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

2011 Tax Act

Need 2011 TaxesTax Addendum Form2013 Irs Form 1040 EzHr Block Online TaxesHow Do You File 2011 TaxesHr Block Free Tax FilingCan I Do My 2012 Taxes NowIrs Tax Form 20101040 XFree Federal And State Tax Filing2006 Tax FilingTax Form 1040xIrs Ez Tax FormFilelate ComFree Tax Filing For Military1040ez Tax TableStudents And TaxesHow To File 1040nr Ez2011 Federal Income Tax Forms2012 State Tax Form2012 Federal Tax Form 1040Amend Taxes 20101049ezFile Taxes FreeUs Tax Forms 2012How To File A Tax AmendmentIrs Gov Free File Federal And State TaxesIrs Free File 1040ezAmended Tax Return 20132012 Tax Forms Irs1040ez DownloadFiling A 2012 Tax Return1040ez Form 2013Free Tax Filing Online 2011Income Tax Forms 1040ezTax Return AmendmentTax Planning Us 10402011 1040 Tax FormFile 1040nr Online FreeHow To File Amended Tax Return 2013

2011 Tax Act

2011 tax act 3. 2011 tax act   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. 2011 tax act Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. 2011 tax act Its treatment as ordinary or capital is determined under rules for section 1231 transactions. 2011 tax act When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. 2011 tax act Any remaining gain is a section 1231 gain. 2011 tax act Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. 2011 tax act Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). 2011 tax act Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. 2011 tax act If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). 2011 tax act Do not take that gain into account as section 1231 gain. 2011 tax act Section 1231 transactions. 2011 tax act   The following transactions result in gain or loss subject to section 1231 treatment. 2011 tax act Sales or exchanges of real property or depreciable personal property. 2011 tax act This property must be used in a trade or business and held longer than 1 year. 2011 tax act Generally, property held for the production of rents or royalties is considered to be used in a trade or business. 2011 tax act Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). 2011 tax act Sales or exchanges of leaseholds. 2011 tax act The leasehold must be used in a trade or business and held longer than 1 year. 2011 tax act Sales or exchanges of cattle and horses. 2011 tax act The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. 2011 tax act Sales or exchanges of other livestock. 2011 tax act This livestock does not include poultry. 2011 tax act It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. 2011 tax act Sales or exchanges of unharvested crops. 2011 tax act The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. 2011 tax act You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). 2011 tax act Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. 2011 tax act Cutting of timber or disposal of timber, coal, or iron ore. 2011 tax act The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. 2011 tax act Condemnations. 2011 tax act The condemned property must have been held longer than 1 year. 2011 tax act It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. 2011 tax act It cannot be property held for personal use. 2011 tax act Casualties and thefts. 2011 tax act The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). 2011 tax act You must have held the property longer than 1 year. 2011 tax act However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. 2011 tax act For more information on casualties and thefts, see Publication 547. 2011 tax act Property for sale to customers. 2011 tax act   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. 2011 tax act If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. 2011 tax act Example. 2011 tax act You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. 2011 tax act Customers make deposits on the reels, which you refund if the reels are returned within a year. 2011 tax act If they are not returned, you keep each deposit as the agreed-upon sales price. 2011 tax act Most reels are returned within the 1-year period. 2011 tax act You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. 2011 tax act Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. 2011 tax act Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. 2011 tax act Copyrights. 2011 tax act    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). 2011 tax act The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. 2011 tax act Treatment as ordinary or capital. 2011 tax act   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. 2011 tax act If you have a net section 1231 loss, it is ordinary loss. 2011 tax act If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. 2011 tax act The rest, if any, is long-term capital gain. 2011 tax act Nonrecaptured section 1231 losses. 2011 tax act   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. 2011 tax act Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. 2011 tax act These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. 2011 tax act Example. 2011 tax act In 2013, Ben has a $2,000 net section 1231 gain. 2011 tax act To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. 2011 tax act From 2008 through 2012 he had the following section 1231 gains and losses. 2011 tax act Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. 2011 tax act 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. 2011 tax act To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. 2011 tax act This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. 2011 tax act On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. 2011 tax act Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. 2011 tax act Whether the adjusted basis was figured using depreciation or amortization another person claimed. 2011 tax act Corporate distributions. 2011 tax act   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. 2011 tax act General asset accounts. 2011 tax act   Different rules apply to dispositions of property you depreciated using a general asset account. 2011 tax act For information on these rules, see Publication 946. 2011 tax act Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. 2011 tax act See Gain Treated as Ordinary Income, later. 2011 tax act Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. 2011 tax act See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. 2011 tax act Section 1245 property defined. 2011 tax act   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. 2011 tax act Personal property (either tangible or intangible). 2011 tax act Other tangible property (except buildings and their structural components) used as any of the following. 2011 tax act See Buildings and structural components below. 2011 tax act An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. 2011 tax act A research facility in any of the activities in (a). 2011 tax act A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). 2011 tax act That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. 2011 tax act Amortization of certified pollution control facilities. 2011 tax act The section 179 expense deduction. 