x irs form The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 1040x irs form For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 1040x irs form Prev  Up  Next   Home   More Online Publications
Print - Click this link to Print this page

The Commissioner's Section

Commissioner John Koskinen
John Koskinen is the 48th Commissioner of the Internal Revenue Service.

Commissioner's Comments, Statements and Remarks
IRS Commissioner discusses a range of tax administration issues.

Previous IRS Commissioners
There have been 47 previous commissioners of Internal Revenue and 26 acting commissioners since the agency was created in 1862.

Longest- and Shortest-Serving Commissioners of Internal Revenue
Before RRA-98 set a five-year term of office, the average length of a Commissioner's tenure was about three years. These were anything but average.

Page Last Reviewed or Updated: 27-Mar-2014

The 1040x Irs Form

1040x irs form 4. 1040x irs form   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. 1040x irs form Rent-to-own contract. 1040x irs form What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. 1040x irs form MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). 1040x irs form Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. 1040x irs form To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. 1040x irs form This chapter explains how to determine which MACRS depreciation system applies to your property. 1040x irs form It also discusses other information you need to know before you can figure depreciation under MACRS. 1040x irs form This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. 1040x irs form It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. 1040x irs form Finally, it explains when and how to recapture MACRS depreciation. 1040x irs form Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. 1040x irs form Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. 1040x irs form You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 1040x irs form If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. 1040x irs form Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. 1040x irs form If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. 1040x irs form Required use of ADS. 1040x irs form   You must use ADS for the following property. 1040x irs form Listed property used 50% or less in a qualified business use. 1040x irs form See chapter 5 for information on listed property. 1040x irs form Any tangible property used predominantly outside the United States during the year. 1040x irs form Any tax-exempt use property. 1040x irs form Any tax-exempt bond-financed property. 1040x irs form All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. 1040x irs form Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. 1040x irs form If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. 1040x irs form Electing ADS. 1040x irs form   Although your property may qualify for GDS, you can elect to use ADS. 1040x irs form The election generally must cover all property in the same property class that you placed in service during the year. 1040x irs form However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. 1040x irs form Once you make this election, you can never revoke it. 1040x irs form   You make the election by completing line 20 in Part III of Form 4562. 1040x irs form Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. 1040x irs form These property classes are also listed under column (a) in section B, Part III, of Form 4562. 1040x irs form For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. 1040x irs form 3-year property. 1040x irs form Tractor units for over-the-road use. 1040x irs form Any race horse over 2 years old when placed in service. 1040x irs form (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. 1040x irs form ) Any other horse (other than a race horse) over 12 years old when placed in service. 1040x irs form Qualified rent-to-own property (defined later). 1040x irs form 5-year property. 1040x irs form Automobiles, taxis, buses, and trucks. 1040x irs form Computers and peripheral equipment. 1040x irs form Office machinery (such as typewriters, calculators, and copiers). 1040x irs form Any property used in research and experimentation. 1040x irs form Breeding cattle and dairy cattle. 1040x irs form Appliances, carpets, furniture, etc. 1040x irs form , used in a residential rental real estate activity. 1040x irs form Certain geothermal, solar, and wind energy property. 1040x irs form 7-year property. 1040x irs form Office furniture and fixtures (such as desks, files, and safes). 1040x irs form Agricultural machinery and equipment. 1040x irs form Any property that does not have a class life and has not been designated by law as being in any other class. 1040x irs form Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. 1040x irs form Any natural gas gathering line placed in service after April 11, 2005. 1040x irs form See Natural gas gathering line and electric transmission property , later. 1040x irs form 10-year property. 1040x irs form Vessels, barges, tugs, and similar water transportation equipment. 1040x irs form Any single purpose agricultural or horticultural structure. 1040x irs form Any tree or vine bearing fruits or nuts. 1040x irs form Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. 1040x irs form 15-year property. 1040x irs form Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). 1040x irs form Any retail motor fuels outlet (defined later), such as a convenience store. 1040x irs form Any municipal wastewater treatment plant. 1040x irs form Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. 1040x irs form Any qualified restaurant property (defined later) placed in service before January 1, 2014. 1040x irs form Initial clearing and grading land improvements for gas utility property. 1040x irs form Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. 1040x irs form See Natural gas gathering line and electric transmission property , later. 1040x irs form Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. 1040x irs form Any qualified retail improvement property placed in service before January 1, 2014. 