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2012 Irs 1040a Instructions

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2012 Irs 1040a Instructions

2012 irs 1040a instructions 4. 2012 irs 1040a instructions   Sales and Trades of Investment Property Table of Contents IntroductionNominees. 2012 irs 1040a instructions Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. 2012 irs 1040a instructions Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. 2012 irs 1040a instructions Debt paid off. 2012 irs 1040a instructions Payment of cash. 2012 irs 1040a instructions Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. 2012 irs 1040a instructions S. 2012 irs 1040a instructions Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. 2012 irs 1040a instructions Exception 2. 2012 irs 1040a instructions Section 1256 contracts and straddles. 2012 irs 1040a instructions Market discount bonds. 2012 irs 1040a instructions File Form 1099-B or Form 1099-S with the IRS. 2012 irs 1040a instructions Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. 2012 irs 1040a instructions Investment property. 2012 irs 1040a instructions   This is property that produces investment income. 2012 irs 1040a instructions Examples include stocks, bonds, and Treasury bills and notes. 2012 irs 1040a instructions Property used in a trade or business is not investment property. 2012 irs 1040a instructions Form 1099-B. 2012 irs 1040a instructions   If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. 2012 irs 1040a instructions You should receive the statement by February 15 of the next year. 2012 irs 1040a instructions It will show the gross proceeds from the sale. 2012 irs 1040a instructions The IRS will also get a copy of Form 1099-B from the broker. 2012 irs 1040a instructions   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. 2012 irs 1040a instructions If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. 2012 irs 1040a instructions This will help you complete Form 8949. 2012 irs 1040a instructions Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. 2012 irs 1040a instructions    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. 2012 irs 1040a instructions Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). 2012 irs 1040a instructions Nominees. 2012 irs 1040a instructions   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. 2012 irs 1040a instructions   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. 2012 irs 1040a instructions Other property transactions. 2012 irs 1040a instructions   Certain transfers of property are discussed in other IRS publications. 2012 irs 1040a instructions These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. 2012 irs 1040a instructions Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . 2012 irs 1040a instructions Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 2012 irs 1040a instructions What Is a Sale or Trade? This section explains what is a sale or trade. 2012 irs 1040a instructions It also explains certain transactions and events that are treated as sales or trades. 2012 irs 1040a instructions A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. 2012 irs 1040a instructions A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. 2012 irs 1040a instructions Sale and purchase. 2012 irs 1040a instructions   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. 2012 irs 1040a instructions The sale and purchase are two separate transactions. 2012 irs 1040a instructions But see Like-Kind Exchanges under Nontaxable Trades, later. 2012 irs 1040a instructions Redemption of stock. 2012 irs 1040a instructions   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. 2012 irs 1040a instructions Dividend versus sale or trade. 2012 irs 1040a instructions   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. 2012 irs 1040a instructions Both direct and indirect ownership of stock will be considered. 2012 irs 1040a instructions The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. 2012 irs 1040a instructions Redemption or retirement of bonds. 2012 irs 1040a instructions   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. 2012 irs 1040a instructions See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. 2012 irs 1040a instructions   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. 2012 irs 1040a instructions For details, see Regulations section 1. 2012 irs 1040a instructions 1001-3. 2012 irs 1040a instructions Surrender of stock. 2012 irs 1040a instructions   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. 2012 irs 1040a instructions The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. 2012 irs 1040a instructions Trade of investment property for an annuity. 2012 irs 1040a instructions   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. 2012 irs 1040a instructions If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. 2012 irs 1040a instructions Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. 2012 irs 1040a instructions Transfer by inheritance. 2012 irs 1040a instructions   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. 2012 irs 1040a instructions No taxable gain or deductible loss results from the transfer. 2012 irs 1040a instructions Termination of certain rights and obligations. 2012 irs 1040a instructions   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. 2012 irs 1040a instructions Any gain or loss is treated as a capital gain or loss. 2012 irs 1040a instructions   This rule does not apply to the retirement of a debt instrument. 2012 irs 1040a instructions See Redemption or retirement of bonds , earlier. 2012 irs 1040a instructions Worthless Securities Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. 2012 irs 1040a instructions This affects whether your capital loss is long term or short term. 2012 irs 1040a instructions See Holding Period , later. 2012 irs 1040a instructions Worthless securities also include securities that you abandon after March 12, 2008. 2012 irs 1040a instructions To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. 2012 irs 1040a instructions All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. 2012 irs 1040a instructions If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. 2012 irs 1040a instructions Do not deduct them in the year the stock became worthless. 2012 irs 1040a instructions How to report loss. 2012 irs 1040a instructions   Report worthless securities in Form 8949, Part I or Part II, whichever applies. 2012 irs 1040a instructions    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. 2012 irs 1040a instructions See Form 8949 and the Instructions for Form 8949. 2012 irs 1040a instructions Filing a claim for refund. 2012 irs 1040a instructions   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. 2012 irs 1040a instructions You must use Form 1040X, Amended U. 2012 irs 1040a instructions S. 2012 irs 1040a instructions Individual Income Tax Return, to amend your return for the year the security became worthless. 2012 irs 1040a instructions You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. 2012 irs 1040a instructions (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. 2012 irs 1040a instructions ) For more information about filing a claim, see Publication 556. 2012 irs 1040a instructions Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. 2012 irs 1040a instructions You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. 2012 irs 1040a instructions This gives you a new holding period for the position that begins on the date of the constructive sale. 2012 irs 1040a instructions Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. 2012 irs 1040a instructions Constructive sale. 2012 irs 1040a instructions   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). 2012 irs 1040a instructions   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. 2012 irs 1040a instructions For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. 2012 irs 1040a instructions Exception for nonmarketable securities. 2012 irs 1040a instructions   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. 2012 irs 1040a instructions Exception for certain closed transactions. 2012 irs 1040a instructions   Do not treat a transaction as a constructive sale if all of the following are true. 2012 irs 1040a instructions You closed the transaction on or before the 30th day after the end of your tax year. 2012 irs 1040a instructions You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. 2012 irs 1040a instructions Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. 2012 irs 1040a instructions   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. 2012 irs 1040a instructions   This exception also applies to successive short sales of an entire appreciated financial position. 2012 irs 1040a instructions For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. 2012 irs 1040a instructions This bulletin is available at www. 2012 irs 1040a instructions irs. 2012 irs 1040a instructions gov/pub/irs-irbs/irb03-03. 2012 irs 1040a instructions pdf. 2012 irs 1040a instructions Appreciated financial position. 2012 irs 1040a instructions   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. 2012 irs 1040a instructions Exceptions. 2012 irs 1040a instructions   An appreciated financial position does not include the following. 2012 irs 1040a instructions Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). 2012 irs 1040a instructions Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. 2012 irs 1040a instructions 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). 2012 irs 1040a instructions Any hedge with respect to a position described in (2). 2012 irs 1040a instructions Certain trust instruments treated as stock. 2012 irs 1040a instructions   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). 2012 irs 1040a instructions Sale of appreciated financial position. 2012 irs 1040a instructions   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. 2012 irs 1040a instructions However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. 2012 irs 1040a instructions Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. 2012 irs 1040a instructions Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. 2012 irs 1040a instructions Exceptions. 2012 irs 1040a instructions   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. 2012 irs 1040a instructions For more details, including definitions of these terms, see section 1256. 2012 irs 1040a instructions Regulated futures contract. 2012 irs 1040a instructions   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. 2012 irs 1040a instructions A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. 2012 irs 1040a instructions Foreign currency contract. 2012 irs 1040a instructions   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. 2012 irs 1040a instructions   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. 2012 irs 1040a instructions   Special rules apply to certain foreign currency transactions. 2012 irs 1040a instructions These transactions may result in ordinary gain or loss treatment. 2012 irs 1040a instructions For details, see Internal Revenue Code section 988 and Regulations sections 1. 2012 irs 1040a instructions 988-1(a)(7) and 1. 2012 irs 1040a instructions 988-3. 2012 irs 1040a instructions Nonequity option. 2012 irs 1040a instructions   This is any listed option (defined later) that is not an equity option. 2012 irs 1040a instructions Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. 2012 irs 1040a instructions A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). 2012 irs 1040a instructions Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. 2012 irs 1040a instructions Cash-settled options. 2012 irs 1040a instructions   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. 