2011 tax act Deduction for clean-fuel vehicles and certain refueling property. 2011 tax act Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. 2011 tax act Deduction for certain qualified refinery property. 2011 tax act Deduction for qualified energy efficient commercial building property. 2011 tax act Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. 2011 tax act (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). 2011 tax act ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). 2011 tax act Expenditures to remove architectural and transportation barriers to the handicapped and elderly. 2011 tax act Deduction for qualified tertiary injectant expenses. 2011 tax act Certain reforestation expenditures. 2011 tax act Deduction for election to expense qualified advanced mine safety equipment property. 2011 tax act Single purpose agricultural (livestock) or horticultural structures. 2011 tax act Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. 2011 tax act Any railroad grading or tunnel bore. 2011 tax act Buildings and structural components. 2011 tax act   Section 1245 property does not include buildings and structural components. 2011 tax act The term building includes a house, barn, warehouse, or garage. 2011 tax act The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. 2011 tax act   Do not treat a structure that is essentially machinery or equipment as a building or structural component. 2011 tax act Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. 2011 tax act   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. 2011 tax act Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. 2011 tax act Facility for bulk storage of fungible commodities. 2011 tax act   This term includes oil or gas storage tanks and grain storage bins. 2011 tax act Bulk storage means the storage of a commodity in a large mass before it is used. 2011 tax act For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. 2011 tax act To be fungible, a commodity must be such that one part may be used in place of another. 2011 tax act   Stored materials that vary in composition, size, and weight are not fungible. 2011 tax act Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. 2011 tax act For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. 2011 tax act Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. 2011 tax act The depreciation and amortization allowed or allowable on the property. 2011 tax act The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). 2011 tax act A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. 2011 tax act For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. 2011 tax act See Gifts and Transfers at Death, later. 2011 tax act Use Part III of Form 4797 to figure the ordinary income part of the gain. 2011 tax act Depreciation taken on other property or taken by other taxpayers. 2011 tax act   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. 2011 tax act Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. 2011 tax act Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). 2011 tax act Depreciation and amortization. 2011 tax act   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. 2011 tax act Ordinary depreciation deductions. 2011 tax act Any special depreciation allowance you claimed. 2011 tax act Amortization deductions for all the following costs. 2011 tax act Acquiring a lease. 2011 tax act Lessee improvements. 2011 tax act Certified pollution control facilities. 2011 tax act Certain reforestation expenses. 2011 tax act Section 197 intangibles. 2011 tax act Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. 2011 tax act Franchises, trademarks, and trade names acquired before August 11, 1993. 2011 tax act The section 179 deduction. 2011 tax act Deductions for all the following costs. 2011 tax act Removing barriers to the disabled and the elderly. 2011 tax act Tertiary injectant expenses. 2011 tax act Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). 2011 tax act Environmental cleanup costs. 2011 tax act Certain reforestation expenses. 2011 tax act Qualified disaster expenses. 2011 tax act Any basis reduction for the investment credit (minus any basis increase for credit recapture). 2011 tax act Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). 2011 tax act Example. 2011 tax act You file your returns on a calendar year basis. 2011 tax act In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. 2011 tax act You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. 2011 tax act You did not take the section 179 deduction. 2011 tax act You sold the truck in May 2013 for $7,000. 2011 tax act The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). 2011 tax act Figure the gain treated as ordinary income as follows. 2011 tax act 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. 2011 tax act   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. 2011 tax act   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. 2011 tax act Depreciation allowed or allowable. 2011 tax act   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. 2011 tax act However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. 2011 tax act If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. 2011 tax act   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. 2011 tax act Multiple asset accounts. 2011 tax act   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. 2011 tax act Example. 2011 tax act In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. 2011 tax act All of the depreciation was recorded in a single depreciation account. 2011 tax act After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. 2011 tax act You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. 2011 tax act However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. 2011 tax act Normal retirement. 2011 tax act   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. 2011 tax act Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. 2011 tax act To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. 2011 tax act Section 1250 property defined. 2011 tax act   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. 2011 tax act It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. 2011 tax act A fee simple interest in land is not included because it is not depreciable. 2011 tax act   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. 2011 tax act Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. 2011 tax act For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. 2011 tax act For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. 2011 tax act If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. 2011 tax act You will not have additional depreciation if any of the following conditions apply to the property disposed of. 2011 tax act You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. 2011 tax act In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. 2011 tax act The property was residential low-income rental property you held for 162/3 years or longer. 2011 tax act For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. 