1040x irs form 20-year property. 1040x irs form Farm buildings (other than single purpose agricultural or horticultural structures). 1040x irs form Municipal sewers not classified as 25-year property. 1040x irs form Initial clearing and grading land improvements for electric utility transmission and distribution plants. 1040x irs form 25-year property. 1040x irs form This class is water utility property, which is either of the following. 1040x irs form Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. 1040x irs form Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. 1040x irs form Residential rental property. 1040x irs form This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. 1040x irs form A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. 1040x irs form It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. 1040x irs form If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. 1040x irs form Nonresidential real property. 1040x irs form This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. 1040x irs form 5 years. 1040x irs form Qualified rent-to-own property. 1040x irs form   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. 1040x irs form It is tangible personal property generally used in the home for personal use. 1040x irs form It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. 1040x irs form Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. 1040x irs form   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. 1040x irs form However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. 1040x irs form Rent-to-own dealer. 1040x irs form   You are a rent-to-own dealer if you meet all the following requirements. 1040x irs form You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. 1040x irs form A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. 1040x irs form The property is tangible personal property of a type generally used within the home for personal use. 1040x irs form Rent-to-own contract. 1040x irs form   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. 1040x irs form Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). 1040x irs form Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. 1040x irs form If the payments are decreasing, no payment can be less than 40% of the largest payment. 1040x irs form Provides for total payments that generally exceed the normal retail price of the property plus interest. 1040x irs form Provides for total payments that do not exceed $10,000 for each item of property. 1040x irs form Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. 1040x irs form Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. 1040x irs form Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. 1040x irs form Motorsports entertainment complex. 1040x irs form   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. 1040x irs form The events must be open to the public for the price of admission. 1040x irs form Qualified smart electric grid system. 1040x irs form   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. 1040x irs form Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. 1040x irs form Retail motor fuels outlet. 1040x irs form   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. 1040x irs form It is not larger than 1,400 square feet. 1040x irs form 50% or more of the gross revenues generated from the property are derived from petroleum sales. 1040x irs form 50% or more of the floor space in the property is devoted to petroleum marketing sales. 1040x irs form A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. 1040x irs form Qualified leasehold improvement property. 1040x irs form    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. 1040x irs form   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. 1040x irs form A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. 1040x irs form Examples include the following. 1040x irs form A complete liquidation of a subsidiary. 1040x irs form A transfer to a corporation controlled by the transferor. 1040x irs form An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. 1040x irs form Qualified restaurant property. 1040x irs form   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. 1040x irs form Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. 1040x irs form Qualified smart electric meter. 1040x irs form   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. 1040x irs form Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. 1040x irs form Natural gas gathering line and electric transmission property. 1040x irs form   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. 1040x irs form The original use of the property must have begun with you after April 11, 2005. 1040x irs form Original use means the first use to which the property is put, whether or not by you. 1040x irs form Therefore, property used by any person before April 12, 2005, is not original use. 1040x irs form Original use includes additional capital expenditures you incurred to recondition or rebuild your property. 1040x irs form However, original use does not include the cost of reconditioned or rebuilt property you acquired. 1040x irs form Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. 1040x irs form The property must not be placed in service under a binding contract in effect before April 12, 2005. 1040x irs form The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. 1040x irs form Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. 1040x irs form What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. 1040x irs form The placed in service date for your property is the date the property is ready and available for a specific use. 1040x irs form It is therefore not necessarily the date it is first used. 1040x irs form If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. 1040x irs form See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. 1040x irs form What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. 1040x irs form For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . 1040x irs form Reduce that amount by any credits and deductions allocable to the property. 1040x irs form The following are examples of some credits and deductions that reduce basis. 