2012 irs 1040a instructions   This rule does not apply to options established before the SEC determines that the stock index is broad based. 2012 irs 1040a instructions Listed option. 2012 irs 1040a instructions   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). 2012 irs 1040a instructions A listed option, however, does not include an option that is a right to acquire stock from the issuer. 2012 irs 1040a instructions Dealer equity option. 2012 irs 1040a instructions   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. 2012 irs 1040a instructions   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. 2012 irs 1040a instructions Equity option. 2012 irs 1040a instructions   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. 2012 irs 1040a instructions  Equity options include options on a group of stocks only if the group is a narrow-based stock index. 2012 irs 1040a instructions Dealer securities futures contract. 2012 irs 1040a instructions   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). 2012 irs 1040a instructions A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . 2012 irs 1040a instructions Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. 2012 irs 1040a instructions That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. 2012 irs 1040a instructions Hedging exception. 2012 irs 1040a instructions   The marked-to-market rules do not apply to hedging transactions. 2012 irs 1040a instructions See Hedging Transactions , later. 2012 irs 1040a instructions 60/40 rule. 2012 irs 1040a instructions   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. 2012 irs 1040a instructions This is true regardless of how long you actually held the property. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions On June 22, 2012, you bought a regulated futures contract for $50,000. 2012 irs 1040a instructions On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. 2012 irs 1040a instructions You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. 2012 irs 1040a instructions On February 1, 2013, you sold the contract for $56,000. 2012 irs 1040a instructions Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. 2012 irs 1040a instructions Limited partners or entrepreneurs. 2012 irs 1040a instructions   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). 2012 irs 1040a instructions Instead, these gains or losses are treated as short term. 2012 irs 1040a instructions Terminations and transfers. 2012 irs 1040a instructions   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. 2012 irs 1040a instructions In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. 2012 irs 1040a instructions Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. 2012 irs 1040a instructions Loss carryback election. 2012 irs 1040a instructions   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. 2012 irs 1040a instructions See How To Report , later, for information about reporting this election on your return. 2012 irs 1040a instructions   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. 2012 irs 1040a instructions In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. 2012 irs 1040a instructions   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. 2012 irs 1040a instructions In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. 2012 irs 1040a instructions   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. 2012 irs 1040a instructions (See Capital Losses under Reporting Capital Gains and Losses, later. 2012 irs 1040a instructions ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. 2012 irs 1040a instructions In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. 2012 irs 1040a instructions Net section 1256 contracts loss. 2012 irs 1040a instructions   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. 2012 irs 1040a instructions Net section 1256 contracts gain. 2012 irs 1040a instructions   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. 2012 irs 1040a instructions  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. 2012 irs 1040a instructions Traders in section 1256 contracts. 2012 irs 1040a instructions   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. 2012 irs 1040a instructions However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. 2012 irs 1040a instructions Treatment of underlying property. 2012 irs 1040a instructions   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. 2012 irs 1040a instructions How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. 2012 irs 1040a instructions Form 6781. 2012 irs 1040a instructions   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. 2012 irs 1040a instructions This includes the amount shown in box 10 of Form 1099-B. 2012 irs 1040a instructions Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. 2012 irs 1040a instructions Include a copy of Form 6781 with your income tax return. 2012 irs 1040a instructions   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. 2012 irs 1040a instructions Follow the Form 6781 instructions for completing Part I. 2012 irs 1040a instructions Loss carryback election. 2012 irs 1040a instructions   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. 2012 irs 1040a instructions Follow the instructions for completing Form 6781 for the loss year to make this election. 2012 irs 1040a instructions Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. 2012 irs 1040a instructions A transaction is a hedging transaction if both of the following conditions are met. 2012 irs 1040a instructions You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. 2012 irs 1040a instructions You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. 2012 irs 1040a instructions This hedging transaction exception does not apply to transactions entered into by or for any syndicate. 2012 irs 1040a instructions A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. 2012 irs 1040a instructions A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. 2012 irs 1040a instructions However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. 2012 irs 1040a instructions Hedging loss limit. 2012 irs 1040a instructions   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. 2012 irs 1040a instructions A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. 2012 irs 1040a instructions   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. 2012 irs 1040a instructions Ignore any hedging transaction items in determining this taxable income. 2012 irs 1040a instructions If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. 2012 irs 1040a instructions   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. 2012 irs 1040a instructions   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. 2012 irs 1040a instructions The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. 2012 irs 1040a instructions Sale of property used in a hedge. 2012 irs 1040a instructions   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. 2012 irs 1040a instructions Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. 2012 irs 1040a instructions See the Instructions for Schedule SE (Form 1040). 2012 irs 1040a instructions In addition, the rules relating to contributions to self-employment retirement plans apply. 2012 irs 1040a instructions For information on retirement plan contributions, see Publication 560 and Publication 590. 2012 irs 1040a instructions Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. 2012 irs 1040a instructions You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. 2012 irs 1040a instructions Investment property you buy normally has an original basis equal to its cost. 2012 irs 1040a instructions If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. 2012 irs 1040a instructions Cost Basis The basis of property you buy is usually its cost. 2012 irs 1040a instructions The cost is the amount you pay in cash, debt obligations, or other property or services. 2012 irs 1040a instructions Unstated interest. 2012 irs 1040a instructions   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. 2012 irs 1040a instructions You generally have unstated interest if your interest rate is less than the applicable federal rate. 2012 irs 1040a instructions For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 2012 irs 1040a instructions Basis Other Than Cost There are times when you must use a basis other than cost. 2012 irs 1040a instructions In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. 2012 irs 1040a instructions Fair market value. 2012 irs 1040a instructions   This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. 2012 irs 1040a instructions Sales of similar property, around the same date, may be helpful in figuring fair market value. 2012 irs 1040a instructions Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. 2012 irs 1040a instructions The amount you include in income then becomes your basis in the property. 2012 irs 1040a instructions If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. 2012 irs 1040a instructions Restricted property. 2012 irs 1040a instructions   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. 2012 irs 1040a instructions Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. 2012 irs 1040a instructions See Restricted Property in Publication 525 for more information. 2012 irs 1040a instructions Bargain purchases. 2012 irs 1040a instructions   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. 2012 irs 1040a instructions Your basis in the property is the price you pay plus the amount you include in income. 2012 irs 1040a instructions Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You trade A Company stock for B Company stock having a fair market value of $1,200. 2012 irs 1040a instructions If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. 2012 irs 1040a instructions If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. 2012 irs 1040a instructions The basis of your B Company stock is $1,200. 2012 irs 1040a instructions If you later sell the B Company stock for $1,300, you will have a gain of $100. 2012 irs 1040a instructions Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. 2012 irs 1040a instructions See Nontaxable Trades , later. 2012 irs 1040a instructions The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. 2012 irs 1040a instructions Increase this amount by any cash you paid, additional costs you had, and any gain recognized. 2012 irs 1040a instructions Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. 2012 irs 1040a instructions Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. 2012 irs 1040a instructions See Transfers Between Spouses , later. 2012 irs 1040a instructions Recordkeeping. 2012 irs 1040a instructions The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. 2012 irs 1040a instructions Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. 2012 irs 1040a instructions Fair market value less than donor's adjusted basis. 2012 irs 1040a instructions   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. 2012 irs 1040a instructions Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. 2012 irs 1040a instructions No gain or loss. 2012 irs 1040a instructions   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. 2012 irs 1040a instructions The fair market value at the time of the gift is $9,000. 2012 irs 1040a instructions You later sell the property for $9,500. 2012 irs 1040a instructions You have neither gain nor loss. 2012 irs 1040a instructions Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. 2012 irs 1040a instructions Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. 2012 irs 1040a instructions Fair market value equal to or more than donor's adjusted basis. 2012 irs 1040a instructions   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. 