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2012 Income Tax Return

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2012 Income Tax Return

2012 income tax return 1. 2012 income tax return   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. 2012 income tax return Amount realized on a recourse debt. 2012 income tax return Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. 2012 income tax return S. 2012 income tax return Individual Income Tax Return 1040X Amended U. 2012 income tax return S. 2012 income tax return Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. 2012 income tax return However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. 2012 income tax return See chapter 5 for information about getting publications and forms. 2012 income tax return Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 2012 income tax return An exchange is a transfer of property for other property or services. 2012 income tax return The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. 2012 income tax return Sale or lease. 2012 income tax return    Some agreements that seem to be leases may really be conditional sales contracts. 2012 income tax return The intention of the parties to the agreement can help you distinguish between a sale and a lease. 2012 income tax return   There is no test or group of tests to prove what the parties intended when they made the agreement. 2012 income tax return You should consider each agreement based on its own facts and circumstances. 2012 income tax return For more information, see chapter 3 in Publication 535, Business Expenses. 2012 income tax return Cancellation of a lease. 2012 income tax return    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. 2012 income tax return Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. 2012 income tax return Copyright. 2012 income tax return    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. 2012 income tax return It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. 2012 income tax return Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. 2012 income tax return   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. 2012 income tax return For more information, see Section 1231 Gains and Losses in chapter 3. 2012 income tax return Easement. 2012 income tax return   The amount received for granting an easement is subtracted from the basis of the property. 2012 income tax return If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. 2012 income tax return If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. 2012 income tax return   Any amount received that is more than the basis to be reduced is a taxable gain. 2012 income tax return The transaction is reported as a sale of property. 2012 income tax return   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. 2012 income tax return However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. 2012 income tax return   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. 2012 income tax return Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. 2012 income tax return See Gain or Loss From Condemnations, later. 2012 income tax return Property transferred to satisfy debt. 2012 income tax return   A transfer of property to satisfy a debt is an exchange. 2012 income tax return Note's maturity date extended. 2012 income tax return   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. 2012 income tax return Also, it is not considered a closed and completed transaction that would result in a gain or loss. 2012 income tax return However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. 2012 income tax return Each case must be determined by its own facts. 2012 income tax return For more information, see Regulations section 1. 2012 income tax return 1001-3. 2012 income tax return Transfer on death. 2012 income tax return   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. 2012 income tax return No taxable gain or deductible loss results from the transfer. 2012 income tax return Bankruptcy. 2012 income tax return   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. 2012 income tax return Consequently, the transfer generally does not result in gain or loss. 2012 income tax return For more information, see Publication 908, Bankruptcy Tax Guide. 2012 income tax return Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. 2012 income tax return A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. 2012 income tax return A loss is the adjusted basis of the property that is more than the amount you realize. 2012 income tax return   Table 1-1. 2012 income tax return How To Figure Whether You Have a Gain or Loss IF your. 2012 income tax return . 2012 income tax return . 2012 income tax return THEN you have a. 2012 income tax return . 2012 income tax return . 2012 income tax return Adjusted basis is more than the amount realized, Loss. 2012 income tax return Amount realized is more than the adjusted basis, Gain. 2012 income tax return Basis. 2012 income tax return   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. 2012 income tax return The basis of property you buy is usually its cost. 2012 income tax return However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. 2012 income tax return See Basis Other Than Cost in Publication 551, Basis of Assets. 2012 income tax return Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. 2012 income tax return See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 2012 income tax return Adjusted basis. 2012 income tax return   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. 2012 income tax return Increases include costs of any improvements having a useful life of more than 1 year. 2012 income tax return Decreases include depreciation and casualty losses. 2012 income tax return For more details and additional examples, see Adjusted Basis in Publication 551. 2012 income tax return Amount realized. 2012 income tax return   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. 2012 income tax return The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. 2012 income tax return Fair market value. 2012 income tax return   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. 2012 income tax return If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. 2012 income tax return If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. 2012 income tax return Example. 2012 income tax return You used a building in your business that cost you $70,000. 2012 income tax return You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. 2012 income tax return You sold the building for $100,000 plus property having an FMV of $20,000. 2012 income tax return The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. 2012 income tax return The selling expenses were $4,000. 2012 income tax return Your gain on the sale is figured as follows. 2012 income tax return Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. 2012 income tax return   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. 2012 income tax return Recognized gains must be included in gross income. 2012 income tax return Recognized losses are deductible from gross income. 2012 income tax return However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. 2012 income tax return See Nontaxable Exchanges, later. 2012 income tax return Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. 2012 income tax return Interest in property. 2012 income tax return   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. 2012 income tax return If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. 2012 income tax return Your basis in the property is disregarded. 2012 income tax return This rule does not apply if all interests in the property are disposed of at the same time. 2012 income tax return Example 1. 2012 income tax return Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. 2012 income tax return You decide to sell your life interest in the farm. 2012 income tax return The entire amount you receive is a recognized gain. 2012 income tax return Your basis in the farm is disregarded. 2012 income tax return Example 2. 2012 income tax return The facts are the same as in Example 1, except that your brother joins you in selling the farm. 2012 income tax return The entire interest in the property is sold, so your basis in the farm is not disregarded. 2012 income tax return Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. 2012 income tax return Canceling a sale of real property. 2012 income tax return   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. 2012 income tax return If the buyer returns the property in the year of sale, no gain or loss is recognized. 2012 income tax return This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. 2012 income tax return If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. 2012 income tax return When the property is returned in a later year, you acquire a new basis in the property. 2012 income tax return That basis is equal to the amount you pay to the buyer. 2012 income tax return Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. 2012 income tax return You have a gain if the amount realized is more than your adjusted basis in the property. 2012 income tax return However, you do not have a loss if the amount realized is less than the adjusted basis of the property. 2012 income tax return Bargain sales to charity. 2012 income tax return   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. 2012 income tax return If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. 2012 income tax return The adjusted basis of the part sold is figured as follows. 2012 income tax return Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. 2012 income tax return This allocation rule does not apply if a charitable contribution deduction is not allowable. 2012 income tax return   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. 2012 income tax return Example. 2012 income tax return You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. 2012 income tax return Your adjusted basis in the property is $4,000. 2012 income tax return Your gain on the sale is $1,200, figured as follows. 2012 income tax return Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. 2012 income tax return You must subtract depreciation you took or could have taken from the basis of the business or rental part. 2012 income tax return However, see the special rule below for a home used partly for business or rental. 2012 income tax return You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. 2012 income tax return Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. 2012 income tax return Any gain on the personal part of the property is a capital gain. 2012 income tax return You cannot deduct a loss on the personal part. 2012 income tax return Home used partly for business or rental. 2012 income tax return    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. 2012 income tax return See Property Used Partly for Business or Rental, in Publication 523. 2012 income tax return Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. 2012 income tax return You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. 2012 income tax return However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. 2012 income tax return Figure the loss you can deduct as follows. 2012 income tax return Use the lesser of the property's adjusted basis or fair market value at the time of the change. 2012 income tax return Add to (1) the cost of any improvements and other increases to basis since the change. 2012 income tax return Subtract from (2) depreciation and any other decreases to basis since the change. 2012 income tax return Subtract the amount you realized on the sale from the result in (3). 2012 income tax return If the amount you realized is more than the result in (3), treat this result as zero. 2012 income tax return The result in (4) is the loss you can deduct. 2012 income tax return Example. 2012 income tax return You changed your main home to rental property 5 years ago. 2012 income tax return At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. 2012 income tax return This year, you sold the property for $55,000. 2012 income tax return You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. 2012 income tax return Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. 2012 income tax return Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. 2012 income tax return   If you have a gain on the sale, you generally must recognize the full amount of the gain. 2012 income tax return You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. 2012 income tax return   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. 2012 income tax return However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. 2012 income tax return   For more information, see Business Use or Rental of Home in Publication 523. 2012 income tax return In addition, special rules apply if the home sold was acquired in a like-kind exchange. 