1040x irs form Any deduction for section 179 property. 1040x irs form Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. 1040x irs form Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. 1040x irs form Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. 1040x irs form Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . 1040x irs form Any deduction for removal of barriers to the disabled and the elderly. 1040x irs form Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. 1040x irs form Any special depreciation allowance. 1040x irs form Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. 1040x irs form For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. 1040x irs form Enter the basis for depreciation under column (c) in Part III of Form 4562. 1040x irs form For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . 1040x irs form Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. 1040x irs form It is determined based on the depreciation system (GDS or ADS) used. 1040x irs form Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. 1040x irs form Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. 1040x irs form 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. 1040x irs form 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. 1040x irs form 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. 1040x irs form 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. 1040x irs form 431. 1040x irs form 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). 1040x irs form The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. 1040x irs form Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. 1040x irs form Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). 1040x irs form Office in the home. 1040x irs form   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. 1040x irs form 5 years if you began using it for business before May 13, 1993). 1040x irs form However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. 1040x irs form 5 years. 1040x irs form See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. 1040x irs form Home changed to rental use. 1040x irs form   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. 1040x irs form 5 years. 1040x irs form Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. 1040x irs form The following table shows these shorter recovery periods. 1040x irs form Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . 1040x irs form Use this chart to find the correct percentage table to use for qualified Indian reservation property. 1040x irs form IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. 1040x irs form   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. 1040x irs form You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. 1040x irs form The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. 1040x irs form   The following property is not qualified property. 1040x irs form Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. 1040x irs form Property acquired directly or indirectly from a related person. 1040x irs form Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. 1040x irs form These activities are defined in section 4 of the Indian Regulatory Act (25 U. 1040x irs form S. 1040x irs form C. 1040x irs form 2703). 1040x irs form Any property you must depreciate under ADS. 1040x irs form Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). 1040x irs form Qualified infrastructure property. 1040x irs form   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. 1040x irs form Qualified infrastructure property is property that meets all the following rules. 1040x irs form It is qualified property, as defined earlier, except that it is outside the reservation. 1040x irs form It benefits the tribal infrastructure. 1040x irs form It is available to the general public. 1040x irs form It is placed in service in connection with the active conduct of a trade or business within a reservation. 1040x irs form Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. 1040x irs form Related person. 1040x irs form   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. 1040x irs form Indian reservation. 1040x irs form   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. 1040x irs form S. 1040x irs form C. 1040x irs form 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. 1040x irs form S. 1040x irs form C. 1040x irs form 1903(10)). 1040x irs form Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. 1040x irs form For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. 1040x irs form Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. 1040x irs form The following table shows some of the ADS recovery periods. 1040x irs form Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. 1040x irs form Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . 1040x irs form Tax-exempt use property subject to a lease. 1040x irs form   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. 1040x irs form Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. 1040x irs form See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. 1040x irs form Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 1040x irs form The recovery period begins on the later of the following dates. 1040x irs form The date you place the addition or improvement in service. 1040x irs form The date you place in service the property to which you made the addition or improvement. 1040x irs form If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). 1040x irs form Example. 1040x irs form You own a rental home that you have been renting out since 1981. 1040x irs form If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. 1040x irs form Under GDS, the property class for the addition is residential rental property and its recovery period is 27. 1040x irs form 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. 1040x irs form Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. 1040x irs form The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. 1040x irs form The mid-month convention. 1040x irs form   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. 1040x irs form   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. 