2012 irs 1040a instructions Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. 2012 irs 1040a instructions Gift received before 1977. 2012 irs 1040a instructions   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. 2012 irs 1040a instructions However, your basis cannot be more than the fair market value of the gift at the time it was given to you. 2012 irs 1040a instructions Example 1. 2012 irs 1040a instructions You were given XYZ Company stock in 1976. 2012 irs 1040a instructions At the time of the gift, the stock had a fair market value of $21,000. 2012 irs 1040a instructions The donor's adjusted basis was $20,000. 2012 irs 1040a instructions The donor paid a gift tax of $500 on the gift. 2012 irs 1040a instructions Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. 2012 irs 1040a instructions Example 2. 2012 irs 1040a instructions The facts are the same as in Example 1 except that the gift tax paid was $1,500. 2012 irs 1040a instructions Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. 2012 irs 1040a instructions Gift received after 1976. 2012 irs 1040a instructions   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. 2012 irs 1040a instructions You figure this part by multiplying the gift tax paid on the gift by a fraction. 2012 irs 1040a instructions The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. 2012 irs 1040a instructions   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. 2012 irs 1040a instructions The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions In 2013, you received a gift of property from your mother. 2012 irs 1040a instructions At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. 2012 irs 1040a instructions The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. 2012 irs 1040a instructions You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . 2012 irs 1040a instructions 701 ($61,000 ÷ $87,000) . 2012 irs 1040a instructions 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. 2012 irs 1040a instructions   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. 2012 irs 1040a instructions Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. 2012 irs 1040a instructions For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. 2012 irs 1040a instructions Gift tax information. 2012 irs 1040a instructions   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 2012 irs 1040a instructions For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. 2012 irs 1040a instructions Property Received as Inheritance Before or after 2010. 2012 irs 1040a instructions   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. 2012 irs 1040a instructions If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. 2012 irs 1040a instructions For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. 2012 irs 1040a instructions Appreciated property you gave the decedent. 2012 irs 1040a instructions   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. 2012 irs 1040a instructions This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. 2012 irs 1040a instructions Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. 2012 irs 1040a instructions More information. 2012 irs 1040a instructions   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. 2012 irs 1040a instructions Inherited in 2010 and executor elected to file Form 8939. 2012 irs 1040a instructions   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. 2012 irs 1040a instructions Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. 2012 irs 1040a instructions The result of these adjustments to the basis is the adjusted basis. 2012 irs 1040a instructions Adjustments to the basis of stocks and bonds are explained in the following discussion. 2012 irs 1040a instructions For information about other adjustments to basis, see Publication 551. 2012 irs 1040a instructions Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. 2012 irs 1040a instructions If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . 2012 irs 1040a instructions The basis of stock must be adjusted for certain events that occur after purchase. 2012 irs 1040a instructions For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. 2012 irs 1040a instructions You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). 2012 irs 1040a instructions These distributions, up to the amount of your basis, are a nontaxable return of capital. 2012 irs 1040a instructions The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. 2012 irs 1040a instructions To find out more, go to www. 2012 irs 1040a instructions irs. 2012 irs 1040a instructions gov/Filing/Filing-Options. 2012 irs 1040a instructions Identifying stock or bonds sold. 2012 irs 1040a instructions   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. 2012 irs 1040a instructions Adequate identification. 2012 irs 1040a instructions   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. 2012 irs 1040a instructions Broker holds stock. 2012 irs 1040a instructions   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. 2012 irs 1040a instructions  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. 2012 irs 1040a instructions Single stock certificate. 2012 irs 1040a instructions   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. 2012 irs 1040a instructions   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. 2012 irs 1040a instructions Bonds. 2012 irs 1040a instructions   These methods of identification also apply to bonds sold or transferred. 2012 irs 1040a instructions Identification not possible. 2012 irs 1040a instructions   If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 2012 irs 1040a instructions Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. 2012 irs 1040a instructions In January 1999 you bought another 200 shares for $11 a share. 2012 irs 1040a instructions In July 1999 you gave your son 50 shares. 2012 irs 1040a instructions In December 2001 you bought 100 shares for $9 a share. 2012 irs 1040a instructions In April 2013 you sold 130 shares. 2012 irs 1040a instructions You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. 2012 irs 1040a instructions The shares of stock you gave your son had a basis of $500 (50 × $10). 2012 irs 1040a instructions You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. 2012 irs 1040a instructions    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You bought 100 shares of Fund A for $10 a share. 2012 irs 1040a instructions You paid a $50 commission to the broker for the purchase. 2012 irs 1040a instructions Your cost basis for each share is $10. 2012 irs 1040a instructions 50 ($1,050 ÷ 100). 2012 irs 1040a instructions Commissions and load charges. 2012 irs 1040a instructions   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. 2012 irs 1040a instructions You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. 2012 irs 1040a instructions A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). 2012 irs 1040a instructions   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. 2012 irs 1040a instructions You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. 2012 irs 1040a instructions You dispose of the shares within 90 days of the purchase date. 2012 irs 1040a instructions You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. 2012 irs 1040a instructions   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. 2012 irs 1040a instructions The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). 2012 irs 1040a instructions Choosing average basis for mutual fund shares. 2012 irs 1040a instructions   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. 2012 irs 1040a instructions The methods you can use to figure average basis are explained later. 2012 irs 1040a instructions Undistributed capital gains. 2012 irs 1040a instructions   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. 2012 irs 1040a instructions See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. 2012 irs 1040a instructions Reinvestment right. 2012 irs 1040a instructions   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. 2012 irs 1040a instructions      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. 2012 irs 1040a instructions This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. 2012 irs 1040a instructions Table 4-1. 2012 irs 1040a instructions This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. 2012 irs 1040a instructions Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. 2012 irs 1040a instructions This worksheet will help you figure the adjusted basis when you sell or redeem shares. 2012 irs 1040a instructions Table 4-1. 2012 irs 1040a instructions Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. 2012 irs 1040a instructions 2 Cost plus or minus adjustments. 2012 irs 1040a instructions Automatic investment service. 2012 irs 1040a instructions   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. 2012 irs 1040a instructions Dividend reinvestment plans. 2012 irs 1040a instructions   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. 2012 irs 1040a instructions You must include the amount of the discount in your income. 2012 irs 1040a instructions Public utilities. 2012 irs 1040a instructions   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. 2012 irs 1040a instructions Stock dividends. 2012 irs 1040a instructions   Stock dividends are distributions made by a corporation of its own stock. 2012 irs 1040a instructions Generally, stock dividends are not taxable to you. 2012 irs 1040a instructions However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. 2012 irs 1040a instructions If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. 2012 irs 1040a instructions New and old stock identical. 2012 irs 1040a instructions   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. 2012 irs 1040a instructions The result is your basis for each share of stock. 2012 irs 1040a instructions Example 1. 2012 irs 1040a instructions You owned one share of common stock that you bought for $45. 2012 irs 1040a instructions The corporation distributed two new shares of common stock for each share held. 2012 irs 1040a instructions You then had three shares of common stock. 2012 irs 1040a instructions Your basis in each share is $15 ($45 ÷ 3). 2012 irs 1040a instructions Example 2. 2012 irs 1040a instructions You owned two shares of common stock. 2012 irs 1040a instructions You bought one for $30 and the other for $45. 2012 irs 1040a instructions The corporation distributed two new shares of common stock for each share held. 2012 irs 1040a instructions You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). 2012 irs 1040a instructions New and old stock not identical. 2012 irs 1040a instructions   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. 2012 irs 1040a instructions Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You bought a share of common stock for $100. 2012 irs 1040a instructions Later, the corporation distributed a share of preferred stock for each share of common stock held. 2012 irs 1040a instructions At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. 2012 irs 1040a instructions You figure the basis of the old and new stock by dividing your $100 basis between them. 2012 irs 1040a instructions The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). 2012 irs 1040a instructions Stock bought at various times. 2012 irs 1040a instructions   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. 2012 irs 1040a instructions Taxable stock dividends. 2012 irs 1040a instructions   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. 2012 irs 1040a instructions The basis of your old stock does not change. 2012 irs 1040a instructions Stock splits. 2012 irs 1040a instructions   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. 