2012 income tax return See Special Situations in Publication 523. 2012 income tax return Also see Like-Kind Exchanges, later. 2012 income tax return Abandonments The abandonment of property is a disposition of property. 2012 income tax return You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. 2012 income tax return Generally, abandonment is not treated as a sale or exchange of the property. 2012 income tax return If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 2012 income tax return If your adjusted basis is more than the amount you realize (if any), then you have a loss. 2012 income tax return Loss from abandonment of business or investment property is deductible as a loss. 2012 income tax return A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 2012 income tax return This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. 2012 income tax return If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. 2012 income tax return The abandonment loss is deducted in the tax year in which the loss is sustained. 2012 income tax return If the abandoned property is secured by debt, special rules apply. 2012 income tax return The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). 2012 income tax return For more information, including examples, see chapter 3 of Publication 4681. 2012 income tax return You cannot deduct any loss from abandonment of your home or other property held for personal use only. 2012 income tax return Cancellation of debt. 2012 income tax return   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. 2012 income tax return This income is separate from any loss realized from abandonment of the property. 2012 income tax return   You must report this income on your tax return unless one of the following applies. 2012 income tax return The cancellation is intended as a gift. 2012 income tax return The debt is qualified farm debt. 2012 income tax return The debt is qualified real property business debt. 2012 income tax return You are insolvent or bankrupt. 2012 income tax return The debt is qualified principal residence indebtedness. 2012 income tax return File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. 2012 income tax return For more information, including other exceptions and exclusion, see Publication 4681. 2012 income tax return Forms 1099-A and 1099-C. 2012 income tax return   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. 2012 income tax return However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. 2012 income tax return The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 2012 income tax return For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 2012 income tax return Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. 2012 income tax return The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 2012 income tax return This is true even if you voluntarily return the property to the lender. 2012 income tax return You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. 2012 income tax return Buyer's (borrower's) gain or loss. 2012 income tax return   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. 2012 income tax return The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 2012 income tax return See Gain or Loss From Sales and Exchanges, earlier. 2012 income tax return You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. 2012 income tax return Amount realized on a nonrecourse debt. 2012 income tax return   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. 2012 income tax return The full canceled debt is included even if the fair market value of the property is less than the canceled debt. 2012 income tax return Example 1. 2012 income tax return Chris bought a new car for $15,000. 2012 income tax return He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. 2012 income tax return Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. 2012 income tax return The credit company repossessed the car because he stopped making loan payments. 2012 income tax return The balance due after taking into account the payments Chris made was $10,000. 2012 income tax return The fair market value of the car when repossessed was $9,000. 2012 income tax return The amount Chris realized on the repossession is $10,000. 2012 income tax return That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. 2012 income tax return Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). 2012 income tax return He has a $5,000 nondeductible loss. 2012 income tax return Example 2. 2012 income tax return Abena paid $200,000 for her home. 2012 income tax return She paid $15,000 down and borrowed the remaining $185,000 from a bank. 2012 income tax return Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. 2012 income tax return The bank foreclosed on the loan because Abena stopped making payments. 2012 income tax return When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. 2012 income tax return The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. 2012 income tax return She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). 2012 income tax return She has a $5,000 realized gain. 2012 income tax return Amount realized on a recourse debt. 2012 income tax return   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. 2012 income tax return You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. 2012 income tax return The amount realized does not include the canceled debt that is your income from cancellation of debt. 2012 income tax return See Cancellation of debt, below. 2012 income tax return Seller's (lender's) gain or loss on repossession. 2012 income tax return   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. 2012 income tax return For more information, see Repossession in Publication 537. 2012 income tax return    Table 1-2. 2012 income tax return Worksheet for Foreclosures and Repossessions Part 1. 2012 income tax return Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 2012 income tax return Complete this part only  if you were personally liable for the debt. 2012 income tax return Otherwise,  go to Part 2. 2012 income tax return   1. 2012 income tax return Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. 2012 income tax return Enter the fair market value of the transferred property   3. 2012 income tax return Ordinary income from cancellation of debt upon foreclosure or    repossession. 2012 income tax return * Subtract line 2 from line 1. 2012 income tax return   If less than zero, enter zero   Part 2. 2012 income tax return Figure your gain or loss from foreclosure or repossession. 2012 income tax return   4. 2012 income tax return If you completed Part 1, enter the smaller of line 1 or line 2. 2012 income tax return   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. 2012 income tax return Enter any proceeds you received from the foreclosure sale   6. 2012 income tax return Add lines 4 and 5   7. 2012 income tax return Enter the adjusted basis of the transferred property   8. 2012 income tax return Gain or loss from foreclosure or repossession. 2012 income tax return Subtract line 7  from line 6   * The income may not be taxable. 2012 income tax return See Cancellation of debt. 2012 income tax return Cancellation of debt. 2012 income tax return   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. 2012 income tax return This income is separate from any gain or loss realized from the foreclosure or repossession. 2012 income tax return Report the income from cancellation of a debt related to a business or rental activity as business or rental income. 2012 income tax return    You can use Table 1-2 to figure your income from cancellation of debt. 2012 income tax return   You must report this income on your tax return unless one of the following applies. 2012 income tax return The cancellation is intended as a gift. 2012 income tax return The debt is qualified farm debt. 2012 income tax return The debt is qualified real property business debt. 2012 income tax return You are insolvent or bankrupt. 2012 income tax return The debt is qualified principal residence indebtedness. 2012 income tax return File Form 982 to report the income exclusion. 2012 income tax return Example 1. 2012 income tax return Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). 2012 income tax return In this case, the amount he realizes is $9,000. 2012 income tax return This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). 2012 income tax return Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). 2012 income tax return He has a $6,000 nondeductible loss. 2012 income tax return He also is treated as receiving ordinary income from cancellation of debt. 2012 income tax return That income is $1,000 ($10,000 − $9,000). 2012 income tax return This is the part of the canceled debt not included in the amount realized. 2012 income tax return Example 2. 2012 income tax return Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). 2012 income tax return In this case, the amount she realizes is $170,000. 2012 income tax return This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). 2012 income tax return Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). 2012 income tax return She has a $5,000 nondeductible loss. 2012 income tax return She also is treated as receiving ordinary income from cancellation of debt. 2012 income tax return (The debt is not exempt from tax as discussed under Cancellation of debt, above. 2012 income tax return ) That income is $10,000 ($180,000 − $170,000). 2012 income tax return This is the part of the canceled debt not included in the amount realized. 2012 income tax return Forms 1099-A and 1099-C. 2012 income tax return   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. 2012 income tax return However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. 2012 income tax return The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 2012 income tax return For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. 2012 income tax return Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. 2012 income tax return Involuntary conversions are also called involuntary exchanges. 2012 income tax return Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. 2012 income tax return You report the gain or deduct the loss on your tax return for the year you realize it. 2012 income tax return You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. 2012 income tax return However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. 2012 income tax return Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. 2012 income tax return Your basis for the new property is the same as your basis for the converted property. 2012 income tax return This means that the gain is deferred until a taxable sale or exchange occurs. 2012 income tax return If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. 2012 income tax return This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. 2012 income tax return If you have a gain or loss from the destruction or theft of property, see Publication 547. 2012 income tax return Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. 2012 income tax return The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. 2012 income tax return The owner receives a condemnation award (money or property) in exchange for the property taken. 2012 income tax return A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. 2012 income tax return Example. 2012 income tax return A local government authorized to acquire land for public parks informed you that it wished to acquire your property. 2012 income tax return After the local government took action to condemn your property, you went to court to keep it. 2012 income tax return But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. 2012 income tax return This is a condemnation of private property for public use. 2012 income tax return Threat of condemnation. 2012 income tax return   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. 2012 income tax return You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. 2012 income tax return   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. 2012 income tax return If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. 2012 income tax return Reports of condemnation. 2012 income tax return   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. 2012 income tax return You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. 2012 income tax return If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. 2012 income tax return Example. 2012 income tax return Your property lies along public utility lines. 2012 income tax return The utility company has the authority to condemn your property. 2012 income tax return The company informs you that it intends to acquire your property by negotiation or condemnation. 2012 income tax return A threat of condemnation exists when you receive the notice. 