2011 tax act You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. 2011 tax act The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. 2011 tax act These properties are depreciated using the straight line method. 2011 tax act In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. 2011 tax act Depreciation taken by other taxpayers or on other property. 2011 tax act   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). 2011 tax act Example. 2011 tax act Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. 2011 tax act Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. 2011 tax act On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. 2011 tax act At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). 2011 tax act Depreciation allowed or allowable. 2011 tax act   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. 2011 tax act If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. 2011 tax act Retired or demolished property. 2011 tax act   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. 2011 tax act Example. 2011 tax act A wing of your building is totally destroyed by fire. 2011 tax act The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. 2011 tax act Figuring straight line depreciation. 2011 tax act   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. 2011 tax act If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. 2011 tax act   Salvage value and useful life are not used for the ACRS method of depreciation. 2011 tax act Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. 2011 tax act   The straight line method is applied without any basis reduction for the investment credit. 2011 tax act Property held by lessee. 2011 tax act   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. 2011 tax act This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. 2011 tax act The same rule applies to the cost of acquiring a lease. 2011 tax act   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. 2011 tax act However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. 2011 tax act Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. 2011 tax act The percentages for these types of real property are as follows. 2011 tax act Nonresidential real property. 2011 tax act   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. 2011 tax act For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. 2011 tax act Residential rental property. 2011 tax act   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. 2011 tax act The percentage for periods before 1976 is zero. 2011 tax act Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. 2011 tax act Low-income housing. 2011 tax act    Low-income housing includes all the following types of residential rental property. 2011 tax act Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. 2011 tax act Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. 2011 tax act Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. 2011 tax act Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. 2011 tax act   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. 2011 tax act If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. 2011 tax act Foreclosure. 2011 tax act   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. 2011 tax act Example. 2011 tax act On June 1, 2001, you acquired low-income housing property. 2011 tax act On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. 2011 tax act The property qualifies for a reduced applicable percentage because it was held more than 100 full months. 2011 tax act The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. 2011 tax act Therefore, 70% of the additional depreciation is treated as ordinary income. 2011 tax act Holding period. 2011 tax act   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. 2011 tax act For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. 2011 tax act If you sold it on January 2, 2013, the holding period is exactly 192 full months. 2011 tax act The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. 2011 tax act Holding period for constructed, reconstructed, or erected property. 2011 tax act   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. 2011 tax act Property acquired by gift or received in a tax-free transfer. 2011 tax act   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. 2011 tax act   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. 2011 tax act See Low-Income Housing With Two or More Elements, next. 2011 tax act Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. 2011 tax act The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. 2011 tax act The following are the types of separate elements. 2011 tax act A separate improvement (defined below). 2011 tax act The basic section 1250 property plus improvements not qualifying as separate improvements. 2011 tax act The units placed in service at different times before all the section 1250 property is finished. 2011 tax act For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. 2011 tax act As a result, the apartment house consists of three separate elements. 2011 tax act The 36-month test for separate improvements. 2011 tax act   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. 2011 tax act Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. 2011 tax act Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). 2011 tax act $5,000. 2011 tax act The 1-year test. 2011 tax act   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. 2011 tax act The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. 2011 tax act In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. 2011 tax act Example. 2011 tax act The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. 2011 tax act During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. 2011 tax act The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. 2011 tax act However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. 2011 tax act Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. 2011 tax act Addition to the capital account. 2011 tax act   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. 2011 tax act   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. 2011 tax act For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. 2011 tax act The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. 2011 tax act The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. 2011 tax act   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. 2011 tax act If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. 2011 tax act Unadjusted basis. 2011 tax act   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. 2011 tax act However, the cost of components retired before that date is not included in the unadjusted basis. 2011 tax act Holding period. 2011 tax act   Use the following guidelines for figuring the applicable percentage for property with two or more elements. 2011 tax act The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. 2011 tax act The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. 2011 tax act The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. 2011 tax act   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. 