2012 irs 1040a instructions Stock rights. 2012 irs 1040a instructions   A stock right is a right to acquire a corporation's stock. 2012 irs 1040a instructions It may be exercised, it may be sold if it has a market value, or it may expire. 2012 irs 1040a instructions Stock rights are rarely taxable when you receive them. 2012 irs 1040a instructions See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. 2012 irs 1040a instructions Taxable stock rights. 2012 irs 1040a instructions   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. 2012 irs 1040a instructions The basis of the old stock does not change. 2012 irs 1040a instructions Nontaxable stock rights. 2012 irs 1040a instructions   If you receive nontaxable stock rights and allow them to expire, they have no basis. 2012 irs 1040a instructions   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. 2012 irs 1040a instructions Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. 2012 irs 1040a instructions   If the fair market value of the stock rights was less than 15%, their basis is zero. 2012 irs 1040a instructions However, you can choose to divide the basis of the old stock between the old stock and the stock rights. 2012 irs 1040a instructions To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. 2012 irs 1040a instructions Basis of new stock. 2012 irs 1040a instructions   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You own 100 shares of ABC Company stock, which cost you $22 per share. 2012 irs 1040a instructions The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. 2012 irs 1040a instructions At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. 2012 irs 1040a instructions Each stock right had a market value of $3. 2012 irs 1040a instructions The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. 2012 irs 1040a instructions You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. 2012 irs 1040a instructions 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. 2012 irs 1040a instructions 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. 2012 irs 1040a instructions 18 ($21. 2012 irs 1040a instructions 78 ÷ 10) per right. 2012 irs 1040a instructions If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. 2012 irs 1040a instructions 18), or $28. 2012 irs 1040a instructions 18 per share. 2012 irs 1040a instructions The remaining basis of the old stock is $21. 2012 irs 1040a instructions 78 per share. 2012 irs 1040a instructions Investment property received in liquidation. 2012 irs 1040a instructions   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. 2012 irs 1040a instructions S corporation stock. 2012 irs 1040a instructions   You must increase your basis in stock of an S corporation by your pro rata share of the following items. 2012 irs 1040a instructions All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. 2012 irs 1040a instructions The nonseparately stated income of the S corporation. 2012 irs 1040a instructions The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. 2012 irs 1040a instructions   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. 2012 irs 1040a instructions Distributions by the S corporation that were not included in your income. 2012 irs 1040a instructions All loss and deduction items of the S corporation that are separately stated and passed through to you. 2012 irs 1040a instructions Any nonseparately stated loss of the S corporation. 2012 irs 1040a instructions Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. 2012 irs 1040a instructions The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. 2012 irs 1040a instructions However, your basis in the stock cannot be reduced below zero. 2012 irs 1040a instructions Specialized small business investment company stock or partnership interest. 2012 irs 1040a instructions   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. 2012 irs 1040a instructions See Rollover of Gain From Publicly Traded Securities , later. 2012 irs 1040a instructions Qualified small business stock. 2012 irs 1040a instructions   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. 2012 irs 1040a instructions See Gains on Qualified Small Business Stock , later. 2012 irs 1040a instructions Short sales. 2012 irs 1040a instructions   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. 2012 irs 1040a instructions   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. 2012 irs 1040a instructions Premiums on bonds. 2012 irs 1040a instructions   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. 2012 irs 1040a instructions If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. 2012 irs 1040a instructions   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. 2012 irs 1040a instructions You must reduce the basis of the bond by the premium you amortized for the period you held the bond. 2012 irs 1040a instructions   See Bond Premium Amortization in chapter 3 for more information. 2012 irs 1040a instructions Market discount on bonds. 2012 irs 1040a instructions   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. 2012 irs 1040a instructions See Market Discount Bonds in chapter 1 for more information. 2012 irs 1040a instructions Bonds purchased at par value. 2012 irs 1040a instructions   A bond purchased at par value (face amount) has no premium or discount. 2012 irs 1040a instructions When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You purchased a bond several years ago for its par value of $10,000. 2012 irs 1040a instructions You sold the bond this year for $10,100. 2012 irs 1040a instructions You have a gain of $100. 2012 irs 1040a instructions However, if you had sold the bond for $9,900, you would have a loss of $100. 2012 irs 1040a instructions Acquisition discount on short-term obligations. 2012 irs 1040a instructions   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. 2012 irs 1040a instructions See Discount on Short-Term Obligations in chapter 1 for more information. 2012 irs 1040a instructions Original issue discount (OID) on debt instruments. 2012 irs 1040a instructions   Increase the basis of a debt instrument by the OID you include in your income. 2012 irs 1040a instructions See Original Issue Discount (OID) in chapter 1. 2012 irs 1040a instructions Discounted tax-exempt obligations. 2012 irs 1040a instructions   OID on tax-exempt obligations is generally not taxable. 2012 irs 1040a instructions However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. 2012 irs 1040a instructions The accrued OID is added to the basis of the obligation to determine your gain or loss. 2012 irs 1040a instructions   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. 2012 irs 1040a instructions   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. 2012 irs 1040a instructions See Discount on Short-Term Obligations in chapter 1. 2012 irs 1040a instructions Stripped tax-exempt obligation. 2012 irs 1040a instructions   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. 2012 irs 1040a instructions For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. 2012 irs 1040a instructions You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . 2012 irs 1040a instructions   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. 2012 irs 1040a instructions Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. 2012 irs 1040a instructions In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. 2012 irs 1040a instructions How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. 2012 irs 1040a instructions Gain. 2012 irs 1040a instructions   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. 2012 irs 1040a instructions Loss. 2012 irs 1040a instructions   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. 2012 irs 1040a instructions Amount realized. 2012 irs 1040a instructions   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). 2012 irs 1040a instructions Amount realized includes the money you receive plus the fair market value of any property or services you receive. 2012 irs 1040a instructions   If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. 2012 irs 1040a instructions For more information, see Publication 537. 2012 irs 1040a instructions   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. 2012 irs 1040a instructions See Regulations section 1. 2012 irs 1040a instructions 1001-1(g). 2012 irs 1040a instructions However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. 2012 irs 1040a instructions Fair market value. 2012 irs 1040a instructions   Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. 2012 irs 1040a instructions Your gain is $3,000 ($10,000 – $7,000). 2012 irs 1040a instructions If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). 2012 irs 1040a instructions Debt paid off. 2012 irs 1040a instructions   A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. 2012 irs 1040a instructions This is true even if neither you nor the buyer is personally liable for the debt. 2012 irs 1040a instructions For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You sell stock that you had pledged as security for a bank loan of $8,000. 2012 irs 1040a instructions Your basis in the stock is $6,000. 2012 irs 1040a instructions The buyer pays off your bank loan and pays you $20,000 in cash. 2012 irs 1040a instructions The amount realized is $28,000 ($20,000 + $8,000). 2012 irs 1040a instructions Your gain is $22,000 ($28,000 – $6,000). 2012 irs 1040a instructions Payment of cash. 2012 irs 1040a instructions   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. 2012 irs 1040a instructions Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. 2012 irs 1040a instructions If the result is a positive number, it is a gain. 2012 irs 1040a instructions If the result is a negative number, it is a loss. 2012 irs 1040a instructions No gain or loss. 2012 irs 1040a instructions   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. 2012 irs 1040a instructions In this case, you may have neither a gain nor a loss. 2012 irs 1040a instructions See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. 2012 irs 1040a instructions Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. 2012 irs 1040a instructions If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu
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Understanding your CP51C Notice

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Page Last Reviewed or Updated: 04-Mar-2014

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The 2012 Irs 1040a Instructions