1040x irs form This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. 1040x irs form   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. 1040x irs form The mid-quarter convention. 1040x irs form   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. 1040x irs form   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. 1040x irs form This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. 1040x irs form   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. 1040x irs form    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. 1040x irs form However, it does not reflect any reduction in basis for any special depreciation allowance. 1040x irs form The half-year convention. 1040x irs form   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. 1040x irs form   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. 1040x irs form This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. 1040x irs form   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. 1040x irs form Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. 1040x irs form The 200% declining balance method over a GDS recovery period. 1040x irs form The 150% declining balance method over a GDS recovery period. 1040x irs form The straight line method over a GDS recovery period. 1040x irs form The straight line method over an ADS recovery period. 1040x irs form For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. 1040x irs form If you made this election, continue to use the same method and recovery period for that property. 1040x irs form Table 4–1 lists the types of property you can depreciate under each method. 1040x irs form It also gives a brief explanation of the method, including any benefits that may apply. 1040x irs form Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. 1040x irs form You can depreciate real property using the straight line method under either GDS or ADS. 1040x irs form Fruit or nut trees and vines. 1040x irs form   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. 1040x irs form ADS required for some farmers. 1040x irs form   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. 1040x irs form You must use ADS for all property you place in service in any year the election is in effect. 1040x irs form See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. 1040x irs form Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. 1040x irs form You must make the election by the due date of the return (including extensions) for the year you placed the property in service. 1040x irs form However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040x irs form Attach the election to the amended return and write “Filed pursuant to section 301. 1040x irs form 9100-2” on the election statement. 1040x irs form File the amended return at the same address you filed the original return. 1040x irs form Once you make the election, you cannot change it. 1040x irs form If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. 1040x irs form However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. 1040x irs form 150% election. 1040x irs form   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. 1040x irs form Make the election by entering “150 DB” under column (f) in Part III of Form 4562. 1040x irs form Straight line election. 1040x irs form   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. 1040x irs form Make the election by entering  “S/L” under column (f) in Part III of Form 4562. 1040x irs form Election of ADS. 1040x irs form   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. 1040x irs form ADS uses the straight line method of depreciation over fixed ADS recovery periods. 1040x irs form Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. 1040x irs form   Make the election by completing line 20 in Part III of Form 4562. 1040x irs form Farm property. 1040x irs form   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. 1040x irs form The straight line method over a GDS recovery period. 1040x irs form The straight line method over an ADS recovery period. 1040x irs form Table 4-1. 1040x irs form Depreciation Methods Note. 1040x irs form The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. 1040x irs form Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. 1040x irs form S. 1040x irs form  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. 1040x irs form 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. 1040x irs form Then, you are ready to figure your depreciation deduction. 1040x irs form You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. 1040x irs form Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. 1040x irs form These percentage tables are in Appendix A near the end of this publication. 1040x irs form Which table to use. 1040x irs form    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. 1040x irs form The percentage tables immediately follow the guide. 1040x irs form Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. 1040x irs form You must apply the rates in the percentage tables to your property's unadjusted basis. 1040x irs form You cannot use the percentage tables for a short tax year. 1040x irs form See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. 1040x irs form Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. 1040x irs form You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. 1040x irs form Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. 1040x irs form Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 1040x irs form   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. 1040x irs form For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. 1040x irs form See Figuring the Deduction Without Using the Tables, later. 1040x irs form Basis adjustment due to casualty loss. 1040x irs form   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. 1040x irs form For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. 1040x irs form See Figuring the Deduction Without Using the Tables, later. 1040x irs form Example. 1040x irs form On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. 1040x irs form It cost $39,000 and she elected a section 179 deduction of $24,000. 1040x irs form She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. 