2011 tax act Use the first day of a calendar month that is closest to the middle of the tax year. 2011 tax act If there are two first days of a month that are equally close to the middle of the year, use the earlier date. 2011 tax act Figuring ordinary income attributable to each separate element. 2011 tax act   Figure ordinary income attributable to each separate element as follows. 2011 tax act   Step 1. 2011 tax act Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. 2011 tax act   Step 2. 2011 tax act Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). 2011 tax act   Step 3. 2011 tax act Multiply the result in Step 2 by the applicable percentage for the element. 2011 tax act Example. 2011 tax act You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. 2011 tax act The property consisted of four elements (W, X, Y, and Z). 2011 tax act Step 1. 2011 tax act The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. 2011 tax act The sum of the additional depreciation for all the elements is $24,000. 2011 tax act Step 2. 2011 tax act The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. 2011 tax act Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). 2011 tax act $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. 2011 tax act Step 3. 2011 tax act The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. 2011 tax act From these facts, the sum of the ordinary income for each element is figured as follows. 2011 tax act   Step 1 Step 2 Step 3 Ordinary Income W . 2011 tax act 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . 2011 tax act 25 5,000 92% 4,600 Z . 2011 tax act 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. 2011 tax act In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. 2011 tax act In any other disposition of the property, figure the fair market value that is more than the adjusted basis. 2011 tax act Figure the additional depreciation for the periods after 1975. 2011 tax act Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. 2011 tax act Stop here if this is residential rental property or if (2) is equal to or more than (1). 2011 tax act This is the gain treated as ordinary income because of additional depreciation. 2011 tax act Subtract (2) from (1). 2011 tax act Figure the additional depreciation for periods after 1969 but before 1976. 2011 tax act Add the lesser of (4) or (5) to the result in (3). 2011 tax act This is the gain treated as ordinary income because of additional depreciation. 2011 tax act A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. 2011 tax act Use Form 4797, Part III, to figure the ordinary income part of the gain. 2011 tax act Corporations. 2011 tax act   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. 2011 tax act The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. 2011 tax act Report this additional ordinary income on Form 4797, Part III, line 26 (f). 2011 tax act Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. 2011 tax act This applies even if no payments are received in that year. 2011 tax act If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. 2011 tax act For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. 2011 tax act If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. 2011 tax act To do this, allocate the selling price and the payments you receive in the year of sale to each asset. 2011 tax act Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. 2011 tax act For a detailed discussion of installment sales, see Publication 537. 2011 tax act Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. 2011 tax act However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. 2011 tax act For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. 2011 tax act See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. 2011 tax act Part gift and part sale or exchange. 2011 tax act   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. 2011 tax act If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. 2011 tax act However, see Bargain sale to charity, later. 2011 tax act Example. 2011 tax act You transferred depreciable personal property to your son for $20,000. 2011 tax act When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. 2011 tax act You took depreciation of $30,000. 2011 tax act You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. 2011 tax act You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. 2011 tax act You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. 2011 tax act Gift to charitable organization. 2011 tax act   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. 2011 tax act Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. 2011 tax act   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. 2011 tax act For more information, see Giving Property That Has Increased in Value in Publication 526. 2011 tax act Bargain sale to charity. 2011 tax act   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. 2011 tax act First, figure the ordinary income as if you had sold the property at its fair market value. 2011 tax act Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. 2011 tax act See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. 2011 tax act Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. 2011 tax act Example. 2011 tax act You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. 2011 tax act Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. 2011 tax act If you had sold the property at its fair market value, your ordinary income would have been $5,000. 2011 tax act Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). 2011 tax act Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. 2011 tax act For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. 2011 tax act However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. 2011 tax act Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. 2011 tax act Example 1. 2011 tax act Janet Smith owned depreciable property that, upon her death, was inherited by her son. 2011 tax act No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. 2011 tax act However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. 2011 tax act Example 2. 2011 tax act The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. 2011 tax act If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. 2011 tax act Ordinary income from depreciation must be reported by the trust on the transfer. 2011 tax act Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. 2011 tax act For information on like-kind exchanges and involuntary conversions, see chapter 1. 2011 tax act Depreciable personal property. 2011 tax act   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. 2011 tax act The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. 2011 tax act The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. 2011 tax act Example 1. 2011 tax act You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. 2011 tax act The old machine cost you $5,000 two years ago. 2011 tax act You took depreciation deductions of $3,950. 2011 tax act Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. 2011 tax act Example 2. 