2012 irs 1040a instructions Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 2012 irs 1040a instructions Cost Basis The basis of property you buy is usually its cost. 2012 irs 1040a instructions The cost is the amount you pay in cash, debt obligations, other property, or services. 2012 irs 1040a instructions Your cost also includes amounts you pay for the following items. 2012 irs 1040a instructions Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if assumed for the seller). 2012 irs 1040a instructions  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. 2012 irs 1040a instructions Loans with low or no interest. 2012 irs 1040a instructions   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. 2012 irs 1040a instructions You generally have unstated interest if your interest rate is less than the applicable federal rate. 2012 irs 1040a instructions For more information, see Unstated Interest and Original Issue Discount in Publication 537. 2012 irs 1040a instructions Purchase of a business. 2012 irs 1040a instructions   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. 2012 irs 1040a instructions Allocate the price among the various assets, including any section 197 intangibles. 2012 irs 1040a instructions See Allocating the Basis, later. 2012 irs 1040a instructions Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. 2012 irs 1040a instructions If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. 2012 irs 1040a instructions You must adjust the basis of stocks for certain events that occur after purchase. 2012 irs 1040a instructions See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. 2012 irs 1040a instructions Identifying stock or bonds sold. 2012 irs 1040a instructions   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. 2012 irs 1040a instructions If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 2012 irs 1040a instructions For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 2012 irs 1040a instructions Mutual fund shares. 2012 irs 1040a instructions   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. 2012 irs 1040a instructions For more information, see Publication 550. 2012 irs 1040a instructions Real Property Real property, also called real estate, is land and generally anything built on or attached to it. 2012 irs 1040a instructions If you buy real property, certain fees and other expenses become part of your cost basis in the property. 2012 irs 1040a instructions Real estate taxes. 2012 irs 1040a instructions   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 2012 irs 1040a instructions You cannot deduct them as taxes. 2012 irs 1040a instructions   If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. 2012 irs 1040a instructions Do not include that amount in the basis of the property. 2012 irs 1040a instructions If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 2012 irs 1040a instructions Settlement costs. 2012 irs 1040a instructions   Your basis includes the settlement fees and closing costs for buying property. 2012 irs 1040a instructions You cannot include in your basis the fees and costs for getting a loan on property. 2012 irs 1040a instructions A fee for buying property is a cost that must be paid even if you bought the property for cash. 2012 irs 1040a instructions   The following items are some of the settlement fees or closing costs you can include in the basis of your property. 2012 irs 1040a instructions Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 2012 irs 1040a instructions   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 2012 irs 1040a instructions   The following items are some settlement fees and closing costs you cannot include in the basis of the property. 2012 irs 1040a instructions Casualty insurance premiums. 2012 irs 1040a instructions Rent for occupancy of the property before closing. 2012 irs 1040a instructions Charges for utilities or other services related to occupancy of the property before closing. 2012 irs 1040a instructions Charges connected with getting a loan. 2012 irs 1040a instructions The following are examples of these charges. 2012 irs 1040a instructions Points (discount points, loan origination fees). 2012 irs 1040a instructions Mortgage insurance premiums. 2012 irs 1040a instructions Loan assumption fees. 2012 irs 1040a instructions Cost of a credit report. 2012 irs 1040a instructions Fees for an appraisal required by a lender. 2012 irs 1040a instructions Fees for refinancing a mortgage. 2012 irs 1040a instructions If these costs relate to business property, items (1) through (3) are deductible as business expenses. 2012 irs 1040a instructions Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. 2012 irs 1040a instructions Points. 2012 irs 1040a instructions   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. 2012 irs 1040a instructions Generally, you deduct the points over the term of the loan. 2012 irs 1040a instructions For more information on how to deduct points, see Points in chapter 4 of Publication 535. 2012 irs 1040a instructions Points on home mortgage. 2012 irs 1040a instructions   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. 2012 irs 1040a instructions If certain requirements are met, you can deduct the points in full for the year in which they are paid. 2012 irs 1040a instructions Reduce the basis of your home by any seller-paid points. 2012 irs 1040a instructions For more information, see Points in Publication 936, Home Mortgage Interest Deduction. 2012 irs 1040a instructions Assumption of mortgage. 2012 irs 1040a instructions   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. 2012 irs 1040a instructions Constructing assets. 2012 irs 1040a instructions   If you build property or have assets built for you, your expenses for this construction are part of your basis. 2012 irs 1040a instructions Some of these expenses include the following costs. 2012 irs 1040a instructions Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 2012 irs 1040a instructions In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. 2012 irs 1040a instructions You must include them in the asset's basis. 2012 irs 1040a instructions Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. 2012 irs 1040a instructions    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 2012 irs 1040a instructions Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. 2012 irs 1040a instructions If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. 2012 irs 1040a instructions In certain circumstances, you may be subject to the uniform capitalization rules, next. 2012 irs 1040a instructions Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. 2012 irs 1040a instructions Activities subject to the rules. 2012 irs 1040a instructions   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. 2012 irs 1040a instructions Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. 2012 irs 1040a instructions However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. 2012 irs 1040a instructions   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. 2012 irs 1040a instructions Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. 2012 irs 1040a instructions Tangible personal property includes films, sound recordings, video tapes, books, or similar property. 2012 irs 1040a instructions    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. 2012 irs 1040a instructions To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. 2012 irs 1040a instructions You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 2012 irs 1040a instructions   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. 2012 irs 1040a instructions The nondeductible part of the cost is not subject to the uniform capitalization rules. 2012 irs 1040a instructions More information. 2012 irs 1040a instructions   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. 2012 irs 1040a instructions Exceptions. 2012 irs 1040a instructions   The following are not subject to the uniform capitalization rules. 2012 irs 1040a instructions Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. 2012 irs 1040a instructions For other exceptions to the uniform capitalization rules, see section 1. 2012 irs 1040a instructions 263A-1(b) of the regulations. 2012 irs 1040a instructions   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. 2012 irs 1040a instructions Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. 2012 irs 1040a instructions The basis of an intangible asset is usually the cost to buy or create it. 2012 irs 1040a instructions If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. 2012 irs 1040a instructions The basis of certain intangibles can be amortized. 2012 irs 1040a instructions See chapter 8 of Publication 535 for information on the amortization of these costs. 2012 irs 1040a instructions Patents. 2012 irs 1040a instructions   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. 2012 irs 1040a instructions If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. 2012 irs 1040a instructions The value of the inventor's time spent on an invention is not part of the basis. 2012 irs 1040a instructions Copyrights. 2012 irs 1040a instructions   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. 2012 irs 1040a instructions Do not include the value of your time as the author, or any other person's time you did not pay for. 2012 irs 1040a instructions Franchises, trademarks, and trade names. 2012 irs 1040a instructions   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. 2012 irs 1040a instructions Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. 2012 irs 1040a instructions You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 2012 irs 1040a instructions See Trade or Business Acquired below. 2012 irs 1040a instructions Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. 2012 irs 1040a instructions If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 2012 irs 1040a instructions However, see Trade or Business Acquired, next. 2012 irs 1040a instructions Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. 2012 irs 1040a instructions Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. 2012 irs 1040a instructions Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. 2012 irs 1040a instructions Certificates of deposit, U. 2012 irs 1040a instructions S. 2012 irs 1040a instructions Government securities, foreign currency, and actively traded personal property, including stock and securities. 2012 irs 1040a instructions Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. 2012 irs 1040a instructions Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. 2012 irs 1040a instructions All other assets except section 197 intangibles, goodwill, and going concern value. 2012 irs 1040a instructions Section 197 intangibles except goodwill and going concern value. 2012 irs 1040a instructions Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 2012 irs 1040a instructions Agreement. 2012 irs 1040a instructions   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. 2012 irs 1040a instructions This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 2012 irs 1040a instructions Reporting requirement. 2012 irs 1040a instructions   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 2012 irs 1040a instructions Use Form 8594 to provide this information. 2012 irs 1040a instructions The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 2012 irs 1040a instructions More information. 2012 irs 1040a instructions   See Sale of a Business in chapter 2 of Publication 544 for more information. 2012 irs 1040a instructions Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. 2012 irs 1040a instructions Figure the basis of each asset by multiplying the lump sum by a fraction. 2012 irs 1040a instructions The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 2012 irs 1040a instructions If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. 2012 irs 1040a instructions Demolition of building. 2012 irs 1040a instructions   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. 2012 irs 1040a instructions Do not claim the costs as a current deduction. 2012 irs 1040a instructions Modification of building. 2012 irs 1040a instructions   A modification of a building will not be treated as a demolition if the following conditions are satisfied. 2012 irs 1040a instructions 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. 2012 irs 1040a instructions   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. 2012 irs 1040a instructions   If these conditions are met, add the costs of the modifications to the basis of the building. 2012 irs 1040a instructions Subdivided lots. 2012 irs 1040a instructions   If you buy a tract of land and subdivide it, you must determine the basis of each lot. 2012 irs 1040a instructions This is necessary because you must figure the gain or loss on the sale of each individual lot. 2012 irs 1040a instructions As a result, you do not recover your entire cost in the tract until you have sold all of the lots. 2012 irs 1040a instructions   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. 