1040x irs form Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). 1040x irs form She figured her MACRS depreciation deduction using the percentage tables. 1040x irs form For 2012, her MACRS depreciation deduction was $268. 1040x irs form In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. 1040x irs form She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. 1040x irs form Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. 1040x irs form She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. 1040x irs form She must now figure her depreciation for 2013 without using the percentage tables. 1040x irs form Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. 1040x irs form Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. 1040x irs form However, you do reduce your original basis by other amounts, including the following. 1040x irs form Any amortization taken on the property. 1040x irs form Any section 179 deduction claimed. 1040x irs form Any special depreciation allowance taken on the property. 1040x irs form For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. 1040x irs form If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. 1040x irs form MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. 1040x irs form Use a separate worksheet for each item of property. 1040x irs form Then, use the information from this worksheet to prepare Form 4562. 1040x irs form Do not use this worksheet for automobiles. 1040x irs form Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. 1040x irs form MACRS Worksheet Part I   1. 1040x irs form MACRS system (GDS or ADS)   2. 1040x irs form Property class   3. 1040x irs form Date placed in service   4. 1040x irs form Recovery period   5. 1040x irs form Method and convention   6. 1040x irs form Depreciation rate (from tables)   Part II   7. 1040x irs form Cost or other basis* $     8. 1040x irs form Business/investment use   %   9. 1040x irs form Multiply line 7 by line 8   $ 10. 1040x irs form Total claimed for section 179 deduction and other items   $ 11. 1040x irs form Subtract line 10 from line 9. 1040x irs form This is your tentative basis for depreciation   $ 12. 1040x irs form Multiply line 11 by . 1040x irs form 50 if the 50% special depreciation allowance applies. 1040x irs form This is your special depreciation allowance. 1040x irs form Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. 1040x irs form Subtract line 12 from line 11. 1040x irs form This is your basis for depreciation     14. 1040x irs form Depreciation rate (from line 6)     15. 1040x irs form Multiply line 13 by line 14. 1040x irs form This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. 1040x irs form The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. 1040x irs form Example. 1040x irs form You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. 1040x irs form You use the furniture only for business. 1040x irs form This is the only property you placed in service this year. 1040x irs form You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. 1040x irs form You use GDS and the half-year convention to figure your depreciation. 1040x irs form You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. 1040x irs form Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. 1040x irs form You figure your depreciation deduction using the MACRS worksheet as follows. 1040x irs form MACRS Worksheet Part I 1. 1040x irs form MACRS system (GDS or ADS) GDS 2. 1040x irs form Property class 7-year 3. 1040x irs form Date placed in service 8/11/13 4. 1040x irs form Recovery period 7-Year 5. 1040x irs form Method and convention 200%DB/Half-Year 6. 1040x irs form Depreciation rate (from tables) . 1040x irs form 1429 Part II 7. 1040x irs form Cost or other basis* $10,000     8. 1040x irs form Business/investment use 100 %   9. 1040x irs form Multiply line 7 by line 8   $10,000 10. 1040x irs form Total claimed for section 179 deduction and other items   -0- 11. 1040x irs form Subtract line 10 from line 9. 1040x irs form This is your tentative basis for depreciation   $10,000 12. 1040x irs form Multiply line 11 by . 1040x irs form 50 if the 50% special depreciation allowance applies. 1040x irs form This is your special depreciation allowance. 1040x irs form Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. 1040x irs form Subtract line 12 from line 11. 1040x irs form This is your basis for depreciation   $10,000 14. 1040x irs form Depreciation rate (from line 6)   . 1040x irs form 1429 15. 1040x irs form Multiply line 13 by line 14. 1040x irs form This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. 1040x irs form If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. 1040x irs form Year   Basis Percentage Deduction 2014 $ 10,000 24. 1040x irs form 49%   $2,449   2015   10,000 17. 1040x irs form 49   1,749   2016   10,000 12. 1040x irs form 49   1,249   2017   10,000 8. 1040x irs form 93   893   2018   10,000 8. 1040x irs form 92   892   2019   10,000 8. 1040x irs form 93   893   2020   10,000 4. 1040x irs form 46   446   Examples The following examples are provided to show you how to use the percentage tables. 1040x irs form In both examples, assume the following. 1040x irs form You use the property only for business. 1040x irs form You use the calendar year as your tax year. 1040x irs form You use GDS for all the properties. 1040x irs form Example 1. 1040x irs form You bought a building and land for $120,000 and placed it in service on March 8. 1040x irs form The sales contract showed that the building cost $100,000 and the land cost $20,000. 1040x irs form It is nonresidential real property. 1040x irs form The building's unadjusted basis is its original cost, $100,000. 1040x irs form You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. 1040x irs form March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. 1040x irs form Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. 1040x irs form 033%   $2,033   2nd   100,000 2. 1040x irs form 564   2,564   3rd   100,000 2. 1040x irs form 564   2,564   Example 2. 1040x irs form During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. 1040x irs form You placed the machine in service in January, the furniture in September, and the computer in October. 