2011 tax act You bought office machinery for $1,500 two years ago and deducted $780 depreciation. 2011 tax act This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). 2011 tax act You choose to postpone reporting gain, but replacement machinery cost you only $1,000. 2011 tax act Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. 2011 tax act All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. 2011 tax act Example 3. 2011 tax act A fire destroyed office machinery you bought for $116,000. 2011 tax act The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. 2011 tax act You received a $117,000 insurance payment, realizing a gain of $92,640. 2011 tax act You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. 2011 tax act $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. 2011 tax act The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. 2011 tax act The amount you must report as ordinary income on the transaction is $12,000, figured as follows. 2011 tax act 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. 2011 tax act Depreciable real property. 2011 tax act   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. 2011 tax act The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. 2011 tax act The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. 2011 tax act   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. 2011 tax act Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. 2011 tax act Example. 2011 tax act The state paid you $116,000 when it condemned your depreciable real property for public use. 2011 tax act You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). 2011 tax act You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. 2011 tax act You choose to postpone reporting the gain. 2011 tax act If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. 2011 tax act The ordinary income to be reported is $6,000, which is the greater of the following amounts. 2011 tax act The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. 2011 tax act The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. 2011 tax act   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. 2011 tax act Basis of property acquired. 2011 tax act   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. 2011 tax act   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). 2011 tax act However, if you acquired both depreciable real property and other property, allocate the total basis as follows. 2011 tax act Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. 2011 tax act Add the fair market value (or cost) of the other property acquired to the result in (1). 2011 tax act Divide the result in (1) by the result in (2). 2011 tax act Multiply the total basis by the result in (3). 2011 tax act This is the basis of the depreciable real property acquired. 2011 tax act If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). 2011 tax act Subtract the result in (4) from the total basis. 2011 tax act This is the basis of the other property acquired. 2011 tax act If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). 2011 tax act Example 1. 2011 tax act In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. 2011 tax act The property's adjusted basis was $38,400, with additional depreciation of $14,932. 2011 tax act On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. 2011 tax act Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). 2011 tax act You chose to postpone reporting the gain under the involuntary conversion rules. 2011 tax act Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. 2011 tax act The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. 2011 tax act The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. 2011 tax act If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. 2011 tax act Example 2. 2011 tax act John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. 2011 tax act He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. 2011 tax act He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. 2011 tax act Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. 2011 tax act The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. 2011 tax act The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. 2011 tax act The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. 2011 tax act The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. 2011 tax act 4. 2011 tax act The basis of the depreciable real property is $12,000. 2011 tax act This is the $30,000 total basis multiplied by the 0. 2011 tax act 4 figured in (3). 2011 tax act The basis of the other property (land) is $18,000. 2011 tax act This is the $30,000 total basis minus the $12,000 figured in (4). 2011 tax act The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. 2011 tax act Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. 2011 tax act Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. 2011 tax act See chapter 2. 2011 tax act In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. 2011 tax act In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. 2011 tax act These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. 2011 tax act The comparison should take into account all the following facts and circumstances. 2011 tax act The original cost and reproduction cost of construction, erection, or production. 2011 tax act The remaining economic useful life. 2011 tax act The state of obsolescence. 2011 tax act The anticipated expenditures required to maintain, renovate, or modernize the properties. 2011 tax act Like-kind exchanges and involuntary conversions. 2011 tax act   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. 2011 tax act The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. 2011 tax act The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. 2011 tax act   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. 2011 tax act The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. 2011 tax act If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. 2011 tax act Example. 2011 tax act A fire destroyed your property with a total fair market value of $50,000. 2011 tax act It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. 2011 tax act You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. 2011 tax act The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. 2011 tax act You choose to postpone reporting your gain from the involuntary conversion. 2011 tax act You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. 2011 tax act The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. 2011 tax act The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. 2011 tax act The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. 2011 tax act Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. 2011 tax act The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. 2011 tax act All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. 2011 tax act Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. 2011 tax act However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 2011 tax act Prev  Up  Next   Home   More Online Publications
Español

