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2012 Tax Form 8863

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2012 Tax Form 8863

2012 tax form 8863 11. 2012 tax form 8863   Casualties, Thefts, and Condemnations Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Casualties and TheftsDeductible losses. 2012 tax form 8863 Nondeductible losses. 2012 tax form 8863 Family pet. 2012 tax form 8863 Progressive deterioration. 2012 tax form 8863 Decline in market value of stock. 2012 tax form 8863 Mislaid or lost property. 2012 tax form 8863 Farming Losses How To Figure a Loss Deduction Limits on Losses of Personal-Use Property When Loss Is Deductible Proof of Loss Figuring a Gain Other Involuntary ConversionsCondemnation Irrigation Project Livestock Losses Tree Seedlings Postponing GainException. 2012 tax form 8863 Related persons. 2012 tax form 8863 Replacement Property Replacement Period How To Postpone Gain Disaster Area LossesWho is eligible. 2012 tax form 8863 Covered disaster area. 2012 tax form 8863 Reporting Gains and Losses Introduction This chapter explains the tax treatment of casualties, thefts, and condemnations. 2012 tax form 8863 A casualty occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. 2012 tax form 8863 A theft occurs when property is stolen. 2012 tax form 8863 A condemnation occurs when private property is legally taken for public use without the owner's consent. 2012 tax form 8863 A casualty, theft, or condemnation may result in a deductible loss or taxable gain on your federal income tax return. 2012 tax form 8863 You may have a deductible loss or a taxable gain even if only a portion of your property was affected by a casualty, theft, or condemnation. 2012 tax form 8863 An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events discussed in this chapter. 2012 tax form 8863 If an involuntary conversion results in a gain and you buy qualified replacement property within the specified replacement period, you can postpone reporting the gain on your income tax return. 2012 tax form 8863 For more information, see Postponing Gain , later. 2012 tax form 8863 Topics - This chapter discusses: Casualties and thefts How to figure a loss or gain Other involuntary conversions Postponing gain Disaster area losses Reporting gains and losses Drought involving property connected with a trade or business or a transaction entered into for profit Useful Items - You may want to see: Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and Theft Loss Workbook Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 4684 Casualties and Thefts 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. 2012 tax form 8863 Casualties and Thefts If your property is destroyed, damaged, or stolen, you may have a deductible loss. 2012 tax form 8863 If the insurance or other reimbursement is more than the adjusted basis of the destroyed, damaged, or stolen property, you may have a taxable gain. 2012 tax form 8863 Casualty. 2012 tax form 8863   A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. 2012 tax form 8863 A sudden event is one that is swift, not gradual or progressive. 2012 tax form 8863 An unexpected event is one that is ordinarily unanticipated and unintended. 2012 tax form 8863 An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. 2012 tax form 8863 Deductible losses. 2012 tax form 8863   Deductible casualty losses can result from a number of different causes, including the following. 2012 tax form 8863 Airplane crashes. 2012 tax form 8863 Car, truck, or farm equipment accidents not resulting from your willful act or willful negligence. 2012 tax form 8863 Earthquakes. 2012 tax form 8863 Fires (but see Nondeductible losses next for exceptions). 2012 tax form 8863 Floods. 2012 tax form 8863 Freezing. 2012 tax form 8863 Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses, in Publication 547. 2012 tax form 8863 Lightning. 2012 tax form 8863 Storms, including hurricanes and tornadoes. 2012 tax form 8863 Terrorist attacks. 2012 tax form 8863 Vandalism. 2012 tax form 8863 Volcanic eruptions. 2012 tax form 8863 Nondeductible losses. 2012 tax form 8863   A casualty loss is not deductible if the damage or destruction is caused by the following. 2012 tax form 8863 Accidentally breaking articles such as glassware or china under normal conditions. 2012 tax form 8863 A family pet (explained below). 2012 tax form 8863 A fire if you willfully set it, or pay someone else to set it. 2012 tax form 8863 A car, truck, or farm equipment accident if your willful negligence or willful act caused it. 2012 tax form 8863 The same is true if the willful act or willful negligence of someone acting for you caused the accident. 2012 tax form 8863 Progressive deterioration (explained below). 2012 tax form 8863 Family pet. 2012 tax form 8863   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed above under Casualty are met. 2012 tax form 8863 Example. 2012 tax form 8863 You keep your horse in your yard. 2012 tax form 8863 The ornamental fruit trees in your yard were damaged when your horse stripped the bark from them. 2012 tax form 8863 Some of the trees were completely girdled and died. 2012 tax form 8863 Because the damage was not unexpected or unusual, the loss is not deductible. 2012 tax form 8863 Progressive deterioration. 