2012 income tax return Related property voluntarily sold. 2012 income tax return   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. 2012 income tax return A substantial economic relationship exists if together the properties were one economic unit. 2012 income tax return You also must show that the condemned property could not reasonably or adequately be replaced. 2012 income tax return You can elect to postpone reporting the gain by buying replacement property. 2012 income tax return See Postponement of Gain, later. 2012 income tax return Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. 2012 income tax return If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. 2012 income tax return You can postpone reporting gain from a condemnation if you buy replacement property. 2012 income tax return If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. 2012 income tax return See Postponement of Gain, later. 2012 income tax return If your net condemnation award is less than your adjusted basis, you have a loss. 2012 income tax return If your loss is from property you held for personal use, you cannot deduct it. 2012 income tax return You must report any deductible loss in the tax year it happened. 2012 income tax return You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. 2012 income tax return Main home condemned. 2012 income tax return   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. 2012 income tax return You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). 2012 income tax return For information on this exclusion, see Publication 523. 2012 income tax return If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. 2012 income tax return See Postponement of Gain, later. 2012 income tax return Table 1-3. 2012 income tax return Worksheet for Condemnations Part 1. 2012 income tax return Gain from severance damages. 2012 income tax return  If you did not receive severance damages, skip Part 1 and go to Part 2. 2012 income tax return   1. 2012 income tax return Enter gross severance damages received   2. 2012 income tax return Enter your expenses in getting severance damages   3. 2012 income tax return Subtract line 2 from line 1. 2012 income tax return If less than zero, enter -0-   4. 2012 income tax return Enter any special assessment on remaining property taken out of your award   5. 2012 income tax return Net severance damages. 2012 income tax return Subtract line 4 from line 3. 2012 income tax return If less than zero, enter -0-   6. 2012 income tax return Enter the adjusted basis of the remaining property   7. 2012 income tax return Gain from severance damages. 2012 income tax return Subtract line 6 from line 5. 2012 income tax return If less than zero, enter -0-   8. 2012 income tax return Refigured adjusted basis of the remaining property. 2012 income tax return Subtract line 5 from line 6. 2012 income tax return If less than zero, enter -0-   Part 2. 2012 income tax return Gain or loss from condemnation award. 2012 income tax return   9. 2012 income tax return Enter the gross condemnation award received   10. 2012 income tax return Enter your expenses in getting the condemnation award   11. 2012 income tax return If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. 2012 income tax return If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. 2012 income tax return Otherwise, enter -0-   12. 2012 income tax return Add lines 10 and 11   13. 2012 income tax return Net condemnation award. 2012 income tax return Subtract line 12 from line 9   14. 2012 income tax return Enter the adjusted basis of the condemned property   15. 2012 income tax return Gain from condemnation award. 2012 income tax return If line 14 is more than line 13, enter -0-. 2012 income tax return Otherwise, subtract line 14 from  line 13 and skip line 16   16. 2012 income tax return Loss from condemnation award. 2012 income tax return Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. 2012 income tax return )   Part 3. 2012 income tax return Postponed gain from condemnation. 2012 income tax return  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. 2012 income tax return )   17. 2012 income tax return If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. 2012 income tax return Otherwise, enter -0-   18. 2012 income tax return If line 15 is more than zero, enter the amount from line 13. 2012 income tax return Otherwise, enter -0-   19. 2012 income tax return Add lines 17 and 18. 2012 income tax return If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. 2012 income tax return Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. 2012 income tax return Subtract line 20 from line 19. 2012 income tax return If less than zero, enter -0-   22. 2012 income tax return If you completed Part 1, add lines 7 and 15. 2012 income tax return Otherwise, enter the amount from line 15. 2012 income tax return If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. 2012 income tax return Recognized gain. 2012 income tax return Enter the smaller of line 21 or line 22. 2012 income tax return   24. 2012 income tax return Postponed gain. 2012 income tax return Subtract line 23 from line 22. 2012 income tax return If less than zero, enter -0-   Condemnation award. 2012 income tax return   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. 2012 income tax return The award is also the amount you are paid for the sale of your property under threat of condemnation. 2012 income tax return Payment of your debts. 2012 income tax return   Amounts taken out of the award to pay your debts are considered paid to you. 2012 income tax return Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. 2012 income tax return Example. 2012 income tax return The state condemned your property for public use. 2012 income tax return The award was set at $200,000. 2012 income tax return The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. 2012 income tax return You are considered to have received the entire $200,000 as a condemnation award. 2012 income tax return Interest on award. 2012 income tax return   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. 2012 income tax return You must report the interest separately as ordinary income. 2012 income tax return Payments to relocate. 2012 income tax return   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. 2012 income tax return Do not include them in your income. 2012 income tax return Replacement housing payments used to buy new property are included in the property's basis as part of your cost. 2012 income tax return Net condemnation award. 2012 income tax return   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. 2012 income tax return If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. 2012 income tax return This is discussed later under Special assessment taken out of award. 2012 income tax return Severance damages. 2012 income tax return    Severance damages are not part of the award paid for the property condemned. 2012 income tax return They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. 2012 income tax return   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. 2012 income tax return Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. 2012 income tax return   The contracting parties should agree on the specific amount of severance damages in writing. 2012 income tax return If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. 2012 income tax return   You cannot make a completely new allocation of the total award after the transaction is completed. 2012 income tax return However, you can show how much of the award both parties intended for severance damages. 2012 income tax return The severance damages part of the award is determined from all the facts and circumstances. 2012 income tax return Example. 2012 income tax return You sold part of your property to the state under threat of condemnation. 2012 income tax return The contract you and the condemning authority signed showed only the total purchase price. 2012 income tax return It did not specify a fixed sum for severance damages. 2012 income tax return However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. 2012 income tax return You may treat this part as severance damages. 2012 income tax return Treatment of severance damages. 2012 income tax return   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. 2012 income tax return Use them to reduce the basis of the remaining property. 2012 income tax return If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. 2012 income tax return   If your net severance damages are more than the basis of your retained property, you have a gain. 2012 income tax return You may be able to postpone reporting the gain. 2012 income tax return See Postponement of Gain, later. 2012 income tax return    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. 2012 income tax return Net severance damages. 2012 income tax return   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. 2012 income tax return You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. 2012 income tax return The balance is your net severance damages. 2012 income tax return Expenses of obtaining a condemnation award and severance damages. 2012 income tax return   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. 2012 income tax return Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. 2012 income tax return If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. 2012 income tax return Example. 2012 income tax return You receive a condemnation award and severance damages. 2012 income tax return One-fourth of the total was designated as severance damages in your agreement with the condemning authority. 2012 income tax return You had legal expenses for the entire condemnation proceeding. 2012 income tax return You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. 2012 income tax return You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. 2012 income tax return Special assessment retained out of award. 2012 income tax return   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. 2012 income tax return An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. 2012 income tax return Examples of improvements that may cause a special assessment are widening a street and installing a sewer. 2012 income tax return   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. 2012 income tax return Example. 2012 income tax return To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. 2012 income tax return You were awarded $5,000 for this and spent $300 to get the award. 2012 income tax return Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. 2012 income tax return The city then paid you only $4,300. 2012 income tax return Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). 2012 income tax return If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). 2012 income tax return The net award would not change, even if you later paid the assessment from the amount you received. 2012 income tax return Severance damages received. 2012 income tax return   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. 2012 income tax return Any balance of the special assessment is used to reduce the condemnation award. 2012 income tax return Example. 2012 income tax return You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. 2012 income tax return You spent $300 to obtain the severance damages. 2012 income tax return A special assessment of $800 was retained out of the award. 2012 income tax return The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. 2012 income tax return Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. 2012 income tax return Part business or rental. 2012 income tax return   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. 2012 income tax return Figure your gain or loss separately because gain or loss on each part may be treated differently. 2012 income tax return   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. 2012 income tax return Example. 2012 income tax return You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. 2012 income tax return You rented half the building and lived in the other half. 2012 income tax return You paid $25,000 for the building and spent an additional $1,000 for a new roof. 2012 income tax return You claimed allowable depreciation of $4,600 on the rental half. 2012 income tax return You spent $200 in legal expenses to obtain the condemnation award. 2012 income tax return Figure your gain or loss as follows. 2012 income tax return     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. 2012 income tax return Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. 2012 income tax return Your basis for the new property is the same as your basis for the old. 2012 income tax return Money or unlike property received. 2012 income tax return   You ordinarily must report the gain if you receive money or unlike property. 