2012 irs 1040a instructions The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. 2012 irs 1040a instructions Future improvement costs. 2012 irs 1040a instructions   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. 2012 irs 1040a instructions See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. 2012 irs 1040a instructions Use of erroneous cost basis. 2012 irs 1040a instructions   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. 2012 irs 1040a instructions Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You bought a tract of land to which you assigned a cost of $15,000. 2012 irs 1040a instructions You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. 2012 irs 1040a instructions You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. 2012 irs 1040a instructions Several years later you determine that your original basis in the tract was $22,500 and not $15,000. 2012 irs 1040a instructions You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. 2012 irs 1040a instructions You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). 2012 irs 1040a instructions You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. 2012 irs 1040a instructions Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. 2012 irs 1040a instructions The result of these adjustments to the basis is the adjusted basis. 2012 irs 1040a instructions Increases to Basis Increase the basis of any property by all items properly added to a capital account. 2012 irs 1040a instructions These include the cost of any improvements having a useful life of more than 1 year. 2012 irs 1040a instructions Rehabilitation expenses also increase basis. 2012 irs 1040a instructions However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. 2012 irs 1040a instructions If you have to recapture any of the credit, increase your basis by the recaptured amount. 2012 irs 1040a instructions If you make additions or improvements to business property, keep separate accounts for them. 2012 irs 1040a instructions Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. 2012 irs 1040a instructions For more information, see Publication 946. 2012 irs 1040a instructions The following items increase the basis of property. 2012 irs 1040a instructions The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. 2012 irs 1040a instructions Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. 2012 irs 1040a instructions Do not deduct them as taxes. 2012 irs 1040a instructions However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. 2012 irs 1040a instructions Add the assessment to your property's basis. 2012 irs 1040a instructions In this example, the assessment is a depreciable asset. 2012 irs 1040a instructions Deducting vs. 2012 irs 1040a instructions Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. 2012 irs 1040a instructions For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. 2012 irs 1040a instructions However, you can choose either to deduct or to capitalize certain other costs. 2012 irs 1040a instructions If you capitalize these costs, include them in your basis. 2012 irs 1040a instructions If you deduct them, do not include them in your basis. 2012 irs 1040a instructions See Uniform Capitalization Rules earlier. 2012 irs 1040a instructions The costs you can choose to deduct or to capitalize include the following. 2012 irs 1040a instructions Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. 2012 irs 1040a instructions If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. 2012 irs 1040a instructions For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. 2012 irs 1040a instructions Table 1. 2012 irs 1040a instructions Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. 2012 irs 1040a instructions Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. 2012 irs 1040a instructions Some of these items are discussed next. 2012 irs 1040a instructions Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. 2012 irs 1040a instructions You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. 2012 irs 1040a instructions To make this determination, compare the repaired property to the property before the casualty. 2012 irs 1040a instructions For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. 2012 irs 1040a instructions Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. 2012 irs 1040a instructions It reduces the basis of the affected part of the property. 2012 irs 1040a instructions If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 2012 irs 1040a instructions Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. 2012 irs 1040a instructions For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. 2012 irs 1040a instructions Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. 2012 irs 1040a instructions This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. 2012 irs 1040a instructions If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. 2012 irs 1040a instructions Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 2012 irs 1040a instructions For more information about the section 179 deduction, see Publication 946. 2012 irs 1040a instructions Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. 2012 irs 1040a instructions Reduce the basis of the property for which you received the subsidy by the excluded amount. 2012 irs 1040a instructions For more information on this subsidy, see Publication 525. 2012 irs 1040a instructions Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 2012 irs 1040a instructions If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 2012 irs 1040a instructions If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 2012 irs 1040a instructions Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. 2012 irs 1040a instructions If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. 2012 irs 1040a instructions In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. 2012 irs 1040a instructions For information on figuring depreciation, see Publication 946. 2012 irs 1040a instructions If you are claiming depreciation on a business vehicle, see Publication 463. 2012 irs 1040a instructions If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. 2012 irs 1040a instructions Include the excess depreciation in your gross income and add it to your basis in the property. 2012 irs 1040a instructions For information on the computation of excess depreciation, see chapter 4 in Publication 463. 2012 irs 1040a instructions Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 2012 irs 1040a instructions A debt includes any indebtedness for which you are liable or which attaches to property you hold. 2012 irs 1040a instructions You can exclude canceled debt from income in the following situations. 2012 irs 1040a instructions Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). 2012 irs 1040a instructions If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 2012 irs 1040a instructions However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. 2012 irs 1040a instructions For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. 2012 irs 1040a instructions For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. 2012 irs 1040a instructions For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. 2012 irs 1040a instructions Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. 2012 irs 1040a instructions For more information on the rules for the sale of a home, see Publication 523. 2012 irs 1040a instructions Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. 2012 irs 1040a instructions This also applies to amounts you received under an employer's adoption assistance program and excluded from income. 2012 irs 1040a instructions For more information Form 8839, Qualified Adoption Expenses. 2012 irs 1040a instructions Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. 2012 irs 1040a instructions You must reduce your basis in that property by the credit claimed. 2012 irs 1040a instructions For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. 2012 irs 1040a instructions Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. 2012 irs 1040a instructions You also paid commissions of $2,000 and title search and legal fees of $600. 2012 irs 1040a instructions You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. 2012 irs 1040a instructions Immediately you spent $20,000 in remodeling the building before you placed it in service. 2012 irs 1040a instructions You were allowed depreciation of $14,526 for the years 2005 through 2009. 2012 irs 1040a instructions In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. 2012 irs 1040a instructions You claimed a deduction for this loss. 2012 irs 1040a instructions You spent $5,500 to repair the damages and extend the useful life of the building. 2012 irs 1040a instructions The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. 2012 irs 1040a instructions It is not affected by any of the above adjustments. 2012 irs 1040a instructions Basis Other Than Cost There are many times when you cannot use cost as basis. 2012 irs 1040a instructions In these cases, the fair market value or the adjusted basis of property may be used. 2012 irs 1040a instructions Adjusted basis is discussed earlier. 2012 irs 1040a instructions Fair market value (FMV). 2012 irs 1040a instructions   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 2012 irs 1040a instructions Sales of similar property on or about the same date may be helpful in figuring the property's FMV. 2012 irs 1040a instructions Property Received for Services If you receive property for services, include the property's FMV in income. 2012 irs 1040a instructions The amount you include in income becomes your basis. 2012 irs 1040a instructions If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 2012 irs 1040a instructions Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. 2012 irs 1040a instructions If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. 2012 irs 1040a instructions Your basis in the property is its FMV (your purchase price plus the amount you include in income). 2012 irs 1040a instructions If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. 2012 irs 1040a instructions However, your basis in the property is still its FMV. 2012 irs 1040a instructions See Employee Discounts in Publication 15-B. 2012 irs 1040a instructions Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. 2012 irs 1040a instructions Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. 2012 irs 1040a instructions There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. 2012 irs 1040a instructions When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. 2012 irs 1040a instructions The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. 2012 irs 1040a instructions You do not report any income until you have completed the 5 years of service that satisfy the condition. 2012 irs 1040a instructions Fair market value. 2012 irs 1040a instructions   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You received stock from your employer for services you performed. 2012 irs 1040a instructions If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. 2012 irs 1040a instructions At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. 2012 irs 1040a instructions This is a restriction that by its terms will never end and you must consider it when you figure the FMV. 2012 irs 1040a instructions Election. 2012 irs 1040a instructions   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. 2012 irs 1040a instructions If you make this choice, the substantially vested rules do not apply. 2012 irs 1040a instructions Your basis is the amount you paid plus the amount you included in income. 2012 irs 1040a instructions   See the discussion of Restricted Property in Publication 525 for more information. 