2012 tax form 8863   Loss of property due to progressive deterioration is not deductible as a casualty loss. 2012 tax form 8863 This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. 2012 tax form 8863 Examples of damage due to progressive deterioration include damage from rust, corrosion, or termites. 2012 tax form 8863 However, weather-related conditions or disease may cause another type of involuntary conversion. 2012 tax form 8863 See Other Involuntary Conversions , later. 2012 tax form 8863 Theft. 2012 tax form 8863   A theft is the taking and removing of money or property with the intent to deprive the owner of it. 2012 tax form 8863 The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. 2012 tax form 8863 You do not need to show a conviction for theft. 2012 tax form 8863   Theft includes the taking of money or property by the following means: Blackmail, Burglary, Embezzlement, Extortion, Kidnapping for ransom, Larceny, Robbery, or Threats. 2012 tax form 8863 The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. 2012 tax form 8863 Decline in market value of stock. 2012 tax form 8863   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. 2012 tax form 8863 However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. 2012 tax form 8863 You report a capital loss on Schedule D (Form 1040). 2012 tax form 8863 For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. 2012 tax form 8863 Mislaid or lost property. 2012 tax form 8863   The simple disappearance of money or property is not a theft. 2012 tax form 8863 However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. 2012 tax form 8863 Example. 2012 tax form 8863 A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. 2012 tax form 8863 The diamond falls from the ring and is never found. 2012 tax form 8863 The loss of the diamond is a casualty. 2012 tax form 8863 Farming Losses You can deduct certain casualty or theft losses that occur in the business of farming. 2012 tax form 8863 The following is a discussion of some losses you can deduct and some you cannot deduct. 2012 tax form 8863 Livestock or produce bought for resale. 2012 tax form 8863   Casualty or theft losses of livestock or produce bought for resale are deductible if you report your income on the cash method. 2012 tax form 8863 If you report your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. 2012 tax form 8863 You cannot take a separate deduction. 2012 tax form 8863 Livestock, plants, produce, and crops raised for sale. 2012 tax form 8863   Losses of livestock, plants, produce, and crops raised for sale are generally not deductible if you report your income on the cash method. 2012 tax form 8863 You have already deducted the cost of raising these items as farm expenses, so their basis is equal to zero. 2012 tax form 8863   For plants with a preproductive period of more than 2 years, you may have a deductible loss if you have a tax basis in the plants. 2012 tax form 8863 You usually have a tax basis if you capitalized the expenses associated with these plants under the uniform capitalization rules. 2012 tax form 8863 The uniform capitalization rules are discussed in chapter 6. 2012 tax form 8863   If you report your income on an accrual method, casualty or theft losses are deductible only if you included the items in your inventory at the beginning of your tax year. 2012 tax form 8863 You get the deduction by omitting the item from your inventory at the close of your tax year. 2012 tax form 8863 You cannot take a separate casualty or theft deduction. 2012 tax form 8863 Income loss. 2012 tax form 8863   A loss of future income is not deductible. 2012 tax form 8863 Example. 2012 tax form 8863 A severe flood destroyed your crops. 2012 tax form 8863 Because you are a cash method taxpayer and already deducted the cost of raising the crops as farm expenses, this loss is not deductible, as explained above under Livestock, plants, produce, and crops raised for sale . 2012 tax form 8863 You estimate that the crop loss will reduce your farm income by $25,000. 2012 tax form 8863 This loss of future income is also not deductible. 2012 tax form 8863 Loss of timber. 2012 tax form 8863   If you sell timber downed as a result of a casualty, treat the proceeds from the sale as a reimbursement. 2012 tax form 8863 If you use the proceeds to buy qualified replacement property, you can postpone reporting the gain. 2012 tax form 8863 See Postponing Gain , later. 2012 tax form 8863 Property used in farming. 2012 tax form 8863   Casualty and theft losses of property used in your farm business usually result in deductible losses. 2012 tax form 8863 If a fire or storm destroyed your barn, or you lose by casualty or theft an animal you bought for draft, breeding, dairy, or sport, you may have a deductible loss. 2012 tax form 8863 See How To Figure a Loss , later. 2012 tax form 8863 Raised draft, breeding, dairy, or sporting animals. 2012 tax form 8863   Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. 2012 tax form 8863 However, you may have a basis in the animal and therefore may be able to claim a deduction if either of the following situations applies to you. 2012 tax form 8863 You use inventories to determine your income and you included the animals in your inventory. 2012 tax form 8863 You capitalized the expenses associated with the animals under the uniform capitalization rules and therefore have a tax basis in the animals subject to a casualty or theft. 