2012 income tax return You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. 2012 income tax return You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. 2012 income tax return See Controlling interest in a corporation, later. 2012 income tax return   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. 2012 income tax return If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. 2012 income tax return   The basis of the replacement property is its cost, reduced by the postponed gain. 2012 income tax return Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. 2012 income tax return See Controlling interest in a corporation, later. 2012 income tax return You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. 2012 income tax return Postponing gain on severance damages. 2012 income tax return   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. 2012 income tax return See Treatment of severance damages, earlier. 2012 income tax return You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). 2012 income tax return   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. 2012 income tax return If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. 2012 income tax return   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. 2012 income tax return Postponing gain on the sale of related property. 2012 income tax return   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. 2012 income tax return You must meet the requirements explained earlier under Related property voluntarily sold. 2012 income tax return You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). 2012 income tax return Buying replacement property from a related person. 2012 income tax return   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. 2012 income tax return For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. 2012 income tax return   This rule applies to the following taxpayers. 2012 income tax return C corporations. 2012 income tax return Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. 2012 income tax return All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. 2012 income tax return   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. 2012 income tax return If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. 2012 income tax return If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. 2012 income tax return Exception. 2012 income tax return   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. 2012 income tax return Advance payment. 2012 income tax return   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). 2012 income tax return Replacement property. 2012 income tax return   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. 2012 income tax return You do not have to use the actual funds from the condemnation award to acquire the replacement property. 2012 income tax return Property you acquire by gift or inheritance does not qualify as replacement property. 2012 income tax return Similar or related in service or use. 2012 income tax return   Your replacement property must be similar or related in service or use to the property it replaces. 2012 income tax return   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. 2012 income tax return For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. 2012 income tax return Owner-user. 2012 income tax return   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. 2012 income tax return Example. 2012 income tax return Your home was condemned and you invested the proceeds from the condemnation in a grocery store. 2012 income tax return Your replacement property is not similar or related in service or use to the condemned property. 2012 income tax return To be similar or related in service or use, your replacement property must also be used by you as your home. 2012 income tax return Owner-investor. 2012 income tax return   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. 2012 income tax return You decide this by determining all the following information. 2012 income tax return Whether the properties are of similar service to you. 2012 income tax return The nature of the business risks connected with the properties. 2012 income tax return What the properties demand of you in the way of management, service, and relations to your tenants. 2012 income tax return Example. 2012 income tax return You owned land and a building you rented to a manufacturing company. 2012 income tax return The building was condemned. 2012 income tax return During the replacement period, you had a new building built on other land you already owned. 2012 income tax return You rented out the new building for use as a wholesale grocery warehouse. 2012 income tax return The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. 2012 income tax return Your management activities. 2012 income tax return The amount and kind of services you provide to your tenants. 2012 income tax return The nature of your business risks connected with the properties. 2012 income tax return Leasehold replaced with fee simple property. 2012 income tax return   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. 2012 income tax return   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. 2012 income tax return A leasehold is property held under a lease, usually for a term of years. 2012 income tax return Outdoor advertising display replaced with real property. 2012 income tax return   You can elect to treat an outdoor advertising display as real property. 2012 income tax return If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. 2012 income tax return For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. 2012 income tax return   You can make this election only if you did not claim a section 179 deduction for the display. 2012 income tax return You cannot cancel this election unless you get the consent of the IRS. 2012 income tax return   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. 2012 income tax return Substituting replacement property. 2012 income tax return   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. 2012 income tax return But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. 2012 income tax return Controlling interest in a corporation. 2012 income tax return   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. 2012 income tax return You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. 2012 income tax return Basis adjustment to corporation's property. 2012 income tax return   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. 2012 income tax return You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). 2012 income tax return   Allocate this reduction to the following classes of property in the order shown below. 2012 income tax return Property that is similar or related in service or use to the condemned property. 2012 income tax return Depreciable property not reduced in (1). 2012 income tax return All other property. 2012 income tax return If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. 2012 income tax return The reduced basis of any single property cannot be less than zero. 2012 income tax return Main home replaced. 2012 income tax return   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. 2012 income tax return The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. 2012 income tax return   You must reduce the basis of your replacement property by the postponed gain. 2012 income tax return Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. 2012 income tax return Example. 2012 income tax return City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. 2012 income tax return The city paid you a condemnation award of $400,000. 2012 income tax return Your adjusted basis in the property was $80,000. 2012 income tax return You realize a gain of $320,000 ($400,000 − $80,000). 2012 income tax return You purchased a new home for $100,000. 2012 income tax return You can exclude $250,000 of the realized gain from your gross income. 2012 income tax return The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). 2012 income tax return You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). 2012 income tax return The remaining $20,000 of realized gain is postponed. 2012 income tax return Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). 2012 income tax return Replacement period. 2012 income tax return   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. 2012 income tax return This is the replacement period. 2012 income tax return   The replacement period for a condemnation begins on the earlier of the following dates. 2012 income tax return The date on which you disposed of the condemned property. 2012 income tax return The date on which the threat of condemnation began. 2012 income tax return   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. 2012 income tax return However, see the exceptions below. 2012 income tax return Three-year replacement period for certain property. 2012 income tax return   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. 2012 income tax return However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. 2012 income tax return Five-year replacement period for certain property. 2012 income tax return   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. 2012 income tax return Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. 2012 income tax return Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. 2012 income tax return Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. 2012 income tax return Extended replacement period for taxpayers affected by other federally declared disasters. 2012 income tax return    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. 2012 income tax return For more information visit www. 2012 income tax return irs. 2012 income tax return gov/uac/Tax-Relief-in-Disaster-Situations. 2012 income tax return Weather-related sales of livestock in an area eligible for federal assistance. 2012 income tax return   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. 2012 income tax return    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. 2012 income tax return See Notice 2006-82. 2012 income tax return You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. 2012 income tax return irs. 2012 income tax return gov/irb/2006-39_IRB/ar13. 2012 income tax return html. 2012 income tax return    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. 2012 income tax return If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. 2012 income tax return You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. 2012 income tax return irs. 2012 income tax return gov/irb/2013-45_IRB/ar04. 2012 income tax return html. 2012 income tax return The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. 2012 income tax return Determining when gain is realized. 2012 income tax return   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. 2012 income tax return If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. 2012 income tax return   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. 2012 income tax return A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. 2012 income tax return   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. 2012 income tax return All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. 2012 income tax return All or part of the award is actually or constructively received. 2012 income tax return For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. 2012 income tax return Replacement property bought before the condemnation. 2012 income tax return   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. 2012 income tax return Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. 2012 income tax return Example. 2012 income tax return On April 3, 2012, city authorities notified you that your property would be condemned. 2012 income tax return On June 5, 2012, you acquired property to replace the property to be condemned. 2012 income tax return You still had the new property when the city took possession of your old property on September 4, 2013. 2012 income tax return You have made a replacement within the replacement period. 2012 income tax return Extension. 2012 income tax return   You can request an extension of the replacement period from the IRS director for your area. 2012 income tax return You should apply before the end of the replacement period. 2012 income tax return Your request should explain in detail why you need an extension. 2012 income tax return The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. 2012 income tax return An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. 2012 income tax return   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. 2012 income tax return Extensions are usually limited to a period of 1 year or less. 2012 income tax return The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. 2012 income tax return If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Iowa Office of the Attorney General