National Economic Council

Established in 1993, the National Economic Council advises the President on U.S. and global economic policy.

Contact the Agency or Department

Website: National Economic Council

Address: The White House
1600 Pennsylvania Ave NW

Washington, DC 20500

Phone Number: (202) 456-1111(202) 456-1414 (White House Switchboard)

TTY: (202) 456-6213(202) 456-2121 (Visitor's Office)

Parent Agency

The 2011 Tax Act

2011 tax act 5. 2011 tax act   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 2011 tax act S. 2011 tax act PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 2011 tax act S. 2011 tax act possessions, and How to report deductions. 2011 tax act Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 2011 tax act Items Related to Excluded Income U. 2011 tax act S. 2011 tax act citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 2011 tax act If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2011 tax act This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 2011 tax act You can deduct only those expenses connected with earning includible income. 2011 tax act These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 2011 tax act These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 2011 tax act For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 2011 tax act If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 2011 tax act Example. 2011 tax act In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 2011 tax act You did not have a housing exclusion. 2011 tax act Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 2011 tax act In 2013, you received a $12,000 bonus for work you did abroad in 2012. 2011 tax act You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 2011 tax act Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 2011 tax act This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 2011 tax act Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 2011 tax act S. 2011 tax act tax purposes and is not the dependent of another U. 2011 tax act S. 2011 tax act taxpayer. 2011 tax act You also can claim exemptions for individuals who qualify as your dependents. 2011 tax act To be your dependent, the individual must be a U. 2011 tax act S. 2011 tax act citizen, U. 2011 tax act S. 2011 tax act national, U. 2011 tax act S. 2011 tax act resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 2011 tax act Children. 2011 tax act   Children usually are citizens or residents of the same country as their parents. 2011 tax act If you were a U. 2011 tax act S. 2011 tax act citizen when your child was born, your child generally is a U. 2011 tax act S. 2011 tax act citizen. 2011 tax act This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 2011 tax act   If you have a legally adopted child who is not a U. 2011 tax act S. 2011 tax act citizen, U. 2011 tax act S. 2011 tax act resident, or U. 2011 tax act S. 2011 tax act national, the child meets the citizen requirement if you are a U. 2011 tax act S. 2011 tax act citizen or U. 2011 tax act S. 2011 tax act national and the child lived with you as a member of your household all year. 2011 tax act Social security number. 2011 tax act   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 2011 tax act To get a social security number for a dependent, apply at a Social Security office or U. 2011 tax act S. 2011 tax act consulate. 2011 tax act You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 2011 tax act   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 2011 tax act Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 2011 tax act   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 2011 tax act To apply for an ITIN, file Form W-7 with the IRS. 2011 tax act It usually takes 6 to 10 weeks to get an ITIN. 2011 tax act Enter your dependent's ITIN wherever an SSN is requested on your tax return. 2011 tax act More information. 2011 tax act   For more information about exemptions, see Publication 501. 2011 tax act Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 2011 tax act Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 2011 tax act You can deduct contributions to a U. 2011 tax act S. 2011 tax act organization that transfers funds to a charitable foreign organization if the U. 2011 tax act S. 2011 tax act organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 2011 tax act S. 2011 tax act organization. 2011 tax act Canadian, Mexican, and Israeli charities. 2011 tax act   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 2011 tax act Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 2011 tax act See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 2011 tax act Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 2011 tax act Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 2011 tax act See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 2011 tax act Foreign moves. 2011 tax act   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 2011 tax act A foreign move does not include a move back to the United States or its possessions. 2011 tax act Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 2011 tax act If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 2011 tax act Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 2011 tax act Year to which expense is connected. 2011 tax act   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 2011 tax act It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 2011 tax act   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 2011 tax act The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 2011 tax act The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 2011 tax act Amount allocable to excluded income. 2011 tax act   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 2011 tax act The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 2011 tax act Example. 2011 tax act On November 1, 2012, you transfer to Monaco. 2011 tax act Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 2011 tax act In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 2011 tax act You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 2011 tax act The reimbursement is included in your income. 2011 tax act Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 2011 tax act Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 2011 tax act Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 2011 tax act You have no housing exclusion. 2011 tax act The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 2011 tax act To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 2011 tax act The result, $5,562, is your nondeductible amount. 2011 tax act    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 2011 tax act In the preceding example, this year was 2012. 2011 tax act You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 2011 tax act Move between foreign countries. 2011 tax act   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 2011 tax act New place of work in U. 2011 tax act S. 2011 tax act   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 2011 tax act If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 2011 tax act Storage expenses. 