1040x irs form You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. 1040x irs form You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. 1040x irs form The total bases of all property you placed in service during the year is $10,000. 1040x irs form The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. 1040x irs form Therefore, you must use the mid-quarter convention for all three items. 1040x irs form You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. 1040x irs form The machine is 7-year property placed in service in the first quarter, so you use Table A-2. 1040x irs form The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. 1040x irs form Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. 1040x irs form Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. 1040x irs form Year Property Basis Percentage Deduction 1st Machine $4,000 25. 1040x irs form 00 $1,000   2nd Machine 4,000 21. 1040x irs form 43 857   1st Furniture 1,000 10. 1040x irs form 71 107   2nd Furniture 1,000 25. 1040x irs form 51 255   1st Computer 5,000 5. 1040x irs form 00 250   2nd Computer 5,000 38. 1040x irs form 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. 1040x irs form You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. 1040x irs form After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. 1040x irs form Half-year convention used. 1040x irs form   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. 1040x irs form Mid-quarter convention used. 1040x irs form   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. 1040x irs form Quarter Percentage First 12. 1040x irs form 5% Second 37. 1040x irs form 5 Third 62. 1040x irs form 5 Fourth 87. 1040x irs form 5 Example. 1040x irs form On December 2, 2010, you placed in service an item of 5-year property costing $10,000. 1040x irs form You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. 1040x irs form Your unadjusted basis for the property was $10,000. 1040x irs form You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. 1040x irs form Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. 1040x irs form Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. 1040x irs form 80% of $10,000). 1040x irs form You disposed of the property on April 6, 2013. 1040x irs form To determine your depreciation deduction for 2013, first figure the deduction for the full year. 1040x irs form This is $1,368 (13. 1040x irs form 68% of $10,000). 1040x irs form April is in the second quarter of the year, so you multiply $1,368 by 37. 1040x irs form 5% to get your depreciation deduction of $513 for 2013. 1040x irs form Mid-month convention used. 1040x irs form   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. 1040x irs form The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. 1040x irs form The denominator is 12. 1040x irs form Example. 1040x irs form On July 2, 2011, you purchased and placed in service residential rental property. 1040x irs form The property cost $100,000, not including the cost of land. 1040x irs form You used Table A-6 to figure your MACRS depreciation for this property. 1040x irs form You sold the property on March 2, 2013. 1040x irs form You file your tax return based on the calendar year. 1040x irs form A full year of depreciation for 2013 is $3,636. 1040x irs form This is $100,000 multiplied by . 1040x irs form 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . 1040x irs form You then apply the mid-month convention for the 2½ months of use in 2013. 1040x irs form Treat the month of disposition as one-half month of use. 1040x irs form Multiply $3,636 by the fraction, 2. 1040x irs form 5 over 12, to get your 2013 depreciation deduction of $757. 1040x irs form 50. 1040x irs form Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. 1040x irs form Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. 1040x irs form Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. 1040x irs form Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. 1040x irs form You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. 1040x irs form The straight line method is explained later. 1040x irs form You figure depreciation for the year you place property in service as follows. 1040x irs form Multiply your adjusted basis in the property by the declining balance rate. 1040x irs form Apply the applicable convention. 1040x irs form You figure depreciation for all other years (before the year you switch to the straight line method) as follows. 1040x irs form Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. 1040x irs form Multiply this new adjusted basis by the same declining balance rate used in earlier years. 1040x irs form If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. 1040x irs form Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. 1040x irs form Declining balance rate. 1040x irs form   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. 1040x irs form For example, for 3-year property depreciated using the 200% declining balance method, divide 2. 1040x irs form 00 (200%) by 3 to get 0. 1040x irs form 6667, or a 66. 1040x irs form 67% declining balance rate. 1040x irs form For 15-year property depreciated using the 150% declining balance method, divide 1. 1040x irs form 50 (150%) by 15 to get 0. 1040x irs form 10, or a 10% declining balance rate. 1040x irs form   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. 1040x irs form Property Class Method Declining Balance Rate Year 3-year 200% DB 66. 1040x irs form 667% 3rd 5-year 200% DB 40. 1040x irs form 0 4th 7-year 200% DB 28. 1040x irs form 571 5th 10-year 200% DB 20. 1040x irs form 0 7th 15-year 150% DB 10. 1040x irs form 0 7th 20-year 150% DB 7. 1040x irs form 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. 1040x irs form You must use the applicable convention in the year you place the property in service and the year you dispose of the property. 1040x irs form You figure depreciation for the year you place property in service as follows. 1040x irs form Multiply your adjusted basis in the property by the straight line rate. 1040x irs form Apply the applicable convention. 