Website: Iowa Office of the Attorney General

Address: Iowa Office of the Attorney General
Consumer Protection Division
1305 E. Walnut St.
Des Moines, IA 50319

Phone Number: 515-281-5926

Toll-free: 1-888-777-4590 (IA)

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Division of Banking

Website: Division of Banking

Address: Division of Banking
200 E. Grand Ave., Suite 300
Des Moines, IA 50309-1827

Phone Number: 515-281-4014

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Division of Insurance

Website: Division of Insurance

Address: Division of Insurance
330 Maple St.
Des Moines, IA 50319-0065

Phone Number: 515-281-5705

Toll-free: 1-877-955-1212 (IA)

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Securities Bureau

Website: Securities Bureau

Address: Securities Bureau
340 Maple St.
Des Moines, IA 50319

Phone Number: 515-281-5705

Toll-free: 1-877-955-1212 (IA)

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Utilities Board

Website: Utilities Board

Address: Utilities Board
Customer Service Group
1375 E. Court Ave., Room 69
Des Moines, IA 50319-0069

Phone Number: 515-725-7321

Toll-free: 1-877-565-4450 (IA)

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The 2012 Income Tax Return

2012 income tax return Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. 2012 income tax return S. 2012 income tax return Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). 2012 income tax return If you itemize, you cannot take the standard deduction. 2012 income tax return This section explains what expenses you can deduct as a homeowner. 2012 income tax return It also points out expenses that you cannot deduct. 2012 income tax return There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. 2012 income tax return Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. 2012 income tax return Your house payment. 2012 income tax return   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. 2012 income tax return Your house payment may include several costs of owning a home. 2012 income tax return The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. 2012 income tax return These are discussed in more detail later. 2012 income tax return   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. 2012 income tax return Minister's or military housing allowance. 2012 income tax return   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. 2012 income tax return You do not have to reduce your deductions by your nontaxable allowance. 2012 income tax return For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. 2012 income tax return Nondeductible payments. 2012 income tax return   You cannot deduct any of the following items. 2012 income tax return Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. 2012 income tax return Wages you pay for domestic help. 2012 income tax return Depreciation. 2012 income tax return The cost of utilities, such as gas, electricity, or water. 2012 income tax return Most settlement costs. 2012 income tax return See Settlement or closing costs under Cost as Basis, later, for more information. 2012 income tax return Forfeited deposits, down payments, or earnest money. 2012 income tax return Hardest Hit Fund and Emergency Homeowners' Loan Programs You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. 2012 income tax return You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. 2012 income tax return You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. 2012 income tax return If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) and box 5 (real property taxes). 2012 income tax return However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. 2012 income tax return Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. 2012 income tax return This is called a real estate tax. 2012 income tax return You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. 2012 income tax return The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. 2012 income tax return Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. 2012 income tax return You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. 2012 income tax return If you own a cooperative apartment, see Special Rules for Cooperatives , later. 2012 income tax return Where to deduct real estate taxes. 2012 income tax return   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. 2012 income tax return Real estate taxes paid at settlement or closing. 2012 income tax return   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. 2012 income tax return Your share of these taxes is fully deductible if you itemize your deductions. 2012 income tax return Division of real estate taxes. 2012 income tax return   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. 2012 income tax return You (the buyer) are treated as paying the taxes beginning with the date of sale. 2012 income tax return This applies regardless of the lien dates under local law. 2012 income tax return Generally, this information is included on the settlement statement you get at closing. 2012 income tax return   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. 2012 income tax return You each can deduct your own share, if you itemize deductions, for the year the property is sold. 2012 income tax return Example. 2012 income tax return You bought your home on September 1. 2012 income tax return The property tax year (the period to which the tax relates) in your area is the calendar year. 2012 income tax return The tax for the year was $730 and was due and paid by the seller on August 15. 2012 income tax return You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). 2012 income tax return You figure your deduction for real estate taxes on your home as follows. 2012 income tax return 1. 2012 income tax return Enter the total real estate taxes for the real property tax year $730 2. 2012 income tax return Enter the number of days in the property tax year that you owned the property 122 3. 2012 income tax return Divide line 2 by 365 . 2012 income tax return 3342 4. 2012 income tax return Multiply line 1 by line 3. 2012 income tax return This is your deduction. 2012 income tax return Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. 2012 income tax return You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. 2012 income tax return Delinquent taxes. 2012 income tax return   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. 2012 income tax return If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. 2012 income tax return You treat them as part of the cost of your home. 2012 income tax return See Real estate taxes , later, under Basis. 2012 income tax return Escrow accounts. 2012 income tax return   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. 2012 income tax return You may not be able to deduct the total you pay into the escrow account. 2012 income tax return You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. 2012 income tax return Your real estate tax bill will show this amount. 2012 income tax return Refund or rebate of real estate taxes. 2012 income tax return   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. 2012 income tax return If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. 2012 income tax return For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. 2012 income tax return Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. 2012 income tax return Charges for services. 2012 income tax return   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. 2012 income tax return You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). 2012 income tax return    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. 2012 income tax return If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. 2012 income tax return Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. 2012 income tax return Assessments for local benefits. 2012 income tax return   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. 2012 income tax return Local benefits include the construction of streets, sidewalks, or water and sewer systems. 2012 income tax return You must add these amounts to the basis of your property. 2012 income tax return   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. 2012 income tax return An example is a charge to repair an existing sidewalk and any interest included in that charge. 2012 income tax return   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. 2012 income tax return If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. 2012 income tax return   An assessment for a local benefit may be listed as an item in your real estate tax bill. 2012 income tax return If so, use the rules in this section to find how much of it, if any, you can deduct. 2012 income tax return Transfer taxes (or stamp taxes). 2012 income tax return   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. 2012 income tax return If you are the buyer and you pay them, include them in the cost basis of the property. 2012 income tax return If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. 2012 income tax return Homeowners association assessments. 2012 income tax return   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. 2012 income tax return Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. 2012 income tax return As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. 2012 income tax return You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. 2012 income tax return For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. 2012 income tax return At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. 2012 income tax return At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. 2012 income tax return Tenant-stockholders. 2012 income tax return   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. 2012 income tax return The tenant-stockholder does not have to live in any of the cooperative's dwelling units. 2012 income tax return The units that the tenant-stockholder has the right to occupy can be rented to others. 2012 income tax return Deductible taxes. 2012 income tax return   You figure your share of real estate taxes in the following way. 2012 income tax return Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 2012 income tax return Multiply the corporation's deductible real estate taxes by the number you figured in (1). 2012 income tax return This is your share of the real estate taxes. 2012 income tax return   Generally, the corporation will tell you your share of its real estate tax. 2012 income tax return This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. 2012 income tax return Refund of real estate taxes. 2012 income tax return   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. 2012 income tax return Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. 2012 income tax return Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). 2012 income tax return Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. 2012 income tax return For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). 2012 income tax return If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. 2012 income tax return Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. 2012 income tax return Most home buyers take out a mortgage (loan) to buy their home. 2012 income tax return They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. 2012 income tax return Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). 2012 income tax return However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. 2012 income tax return If either of these situations applies to you, see Publication 936 for more information. 2012 income tax return Also see Publication 936 if you later refinance your mortgage or buy a second home. 2012 income tax return Refund of home mortgage interest. 2012 income tax return   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. 2012 income tax return For more information, see Recoveries in Publication 525. 2012 income tax return The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. 2012 income tax return See Mortgage Interest Statement , later. 2012 income tax return Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. 2012 income tax return The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. 2012 income tax return Prepaid interest. 2012 income tax return   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. 2012 income tax return Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. 2012 income tax return An exception (discussed later) applies to points. 2012 income tax return Late payment charge on mortgage payment. 2012 income tax return   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. 