2011 tax act   These expenses are attributable to work you do during the year in which you incur the storage expenses. 2011 tax act You cannot deduct the amount allocable to excluded income. 2011 tax act Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 2011 tax act By then, you should have all the information needed to properly figure the moving expense deduction. 2011 tax act See Extensions under When To File and Pay in chapter 1. 2011 tax act If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 2011 tax act You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 2011 tax act Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 2011 tax act If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 2011 tax act You cannot claim it on the return for the second year. 2011 tax act Forms To File Report your moving expenses on Form 3903. 2011 tax act Report your moving expense deduction on line 26 of Form 1040. 2011 tax act If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 2011 tax act For more information about figuring moving expenses, see Publication 521. 2011 tax act Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 2011 tax act In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 2011 tax act Do not reduce your compensation by the foreign housing deduction. 2011 tax act If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 2011 tax act This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 2011 tax act Other modifications are also required. 2011 tax act For more information on IRAs, see Publication 590. 2011 tax act Taxes of Foreign Countries and U. 2011 tax act S. 2011 tax act Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 2011 tax act S. 2011 tax act possession. 2011 tax act Taken as a deduction, foreign income taxes reduce your taxable income. 2011 tax act Taken as a credit, foreign income taxes reduce your tax liability. 2011 tax act You must treat all foreign income taxes the same way. 2011 tax act If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 2011 tax act However, you may be able to deduct other foreign taxes. 2011 tax act See Deduction for Other Foreign Taxes, later. 2011 tax act There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 2011 tax act In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 2011 tax act S. 2011 tax act tax liability, rather than as a deduction in figuring taxable income. 2011 tax act However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 2011 tax act S. 2011 tax act income is small, a lower final tax may result from deducting the foreign income taxes. 2011 tax act In any event, you should figure your tax liability both ways and then use the one that is better for you. 2011 tax act You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 2011 tax act Foreign income taxes. 2011 tax act   These are generally income taxes you pay to any foreign country or possession of the United States. 2011 tax act Foreign income taxes on U. 2011 tax act S. 2011 tax act return. 2011 tax act   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 2011 tax act These amounts cannot be included as withheld income taxes on Form 1040, line 62. 2011 tax act Foreign taxes paid on excluded income. 2011 tax act   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 2011 tax act Foreign earned income exclusion. 2011 tax act Foreign housing exclusion. 2011 tax act Possession exclusion. 2011 tax act If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 2011 tax act   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 2011 tax act You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 2011 tax act The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 2011 tax act The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 2011 tax act   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 2011 tax act    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 2011 tax act Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 2011 tax act Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 2011 tax act Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 2011 tax act The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 2011 tax act The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 2011 tax act You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 2011 tax act Subsidies. 2011 tax act   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 2011 tax act This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 2011 tax act   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2011 tax act A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 2011 tax act Limit The foreign tax credit is limited to the part of your total U. 2011 tax act S. 2011 tax act tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 2011 tax act The allowable foreign tax credit cannot be more than your actual foreign tax liability. 2011 tax act Exemption from limit. 2011 tax act   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 2011 tax act Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 2011 tax act ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 2011 tax act Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 2011 tax act You elect this procedure. 2011 tax act If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 2011 tax act Separate limit. 2011 tax act   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 2011 tax act Figuring the limit. 2011 tax act   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 2011 tax act Do not take any excluded amount into account. 2011 tax act   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 2011 tax act   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 2011 tax act The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 2011 tax act The denominator (bottom number) of the fraction is your gross income from all sources. 2011 tax act For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 2011 tax act You must use special rules for deducting interest expenses. 2011 tax act For more information on allocating and apportioning your deductions, see Publication 514. 2011 tax act Exemptions. 2011 tax act   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 2011 tax act Recapture of foreign losses. 2011 tax act   If you have an overall foreign loss and the loss reduces your U. 2011 tax act S. 2011 tax act source income (resulting in a reduction of your U. 2011 tax act S. 2011 tax act tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 2011 tax act This is done by treating a part of your taxable income from foreign sources in later years as U. 2011 tax act S. 2011 tax act source income. 2011 tax act This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 2011 tax act Recapture of domestic losses. 2011 tax act   If you have an overall domestic loss (resulting in no U. 2011 tax act S. 2011 tax act tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 2011 tax act You must recapture the loss in later years when you have U. 2011 tax act S. 2011 tax act source taxable income. 2011 tax act This is done by treating a part of your taxable income from U. 2011 tax act S. 2011 tax act sources in later years as foreign source income. 