2012 irs 1040a instructions Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 2012 irs 1040a instructions A taxable gain or deductible loss is also known as a recognized gain or loss. 2012 irs 1040a instructions If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. 2012 irs 1040a instructions A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. 2012 irs 1040a instructions You must report a taxable gain of $3,000 for the land. 2012 irs 1040a instructions The tractor has a basis of $6,000. 2012 irs 1040a instructions Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. 2012 irs 1040a instructions Similar or related property. 2012 irs 1040a instructions   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. 2012 irs 1040a instructions However, make the following adjustments. 2012 irs 1040a instructions Decrease the basis by the following. 2012 irs 1040a instructions Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. 2012 irs 1040a instructions Increase the basis by the following. 2012 irs 1040a instructions Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. 2012 irs 1040a instructions Money or property not similar or related. 2012 irs 1040a instructions   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions The state condemned your property. 2012 irs 1040a instructions The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. 2012 irs 1040a instructions You realized a gain of $5,000 ($31,000 − $26,000). 2012 irs 1040a instructions You bought replacement property similar in use to the converted property for $29,000. 2012 irs 1040a instructions You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 2012 irs 1040a instructions Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 2012 irs 1040a instructions The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. 2012 irs 1040a instructions   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. 2012 irs 1040a instructions Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. 2012 irs 1040a instructions More information. 2012 irs 1040a instructions   For more information about condemnations, see Involuntary Conversions in Publication 544. 2012 irs 1040a instructions For more information about casualty and theft losses, see Publication 547. 2012 irs 1040a instructions Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 2012 irs 1040a instructions If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 2012 irs 1040a instructions A nontaxable gain or loss is also known as an unrecognized gain or loss. 2012 irs 1040a instructions Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 2012 irs 1040a instructions To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 2012 irs 1040a instructions There must also be an exchange of like-kind property. 2012 irs 1040a instructions For more information, see Like-Kind Exchanges in Publication 544. 2012 irs 1040a instructions The basis of the property you receive is the same as the basis of the property you gave up. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. 2012 irs 1040a instructions Your basis in the new property is the same as the basis of the old ($50,000). 2012 irs 1040a instructions Exchange expenses. 2012 irs 1040a instructions   Exchange expenses are generally the closing costs you pay. 2012 irs 1040a instructions They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. 2012 irs 1040a instructions Add them to the basis of the like-kind property received. 2012 irs 1040a instructions Property plus cash. 2012 irs 1040a instructions   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. 2012 irs 1040a instructions Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). 2012 irs 1040a instructions Special rules for related persons. 2012 irs 1040a instructions   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 2012 irs 1040a instructions Each person must report any gain or loss not recognized on the original exchange. 2012 irs 1040a instructions Each person reports it on the tax return filed for the year in which the later disposition occurs. 2012 irs 1040a instructions If this rule applies, the basis of the property received in the original exchange will be its fair market value. 2012 irs 1040a instructions   These rules generally do not apply to the following kinds of property dispositions. 2012 irs 1040a instructions Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. 2012 irs 1040a instructions Related persons. 2012 irs 1040a instructions   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. 2012 irs 1040a instructions   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. 2012 irs 1040a instructions ), see Nondeductible Loss in chapter 2 of Publication 544. 2012 irs 1040a instructions Exchange of business property. 2012 irs 1040a instructions   Exchanging the assets of one business for the assets of another business is a multiple property exchange. 2012 irs 1040a instructions For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 2012 irs 1040a instructions Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. 2012 irs 1040a instructions The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. 2012 irs 1040a instructions Decrease the basis by the following amounts. 2012 irs 1040a instructions Any money you receive, and Any loss you recognize on the exchange. 2012 irs 1040a instructions Increase the basis by the following amounts. 2012 irs 1040a instructions Any additional costs you incur, and Any gain you recognize on the exchange. 2012 irs 1040a instructions If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. 2012 irs 1040a instructions You realized a gain of $200 ($6,200 − $6,000). 2012 irs 1040a instructions This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). 2012 irs 1040a instructions You include all the gain in income (recognized gain) because the gain is less than the cash received. 2012 irs 1040a instructions Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. 2012 irs 1040a instructions   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 2012 irs 1040a instructions The rest is the basis of the like property. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You had an adjusted basis of $15,000 in real estate you held for investment. 2012 irs 1040a instructions You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. 2012 irs 1040a instructions The truck is unlike property. 2012 irs 1040a instructions You realized a gain of $1,500 ($16,500 − $15,000). 2012 irs 1040a instructions This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). 2012 irs 1040a instructions You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 2012 irs 1040a instructions Your basis in the properties you received is figured as follows. 2012 irs 1040a instructions Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). 2012 irs 1040a instructions This is the truck's FMV. 2012 irs 1040a instructions The rest ($12,500) is the basis of the real estate. 2012 irs 1040a instructions Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You are a salesperson and you use one of your cars 100% for business. 2012 irs 1040a instructions You have used this car in your sales activities for 2 years and have depreciated it. 2012 irs 1040a instructions Your adjusted basis in the car is $22,600 and its FMV is $23,100. 2012 irs 1040a instructions You are interested in a new car, which sells for $28,000. 2012 irs 1040a instructions If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). 2012 irs 1040a instructions However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. 2012 irs 1040a instructions Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). 2012 irs 1040a instructions Your basis for depreciating the new car is $27,500, the same as if you traded the old car. 2012 irs 1040a instructions Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. 2012 irs 1040a instructions The first is an exchange of like-kind property. 2012 irs 1040a instructions The second is personal-use property on which gain is recognized and loss is not recognized. 2012 irs 1040a instructions First, figure your adjusted basis in the property as if you transferred two separate properties. 2012 irs 1040a instructions Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. 2012 irs 1040a instructions Deduct the depreciation you took or could have taken from the adjusted basis of the business part. 2012 irs 1040a instructions Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. 2012 irs 1040a instructions The business part of the property is permitted to be exchanged tax free. 2012 irs 1040a instructions However, you must recognize any gain from the exchange of the nonbusiness part. 2012 irs 1040a instructions You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. 2012 irs 1040a instructions The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. 2012 irs 1040a instructions If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. 2012 irs 1040a instructions For more information, see Publication 523. 2012 irs 1040a instructions Trade of car used partly in business. 2012 irs 1040a instructions   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. 2012 irs 1040a instructions   For information on figuring your basis for depreciation, see Publication 463. 2012 irs 1040a instructions Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. 2012 irs 1040a instructions However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. 2012 irs 1040a instructions This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. 2012 irs 1040a instructions If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. 2012 irs 1040a instructions Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. 2012 irs 1040a instructions For more information on these bonds, see Publication 550. 2012 irs 1040a instructions At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. 2012 irs 1040a instructions For more information, see Publication 504, Divorced or Separated Individuals. 2012 irs 1040a instructions Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. 2012 irs 1040a instructions FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 2012 irs 1040a instructions Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. 2012 irs 1040a instructions Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). 2012 irs 1040a instructions If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions You received an acre of land as a gift. 2012 irs 1040a instructions At the time of the gift, the land had an FMV of $8,000. 2012 irs 1040a instructions The donor's adjusted basis was $10,000. 2012 irs 1040a instructions After you received the land, no events occurred to increase or decrease your basis. 2012 irs 1040a instructions If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. 2012 irs 1040a instructions If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. 2012 irs 1040a instructions If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 2012 irs 1040a instructions For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. 2012 irs 1040a instructions If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. 2012 irs 1040a instructions Business property. 2012 irs 1040a instructions   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 2012 irs 1040a instructions FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. 2012 irs 1040a instructions Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 2012 irs 1040a instructions Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. 2012 irs 1040a instructions See Adjusted Basis earlier. 2012 irs 1040a instructions Gift received before 1977. 2012 irs 1040a instructions   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. 2012 irs 1040a instructions However, do not increase your basis above the FMV of the gift at the time it was given to you. 2012 irs 1040a instructions Example 1. 