2012 income tax return Mortgage prepayment penalty. 2012 income tax return   If you pay off your home mortgage early, you may have to pay a penalty. 2012 income tax return You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. 2012 income tax return Ground rent. 2012 income tax return   In some states (such as Maryland), you may buy your home subject to a ground rent. 2012 income tax return A ground rent is an obligation you assume to pay a fixed amount per year on the property. 2012 income tax return Under this arrangement, you are leasing (rather than buying) the land on which your home is located. 2012 income tax return Redeemable ground rents. 2012 income tax return   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. 2012 income tax return The ground rent is a redeemable ground rent only if all of the following are true. 2012 income tax return Your lease, including renewal periods, is for more than 15 years. 2012 income tax return You can freely assign the lease. 2012 income tax return You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. 2012 income tax return The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. 2012 income tax return   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. 2012 income tax return You cannot deduct them. 2012 income tax return Nonredeemable ground rents. 2012 income tax return   Payments on a nonredeemable ground rent are not mortgage interest. 2012 income tax return You can deduct them as rent only if they are a business expense or if they are for rental property. 2012 income tax return Cooperative apartment. 2012 income tax return   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . 2012 income tax return In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. 2012 income tax return Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. 2012 income tax return For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. 2012 income tax return Refund of cooperative's mortgage interest. 2012 income tax return   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. 2012 income tax return The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. 2012 income tax return   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. 2012 income tax return Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. 2012 income tax return You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). 2012 income tax return This amount should be included in the mortgage interest statement provided by your lender. 2012 income tax return See the discussion under Mortgage Interest Statement , later. 2012 income tax return Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. 2012 income tax return Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. 2012 income tax return Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. 2012 income tax return A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. 2012 income tax return See Points paid by the seller , later. 2012 income tax return General rule. 2012 income tax return   You cannot deduct the full amount of points in the year paid. 2012 income tax return They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. 2012 income tax return Exception. 2012 income tax return   You can deduct the full amount of points in the year paid if you meet all the following tests. 2012 income tax return Your loan is secured by your main home. 2012 income tax return (Generally, your main home is the one you live in most of the time. 2012 income tax return ) Paying points is an established business practice in the area where the loan was made. 2012 income tax return The points paid were not more than the points generally charged in that area. 2012 income tax return You use the cash method of accounting. 2012 income tax return This means you report income in the year you receive it and deduct expenses in the year you pay them. 2012 income tax return Most individuals use this method. 2012 income tax return The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. 2012 income tax return The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. 2012 income tax return The funds you provided are not required to have been applied to the points. 2012 income tax return They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. 2012 income tax return You cannot have borrowed these funds. 2012 income tax return You use your loan to buy or build your main home. 2012 income tax return The points were computed as a percentage of the principal amount of the mortgage. 2012 income tax return The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. 2012 income tax return The points may be shown as paid from either your funds or the seller's. 2012 income tax return Note. 2012 income tax return If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. 2012 income tax return If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. 2012 income tax return Home improvement loan. 2012 income tax return   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. 2012 income tax return Refinanced loan. 2012 income tax return   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. 2012 income tax return You can deduct the rest of the points over the life of the loan. 2012 income tax return Points not fully deductible in year paid. 2012 income tax return    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. 2012 income tax return Figure A. 2012 income tax return   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. 2012 income tax return    Please click here for the text description of the image. 2012 income tax return Figure A. 2012 income tax return Are my points fully deductible this year? Amounts charged for services. 2012 income tax return   Amounts charged by the lender for specific services connected to the loan are not interest. 2012 income tax return Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. 2012 income tax return You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. 2012 income tax return For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. 2012 income tax return Points paid by the seller. 2012 income tax return   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 2012 income tax return Treatment by seller. 2012 income tax return   The seller cannot deduct these fees as interest. 2012 income tax return However, they are a selling expense that reduces the seller's amount realized. 2012 income tax return See Publication 523 for more information. 2012 income tax return Treatment by buyer. 2012 income tax return   The buyer treats seller-paid points as if he or she had paid them. 2012 income tax return If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. 2012 income tax return If any of those tests are not met, the buyer must deduct the points over the life of the loan. 2012 income tax return   The buyer must also reduce the basis of the home by the amount of the seller-paid points. 2012 income tax return For more information about the basis of your home, see Basis , later. 2012 income tax return Funds provided are less than points. 2012 income tax return   If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. 2012 income tax return In addition, you can deduct any points paid by the seller. 2012 income tax return Example 1. 2012 income tax return When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). 2012 income tax return You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. 2012 income tax return Of the $1,000 you were charged for points, you can deduct $750 in the year paid. 2012 income tax return You spread the remaining $250 over the life of the mortgage. 2012 income tax return Example 2. 2012 income tax return The facts are the same as in Example 1 , except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. 2012 income tax return In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). 2012 income tax return You spread the remaining $250 over the life of the mortgage. 2012 income tax return You must reduce the basis of your home by the $1,000 paid by the seller. 2012 income tax return Excess points. 2012 income tax return   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. 2012 income tax return You must spread any additional points over the life of the mortgage. 2012 income tax return Mortgage ending early. 2012 income tax return   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. 2012 income tax return A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. 2012 income tax return Example. 2012 income tax return Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. 2012 income tax return He had deducted $1,400 of these points through 2012. 2012 income tax return Dan prepaid his mortgage in full in 2013. 2012 income tax return He can deduct the remaining $1,600 of points in 2013. 2012 income tax return Exception. 2012 income tax return   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. 2012 income tax return Instead, deduct them over the term of the new loan. 2012 income tax return Form 1098. 2012 income tax return   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. 2012 income tax return See Mortgage Interest Statement , later. 2012 income tax return Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). 2012 income tax return If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. 2012 income tax return See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. 2012 income tax return If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. 2012 income tax return The seller must give you this number and you must give the seller your SSN. 2012 income tax return Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. 2012 income tax return Failure to meet either of these requirements may result in a $50 penalty for each failure. 2012 income tax return Table 1. 2012 income tax return Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. 2012 income tax return IF you are eligible to deduct . 2012 income tax return . 2012 income tax return . 2012 income tax return THEN report the amount  on Schedule A (Form 1040) . 2012 income tax return . 2012 income tax return . 2012 income tax return real estate taxes line 6. 2012 income tax return home mortgage interest and points reported on Form 1098 line 10. 2012 income tax return home mortgage interest not reported on  Form 1098 line 11. 2012 income tax return points not reported on Form 1098 line 12. 2012 income tax return qualified mortgage insurance premiums line 13. 2012 income tax return Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. 2012 income tax return The statement will show the total interest paid on your mortgage during the year. 2012 income tax return If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. 2012 income tax return See Points , earlier. 2012 income tax return The interest you paid at settlement should be included on the statement. 2012 income tax return If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. 2012 income tax return Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. 2012 income tax return Write “See attached” to the right of line 10. 2012 income tax return A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. 2012 income tax return If a statement comes from a cooperative housing corporation, it generally will show your share of interest. 2012 income tax return Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. 2012 income tax return If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. 2012 income tax return A copy of this form will be sent to the IRS also. 2012 income tax return Example. 2012 income tax return You bought a new home on May 3. 2012 income tax return You paid no points on the purchase. 2012 income tax return During the year, you made mortgage payments which included $4,480 deductible interest on your new home. 2012 income tax return The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. 2012 income tax return The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). 2012 income tax return You can deduct the $5,100 if you itemize your deductions. 2012 income tax return Refund of overpaid interest. 2012 income tax return   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. 2012 income tax return Generally, you must include the refund in income in the year you receive it. 2012 income tax return See Refund of home mortgage interest , earlier, under Home Mortgage Interest. 2012 income tax return More than one borrower. 2012 income tax return   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. 2012 income tax return Show how much of the interest each of you paid, and give the name and address of the person who received the form. 2012 income tax return Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. 2012 income tax return Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. 