2011 tax act This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 2011 tax act Foreign tax credit carryback and carryover. 2011 tax act   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 2011 tax act   More information on figuring the foreign tax credit can be found in Publication 514. 2011 tax act Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 2011 tax act You can deduct only foreign income taxes paid on income that is subject to U. 2011 tax act S. 2011 tax act tax. 2011 tax act You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 2011 tax act Foreign earned income exclusion. 2011 tax act Foreign housing exclusion. 2011 tax act Possession exclusion. 2011 tax act Example. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen and qualify to exclude your foreign earned income. 2011 tax act Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 2011 tax act You received dividends from Country X of $2,000 on which you paid income tax of $600. 2011 tax act You can deduct the $600 tax payment because the dividends relating to it are subject to U. 2011 tax act S. 2011 tax act tax. 2011 tax act Because you exclude your wages, you cannot deduct the income tax of $10,000. 2011 tax act If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 2011 tax act Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 2011 tax act You take this deduction on Schedule A (Form 1040). 2011 tax act You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 2011 tax act On the other hand, you generally can deduct personal property taxes when you pay them to U. 2011 tax act S. 2011 tax act possessions. 2011 tax act But if you claim the possession exclusion, see Publication 570. 2011 tax act The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 2011 tax act You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 2011 tax act How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 2011 tax act If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 2011 tax act Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2011 tax act Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 2011 tax act If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 2011 tax act You figure that amount by subtracting from the total deduction the amount related to excluded income. 2011 tax act Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2011 tax act Attach a statement to your return showing how you figured the deductible amount. 2011 tax act Example 1. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen employed as an accountant. 2011 tax act Your tax home is in Germany for the entire tax year. 2011 tax act You meet the physical presence test. 2011 tax act Your foreign earned income for the year was $122,000 and your investment income was $10,380. 2011 tax act After excluding $97,600, your AGI is $34,780. 2011 tax act You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 2011 tax act These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 2011 tax act You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 2011 tax act You must fill out Form 2106. 2011 tax act On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 2011 tax act You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 2011 tax act You carry the remaining total of $450 to line 21 of Schedule A. 2011 tax act Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 2011 tax act On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 2011 tax act Enter $254 on line 27 of Schedule A. 2011 tax act Example 2. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen, have a tax home in Spain, and meet the physical presence test. 2011 tax act You are self-employed and personal services produce the business income. 2011 tax act Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 2011 tax act You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 2011 tax act Since your excluded income is 83. 2011 tax act 47% of your total income, 83. 2011 tax act 47% of your business expenses are not deductible. 2011 tax act Report your total income and expenses on Schedule C (Form 1040). 2011 tax act On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 2011 tax act 47% × $66,895) business expenses attributable to the exclusion. 2011 tax act In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 2011 tax act Example 3. 2011 tax act Assume in Example 2 that both capital and personal services combine to produce the business income. 2011 tax act No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 2011 tax act Your exclusion of $15,011 is 12. 2011 tax act 84% of your gross income ($15,011 ÷ $116,931). 2011 tax act Because you excluded 12. 2011 tax act 84% of your total income, $8,589 (. 2011 tax act 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 2011 tax act Example 4. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen, have a tax home in Brazil, and meet the physical presence test. 2011 tax act You are self-employed and both capital and personal services combine to produce business income. 2011 tax act Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 2011 tax act A reasonable allowance for the services you performed for the business is $77,000. 2011 tax act Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 2011 tax act The $77,000 is foreign earned income. 2011 tax act If you choose to exclude the $77,000, you exclude 52. 2011 tax act 74% of your gross income ($77,000 ÷ $146,000), and 52. 2011 tax act 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 2011 tax act Show your total income and expenses on Schedule C (Form 1040). 2011 tax act On Form 2555, exclude $77,000 and show $90,713 on line 44. 2011 tax act Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 2011 tax act Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 2011 tax act In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 2011 tax act If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 2011 tax act To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 2011 tax act See Choosing the Exclusion in chapter 4. 2011 tax act Example 5. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen, have a tax home in Panama, and meet the bona fide residence test. 2011 tax act You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 2011 tax act Capital investment is not material in producing the partnership's income. 2011 tax act Under the terms of the partnership agreement, you are to receive 50% of the net profits. 2011 tax act The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 2011 tax act Of the net profits of $145,750, you received $72,875 as your distributive share. 2011 tax act You choose to exclude $97,600 of your share of the gross income. 2011 tax act Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 2011 tax act 80 × $49,125). 2011 tax act Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 2011 tax act On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 2011 tax act Your exclusion on Form 2555 is $58,300. 2011 tax act In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 2011 tax act Prev  Up  Next   Home   More Online Publications