1040x irs form You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. 1040x irs form Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). 1040x irs form Determine the depreciation rate for the year. 1040x irs form Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). 1040x irs form If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. 1040x irs form Straight line rate. 1040x irs form   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. 1040x irs form When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. 1040x irs form If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. 1040x irs form 0 (100%). 1040x irs form Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. 1040x irs form It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. 1040x irs form See Straight line rate in the previous discussion. 1040x irs form Use the applicable convention as explained in the following discussions. 1040x irs form Half-year convention. 1040x irs form   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. 1040x irs form You deduct a full year of depreciation for any other year during the recovery period. 1040x irs form   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. 1040x irs form If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. 1040x irs form If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. 1040x irs form Mid-quarter convention. 1040x irs form   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. 1040x irs form   A quarter of a full 12-month tax year is a period of 3 months. 1040x irs form The first quarter in a year begins on the first day of the tax year. 1040x irs form The second quarter begins on the first day of the fourth month of the tax year. 1040x irs form The third quarter begins on the first day of the seventh month of the tax year. 1040x irs form The fourth quarter begins on the first day of the tenth month of the tax year. 1040x irs form A calendar year is divided into the following quarters. 1040x irs form Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. 1040x irs form Quarter Percentage First 87. 1040x irs form 5% Second 62. 1040x irs form 5 Third 37. 1040x irs form 5 Fourth 12. 1040x irs form 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. 1040x irs form Quarter Percentage First 12. 1040x irs form 5% Second 37. 1040x irs form 5 Third 62. 1040x irs form 5 Fourth 87. 1040x irs form 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. 1040x irs form Mid-month convention. 1040x irs form   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. 1040x irs form Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. 1040x irs form The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. 1040x irs form 5). 1040x irs form The denominator is 12. 1040x irs form   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. 1040x irs form If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. 1040x irs form Example. 1040x irs form You use the calendar year and place nonresidential real property in service in August. 1040x irs form The property is in service 4 full months (September, October, November, and December). 1040x irs form Your numerator is 4. 1040x irs form 5 (4 full months plus 0. 1040x irs form 5). 1040x irs form You multiply the depreciation for a full year by 4. 1040x irs form 5/12, or 0. 1040x irs form 375. 1040x irs form Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. 1040x irs form Figures are rounded for purposes of the examples. 1040x irs form Assume for all the examples that you use a calendar year as your tax year. 1040x irs form Example 1—200% DB method and half-year convention. 1040x irs form In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. 1040x irs form You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. 1040x irs form You use GDS and the 200% declining balance (DB) method to figure your depreciation. 1040x irs form When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. 1040x irs form You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. 1040x irs form First year. 1040x irs form You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). 1040x irs form The result is 40%. 1040x irs form You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. 1040x irs form You apply the half-year convention by dividing the result ($400) by 2. 1040x irs form Depreciation for the first year under the 200% DB method is $200. 1040x irs form You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. 1040x irs form The result is 20%. 1040x irs form You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. 1040x irs form You apply the half-year convention by dividing the result ($200) by 2. 1040x irs form Depreciation for the first year under the SL method is $100. 1040x irs form The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. 1040x irs form Second year. 1040x irs form You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). 1040x irs form You multiply the result ($800) by the DB rate (40%). 1040x irs form Depreciation for the second year under the 200% DB method is $320. 1040x irs form You figure the SL depreciation rate by dividing 1 by 4. 1040x irs form 5, the number of years remaining in the recovery period. 1040x irs form (Based on the half-year convention, you used only half a year of the recovery period in the first year. 1040x irs form ) You multiply the reduced adjusted basis ($800) by the result (22. 1040x irs form 22%). 1040x irs form Depreciation under the SL method for the second year is $178. 1040x irs form The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. 1040x irs form Third year. 1040x irs form You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). 1040x irs form You multiply the result ($480) by the DB rate (40%). 1040x irs form Depreciation for the third year under the 200% DB method is $192. 1040x irs form You figure the SL depreciation rate by dividing 1 by 3. 1040x irs form 5. 1040x irs form You multiply the reduced adjusted basis ($480) by the result (28. 1040x irs form 57%). 1040x irs form Depreciation under the SL method for the third year is $137. 1040x irs form The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. 1040x irs form Fourth year. 1040x irs form You reduce the adjusted basis ($480) by the de