2012 income tax return Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. 2012 income tax return Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). 2012 income tax return Prepaid mortgage insurance premiums. 2012 income tax return   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. 2012 income tax return The premiums are treated as paid in the year to which they were allocated. 2012 income tax return If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. 2012 income tax return See Publication 936 for details. 2012 income tax return Exception for certain mortgage insurance. 2012 income tax return   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. 2012 income tax return Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. 2012 income tax return It also must be secured by that home. 2012 income tax return If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. 2012 income tax return Home acquisition debt limit. 2012 income tax return   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). 2012 income tax return Discharges of qualified principal residence indebtedness. 2012 income tax return   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. 2012 income tax return You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. 2012 income tax return Principal residence. 2012 income tax return   Your principal residence is the home where you ordinarily live most of the time. 2012 income tax return You can have only one principal residence at any one time. 2012 income tax return Qualified principal residence indebtedness. 2012 income tax return   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. 2012 income tax return If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. 2012 income tax return   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. 2012 income tax return Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. 2012 income tax return Amount you can exclude. 2012 income tax return   You can only exclude debt discharged after 2006 and before 2014. 2012 income tax return The most you can exclude is $2 million ($1 million if married filing separately). 2012 income tax return You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. 2012 income tax return Ordering rule. 2012 income tax return   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. 2012 income tax return Qualified Home This means your main home or your second home. 2012 income tax return A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. 2012 income tax return Main home. 2012 income tax return   You can have only one main home at any one time. 2012 income tax return This is the home where you ordinarily live most of the time. 2012 income tax return Second home and other special situations. 2012 income tax return   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. 2012 income tax return Limit on Deduction If your adjusted gross income (AGI) on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are deductible is reduced and may be eliminated. 2012 income tax return See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. 2012 income tax return If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. 2012 income tax return Form 1098. 2012 income tax return   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. 2012 income tax return See Form 1098, Mortgage Interest Statement in Publication 936. 2012 income tax return Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. 2012 income tax return If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. 2012 income tax return Who qualifies. 2012 income tax return   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. 2012 income tax return Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. 2012 income tax return The MCC will show the certificate credit rate you will use to figure your credit. 2012 income tax return It also will show the certified indebtedness amount. 2012 income tax return Only the interest on that amount qualifies for the credit. 2012 income tax return See Figuring the Credit , later. 2012 income tax return You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. 2012 income tax return Contact your state or local housing finance agency for information about the availability of MCCs in your area. 2012 income tax return How to claim the credit. 2012 income tax return   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. 2012 income tax return S. 2012 income tax return Nonresident Alien Income Tax Return. 2012 income tax return Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. 2012 income tax return Reducing your home mortgage interest deduction. 2012 income tax return   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. 2012 income tax return You must do this even if part of that amount is to be carried forward to 2014. 2012 income tax return Selling your home. 2012 income tax return   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. 2012 income tax return For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. 2012 income tax return Figuring the Credit Figure your credit on Form 8396. 2012 income tax return Mortgage not more than certified indebtedness. 2012 income tax return   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. 2012 income tax return Mortgage more than certified indebtedness. 2012 income tax return   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. 2012 income tax return To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. 2012 income tax return Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. 2012 income tax return Example. 2012 income tax return Emily bought a home this year. 2012 income tax return Her mortgage loan is $125,000. 2012 income tax return The certified indebtedness amount on her MCC is $100,000. 2012 income tax return She paid $7,500 interest this year. 2012 income tax return Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. 2012 income tax return 80)       $125,000       $7,500 x . 2012 income tax return 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. 2012 income tax return In each later year, she will figure her credit using only 80% of the interest she pays for that year. 2012 income tax return Limits Two limits may apply to your credit. 2012 income tax return A limit based on the credit rate, and A limit based on your tax. 2012 income tax return Limit based on credit rate. 2012 income tax return   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. 2012 income tax return Limit based on tax. 2012 income tax return   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. 2012 income tax return See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. 2012 income tax return Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. 2012 income tax return Example. 2012 income tax return John and his brother, George, were issued an MCC. 2012 income tax return They used it to get a mortgage on their main home. 2012 income tax return John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. 2012 income tax return John paid $5,400 mortgage interest this year and George paid $3,600. 2012 income tax return The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. 2012 income tax return The loan amount (mortgage) on their home is $120,000. 2012 income tax return The credit is limited to $2,000 because the credit rate is more than 20%. 2012 income tax return John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. 2012 income tax return His credit is limited to $1,200 ($2,000 × 60%). 2012 income tax return George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. 2012 income tax return His credit is limited to $800 ($2,000 × 40%). 2012 income tax return Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. 2012 income tax return Example. 2012 income tax return You receive a mortgage credit certificate from State X. 2012 income tax return This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. 2012 income tax return You claim no other credits. 2012 income tax return Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). 2012 income tax return You can carry forward this amount to the next 3 years or until used, whichever comes first. 2012 income tax return Credit rate more than 20%. 2012 income tax return   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). 2012 income tax return Example. 2012 income tax return In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. 2012 income tax return The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. 2012 income tax return Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. 2012 income tax return The amount of credit you can claim on the new loan may change. 2012 income tax return Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. 2012 income tax return Table 2. 2012 income tax return Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . 2012 income tax return . 2012 income tax return . 2012 income tax return THEN the interest you claim on Form 8396, line 1, is* . 2012 income tax return . 2012 income tax return . 2012 income tax return smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. 2012 income tax return larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. 2012 income tax return         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. 2012 income tax return  See New MCC cannot increase your credit above. 2012 income tax return An issuer may reissue an MCC after you refinance your mortgage. 2012 income tax return If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. 2012 income tax return Year of refinancing. 2012 income tax return   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. 2012 income tax return   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. 2012 income tax return The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. 2012 income tax return It must show a separate calculation for the part of the year when the new MCC was in effect. 2012 income tax return Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. 2012 income tax return New MCC cannot increase your credit. 2012 income tax return   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. 2012 income tax return   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. 2012 income tax return However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. 2012 income tax return In that case, you will need to know the amount of the credit you could have claimed using the old MCC. 2012 income tax return   There are two methods for figuring the credit you could have claimed. 2012 income tax return Under one method, you figure the actual credit that would have been allowed. 2012 income tax return This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. 2012 income tax return   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. 2012 income tax return Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. 2012 income tax return The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. 2012 income tax return The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. 2012 income tax return    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. 2012 income tax return    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. 2012 income tax return Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. 2012 income tax return While you own your home, you may add certain items to your basis. 2012 income tax return You may subtract certain other items from your basis. 2012 income tax return These items are called adjustments to basis and are explained later under Adjusted Basis . 2012 income tax return It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. 2012 income tax return You also must keep records of the events that affect basis or adjusted basis. 2012 income tax return See Keeping Records , below. 2012 income tax return Figuring Your Basis How you figure your basis depends on how you acquire your home. 2012 income tax return If you buy or build your home, your cost is your basis. 2012 income tax return If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. 2012 income tax return If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. 2012 income tax return Each of these topics is discussed later. 2012 income tax return Property transferred from a spouse. 2012 income tax return   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. 2012 income tax return Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. 2012 income tax return Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. 2012 income tax return The cost of your home includes most settlement or closing costs you paid when you bought the home. 2012 income tax return If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. 2012 income tax return See Settlement or closing costs , later. 