2012 irs 1040a instructions You were given a house in 1976 with an FMV of $21,000. 2012 irs 1040a instructions The donor's adjusted basis was $20,000. 2012 irs 1040a instructions The donor paid a gift tax of $500. 2012 irs 1040a instructions Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. 2012 irs 1040a instructions Example 2. 2012 irs 1040a instructions If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. 2012 irs 1040a instructions This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. 2012 irs 1040a instructions Gift received after 1976. 2012 irs 1040a instructions   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. 2012 irs 1040a instructions Figure the increase by multiplying the gift tax paid by a fraction. 2012 irs 1040a instructions The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 2012 irs 1040a instructions   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. 2012 irs 1040a instructions The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 2012 irs 1040a instructions For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions In 2010, you received a gift of property from your mother that had an FMV of $50,000. 2012 irs 1040a instructions Her adjusted basis was $20,000. 2012 irs 1040a instructions The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). 2012 irs 1040a instructions She paid a gift tax of $9,000. 2012 irs 1040a instructions Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . 2012 irs 1040a instructions 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. 2012 irs 1040a instructions See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 2012 irs 1040a instructions If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. 2012 irs 1040a instructions The FMV of the property at the date of the individual's death. 2012 irs 1040a instructions The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. 2012 irs 1040a instructions For information on the alternate valuation date, see the Instructions for Form 706. 2012 irs 1040a instructions The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. 2012 irs 1040a instructions This method is discussed later. 2012 irs 1040a instructions The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. 2012 irs 1040a instructions For information on a qualified conservation easement, see the Instructions for Form 706. 2012 irs 1040a instructions If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 2012 irs 1040a instructions For more information, see the Instructions for Form 706. 2012 irs 1040a instructions Appreciated property. 2012 irs 1040a instructions   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. 2012 irs 1040a instructions Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. 2012 irs 1040a instructions Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. 2012 irs 1040a instructions Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. 2012 irs 1040a instructions When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. 2012 irs 1040a instructions For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. 2012 irs 1040a instructions For example, you and your spouse owned community property that had a basis of $80,000. 2012 irs 1040a instructions When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 2012 irs 1040a instructions The FMV of the community interest was $100,000. 2012 irs 1040a instructions The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 2012 irs 1040a instructions The basis of the other half to your spouse's heirs is also $50,000. 2012 irs 1040a instructions For more information on community property, see Publication 555, Community Property. 2012 irs 1040a instructions Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. 2012 irs 1040a instructions John furnished two-thirds of the purchase price and Jim furnished one-third. 2012 irs 1040a instructions Depreciation deductions allowed before John's death were $12,000. 2012 irs 1040a instructions Under local law, each had a half interest in the income from the property. 2012 irs 1040a instructions At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. 2012 irs 1040a instructions Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. 2012 irs 1040a instructions This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. 2012 irs 1040a instructions If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. 2012 irs 1040a instructions Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. 2012 irs 1040a instructions It does not matter how much each spouse contributed to the purchase price. 2012 irs 1040a instructions Also, it does not matter which spouse dies first. 2012 irs 1040a instructions A qualified joint interest is any interest in property held by husband and wife as either of the following. 2012 irs 1040a instructions Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. 2012 irs 1040a instructions Basis. 2012 irs 1040a instructions   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. 2012 irs 1040a instructions Decrease the cost by any deductions allowed to you for depreciation and depletion. 2012 irs 1040a instructions Increase the reduced cost by your basis in the half you inherited. 2012 irs 1040a instructions Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. 2012 irs 1040a instructions If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. 2012 irs 1040a instructions If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. 2012 irs 1040a instructions Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 2012 irs 1040a instructions Special-use valuation. 2012 irs 1040a instructions   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. 2012 irs 1040a instructions Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 2012 irs 1040a instructions Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. 2012 irs 1040a instructions Figure all FMVs without regard to the special-use valuation. 2012 irs 1040a instructions   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 2012 irs 1040a instructions This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. 2012 irs 1040a instructions   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. 2012 irs 1040a instructions If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 2012 irs 1040a instructions The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. 2012 irs 1040a instructions   You make the election by filing with Form 706-A a statement that does all of the following. 2012 irs 1040a instructions Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. 2012 irs 1040a instructions   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. 2012 irs 1040a instructions Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 2012 irs 1040a instructions An example of changing property held for personal use to business use would be renting out your former main home. 2012 irs 1040a instructions Basis for depreciation. 2012 irs 1040a instructions   The basis for depreciation is the lesser of the following amounts. 2012 irs 1040a instructions The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. 2012 irs 1040a instructions You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. 2012 irs 1040a instructions Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 2012 irs 1040a instructions Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 2012 irs 1040a instructions On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 2012 irs 1040a instructions The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). 2012 irs 1040a instructions Sale of property. 2012 irs 1040a instructions   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. 2012 irs 1040a instructions Gain. 2012 irs 1040a instructions   The basis for figuring a gain is your adjusted basis when you sell the property. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. 2012 irs 1040a instructions Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 2012 irs 1040a instructions Loss. 2012 irs 1040a instructions   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 2012 irs 1040a instructions Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. 2012 irs 1040a instructions Example. 2012 irs 1040a instructions Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. 2012 irs 1040a instructions In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. 2012 irs 1040a instructions Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). 2012 irs 1040a instructions How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. 2012 irs 1040a instructions By selecting the method that is best for you, you will have quick and easy access to tax help. 2012 irs 1040a instructions Contacting your Taxpayer Advocate. 2012 irs 1040a instructions   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. 2012 irs 1040a instructions We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. 2012 irs 1040a instructions Here are seven things every taxpayer should know about TAS. 2012 irs 1040a instructions TAS is your voice at the IRS. 2012 irs 1040a instructions Our service is free, confidential, and tailored to meet your needs. 2012 irs 1040a instructions You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. 2012 irs 1040a instructions We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. 2012 irs 1040a instructions This includes businesses as well as individuals. 2012 irs 1040a instructions Our employees know the IRS and how to navigate it. 2012 irs 1040a instructions If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. 2012 irs 1040a instructions We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. 2012 irs 1040a instructions You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. 2012 irs 1040a instructions irs. 2012 irs 1040a instructions gov/advocate. 2012 irs 1040a instructions You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. 2012 irs 1040a instructions You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. 2012 irs 1040a instructions taxtoolkit. 2012 irs 1040a instructions irs. 2012 irs 1040a instructions gov. 2012 irs 1040a instructions You can get updates on hot tax topics by visiting our YouTube channel at www. 2012 irs 1040a instructions youtube. 2012 irs 1040a instructions com/tasnta and our Facebook page at www. 2012 irs 1040a instructions facebook. 2012 irs 1040a instructions com/YourVoiceAtIRS, or by following our tweets at www. 2012 irs 1040a instructions twitter. 2012 irs 1040a instructions com/YourVoiceAtIRS. 2012 irs 1040a instructions Low Income Taxpayer Clinics (LITCs). 2012 irs 1040a instructions   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. 2012 irs 1040a instructions LITCs are independent from the IRS. 2012 irs 1040a instructions Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. 2012 irs 1040a instructions If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. 2012 irs 1040a instructions For more information, see Publication 4134, Low Income Taxpayer Clinic List. 2012 irs 1040a instructions This publication is available at IRS. 2012 irs 1040a instructions gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. 2012 irs 1040a instructions Free tax services. 2012 irs 1040a instructions   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. 2012 irs 1040a instructions Learn about free tax information from the IRS, including publications, services, and education and assistance programs. 2012 irs 1040a instructions The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. 2012 irs 1040a instructions The majority of the information and services listed in this publication are available to you free of charge. 2012 irs 1040a instructions If there is a fee associated with a resource or service, it is listed in the publication. 2012 irs 1040a instructions   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d