2012 income tax return If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. 2012 income tax return Purchase. 2012 income tax return   The basis of a home you bought is the amount you paid for it. 2012 income tax return This usually includes your down payment and any debt you assumed. 2012 income tax return The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. 2012 income tax return This amount includes any purchase commissions or other costs of acquiring the shares. 2012 income tax return Construction. 2012 income tax return   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. 2012 income tax return This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. 2012 income tax return If you built all or part of your home yourself, your basis is the total amount it cost you to build it. 2012 income tax return You cannot include in basis the value of your own labor or any other labor for which you did not pay. 2012 income tax return Real estate taxes. 2012 income tax return   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. 2012 income tax return See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. 2012 income tax return   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. 2012 income tax return You cannot deduct them as taxes paid. 2012 income tax return   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. 2012 income tax return Do not include those taxes in your basis. 2012 income tax return If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 2012 income tax return Example 1. 2012 income tax return You bought your home on September 1. 2012 income tax return The property tax year in your area is the calendar year, and the tax is due on August 15. 2012 income tax return The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. 2012 income tax return You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. 2012 income tax return You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. 2012 income tax return You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. 2012 income tax return Example 2. 2012 income tax return You bought your home on May 3, 2013. 2012 income tax return The property tax year in your area is the calendar year. 2012 income tax return The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. 2012 income tax return Under state law, the taxes become a lien on May 31. 2012 income tax return You agreed to pay all taxes due after the date of sale. 2012 income tax return The taxes due in 2013 for 2012 were $1,375. 2012 income tax return The taxes due in 2014 for 2013 will be $1,425. 2012 income tax return You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. 2012 income tax return Instead, you add the $1,375 to the cost (basis) of your home. 2012 income tax return You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. 2012 income tax return You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. 2012 income tax return Settlement or closing costs. 2012 income tax return   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. 2012 income tax return These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. 2012 income tax return If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. 2012 income tax return   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. 2012 income tax return You deduct them in the year you buy your home if you itemize your deductions. 2012 income tax return You can add certain other settlement or closing costs to the basis of your home. 2012 income tax return Items added to basis. 2012 income tax return   You can include in your basis the settlement fees and closing costs you paid for buying your home. 2012 income tax return A fee is for buying the home if you would have had to pay it even if you paid cash for the home. 2012 income tax return   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. 2012 income tax return Abstract fees (abstract of title fees). 2012 income tax return Charges for installing utility services. 2012 income tax return Legal fees (including fees for the title search and preparation of the sales contract and deed). 2012 income tax return Recording fees. 2012 income tax return Surveys. 2012 income tax return Transfer or stamp taxes. 2012 income tax return Owner's title insurance. 2012 income tax return Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. 2012 income tax return   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. 2012 income tax return Items not added to basis and not deductible. 2012 income tax return   Here are some settlement and closing costs that you cannot deduct or add to your basis. 2012 income tax return Fire insurance premiums. 2012 income tax return Charges for using utilities or other services related to occupancy of the home before closing. 2012 income tax return Rent for occupying the home before closing. 2012 income tax return Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. 2012 income tax return Points paid by seller. 2012 income tax return   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. 2012 income tax return   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. 2012 income tax return See Points , earlier, for the rules on deducting points. 2012 income tax return Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. 2012 income tax return Fair market value. 2012 income tax return   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. 2012 income tax return Donor's adjusted basis is more than FMV. 2012 income tax return   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. 2012 income tax return Disposition basis. 2012 income tax return   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. 2012 income tax return Your basis for figuring a gain is the same as the donor's adjusted basis. 2012 income tax return Your basis for figuring a loss is the FMV when you received the gift. 2012 income tax return If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. 2012 income tax return However, if using the FMV results in a gain, then you neither have a gain nor a loss. 2012 income tax return Example 1. 2012 income tax return Andrew received a house as a gift from Ishmael (the donor). 2012 income tax return At the time of the gift, the home had an FMV of $80,000. 2012 income tax return Ishmael's adjusted basis was $100,000. 2012 income tax return After he received the house, no events occurred to increase or decrease the basis. 2012 income tax return If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. 2012 income tax return Example 2. 2012 income tax return Same facts as Example 1 , except this time Andrew sells the house for $70,000. 2012 income tax return He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. 2012 income tax return Example 3. 2012 income tax return Same facts as Example 1 , except this time Andrew sells the house for $90,000. 2012 income tax return Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. 2012 income tax return Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. 2012 income tax return So in this situation, Andrew will neither have a gain nor a loss. 2012 income tax return Donor's adjusted basis equal to or less than the FMV. 2012 income tax return   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. 2012 income tax return Part of federal gift tax due to net increase in value. 2012 income tax return   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. 2012 income tax return The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. 2012 income tax return The net increase in the value of the home is its FMV minus the adjusted basis of the donor. 2012 income tax return Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. 2012 income tax return Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. 2012 income tax return If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. 2012 income tax return If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. 2012 income tax return Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. 2012 income tax return If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. 2012 income tax return Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. 2012 income tax return These events can increase or decrease your original basis. 2012 income tax return The result is called adjusted basis. 2012 income tax return See Table 3, on this page, for a list of some of the items that can adjust your basis. 2012 income tax return Table 3. 2012 income tax return Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. 2012 income tax return It is not intended to be all-inclusive. 2012 income tax return Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. 2012 income tax return   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. 2012 income tax return You must add the cost of any improvements to the basis of your home. 2012 income tax return You cannot deduct these costs. 2012 income tax return   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. 2012 income tax return Amount added to basis. 2012 income tax return   The amount you add to your basis for improvements is your actual cost. 2012 income tax return This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. 2012 income tax return For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. 2012 income tax return   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. 2012 income tax return These assessments are discussed earlier under Real Estate Taxes . 2012 income tax return Improvements no longer part of home. 2012 income tax return    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. 2012 income tax return Example. 2012 income tax return You put wall-to-wall carpeting in your home 15 years ago. 2012 income tax return Later, you replaced that carpeting with new wall-to-wall carpeting. 2012 income tax return The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. 2012 income tax return Repairs versus improvements. 2012 income tax return   A repair keeps your home in an ordinary, efficient operating condition. 2012 income tax return It does not add to the value of your home or prolong its life. 2012 income tax return Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. 2012 income tax return You cannot deduct repair costs and generally cannot add them to the basis of your home. 2012 income tax return   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. 2012 income tax return You add them to the basis of your home. 2012 income tax return Records to keep. 2012 income tax return   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. 2012 income tax return Also see Keeping Records , below. 2012 income tax return Energy conservation subsidy. 2012 income tax return   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. 2012 income tax return You must reduce the basis of your home by that value. 2012 income tax return   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. 2012 income tax return Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. 2012 income tax return These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. 2012 income tax return You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. 2012 income tax return In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. 2012 income tax return How to keep records. 2012 income tax return   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. 2012 income tax return How long to keep records. 2012 income tax return   You must keep your records for as long as they are important for meeting any provision of the federal tax law. 2012 income tax return   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. 2012 income tax return (A period of limitations is the period of time after which no legal action can be brought. 2012 income tax return ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. 2012 income tax return For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. 2012 income tax return Returns filed before the due date are treated as filed on the due date. 2012 income tax return   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. 2012 income tax return Keep those records as long as they are important in figuring the basis of the original or replacement property. 2012 income tax return Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. 2012 income tax return Table 4. 2012 income tax return Record of Home Improvements Keep this for your records. 2012 income tax return Also, keep receipts or other proof of improvements. 2012 income tax return Remove from this record any improvements that are no longer part of your main home. 2012 income tax return For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. 2012 income tax return (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To