2012 tax form 8863 When you include livestock in inventory, its last inventory value is its basis. 2012 tax form 8863 When you lose an inventoried animal held for draft, breeding, dairy, or sport by casualty or theft during the year, decrease ending inventory by the amount you included in inventory for the animal. 2012 tax form 8863 You cannot take a separate deduction. 2012 tax form 8863 How To Figure a Loss How you figure a deductible casualty or theft loss depends on whether the loss was to farm or personal-use property and whether the property was stolen or partly or completely destroyed. 2012 tax form 8863 Farm property. 2012 tax form 8863   Farm property is the property you use in your farming business. 2012 tax form 8863 If your farm property was completely destroyed or stolen, your loss is figured as follows:      Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive      You can use the schedules in Publication 584-B to list your stolen, damaged, or destroyed business property and to figure your loss. 2012 tax form 8863   If your farm property was partially damaged, use the steps shown under Personal-use property next to figure your casualty loss. 2012 tax form 8863 However, the deduction limits, discussed later, do not apply to farm property. 2012 tax form 8863 Personal-use property. 2012 tax form 8863   Personal-use property is property used by you or your family members for personal purposes and not used in your farm business or for income-producing purposes. 2012 tax form 8863 The following items are examples of personal-use property: Your main home. 2012 tax form 8863 Furniture and electronics used in your main home and not used in a home office or for business purposes. 2012 tax form 8863 Clothing and jewelry. 2012 tax form 8863 An automobile used for nonbusiness purposes. 2012 tax form 8863 You figure the casualty or theft loss on this property by taking the following steps. 2012 tax form 8863 Determine your adjusted basis in the property before the casualty or theft. 2012 tax form 8863 Determine the decrease in fair market value of the property as a result of the casualty or theft. 2012 tax form 8863 From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive or expect to receive. 2012 tax form 8863 You must apply the deduction limits, discussed later, to determine your deductible loss. 2012 tax form 8863    You can use Publication 584 to list your stolen or damaged personal-use property and figure your loss. 2012 tax form 8863 It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. 2012 tax form 8863 Adjusted basis. 2012 tax form 8863   Adjusted basis is your basis (usually cost) increased or decreased by various events, such as improvements and casualty losses. 2012 tax form 8863 For more information about adjusted basis, see chapter 6. 2012 tax form 8863 Decrease in fair market value (FMV). 2012 tax form 8863   The decrease in FMV is the difference between the property's value immediately before the casualty or theft and its value immediately afterward. 2012 tax form 8863 FMV is defined in chapter 10 under Payments Received or Considered Received . 2012 tax form 8863 Appraisal. 2012 tax form 8863   To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. 2012 tax form 8863 But other measures, such as the cost of cleaning up or making repairs (discussed next) can be used to establish decreases in FMV. 2012 tax form 8863   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. 2012 tax form 8863 The appraiser must recognize the effects of any general market decline that may occur along with the casualty. 2012 tax form 8863 This information is needed to limit any deduction to the actual loss resulting from damage to the property. 2012 tax form 8863 Cost of cleaning up or making repairs. 2012 tax form 8863   The cost of cleaning up after a casualty is not part of a casualty loss. 2012 tax form 8863 Neither is the cost of repairing damaged property after a casualty. 2012 tax form 8863 But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. 2012 tax form 8863 The repairs are actually made. 2012 tax form 8863 The repairs are necessary to bring the property back to its condition before the casualty. 2012 tax form 8863 The amount spent for repairs is not excessive. 2012 tax form 8863 The repairs fix the damage only. 2012 tax form 8863 The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. 2012 tax form 8863 Related expenses. 2012 tax form 8863   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, temporary housing, or a rental car, are not part of your casualty or theft loss. 2012 tax form 8863 However, they may be deductible as farm business expenses if the damaged or stolen property is farm property. 2012 tax form 8863 Separate computations for more than one item of property. 2012 tax form 8863   Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for each item of property. 2012 tax form 8863 Then combine the losses to determine your total loss. 2012 tax form 8863    There is an exception to this rule for personal-use real property. 2012 tax form 8863 See Exception for personal-use real property, later. 2012 tax form 8863 Example. 2012 tax form 8863 A fire on your farm damaged a tractor and the barn in which it was stored. 2012 tax form 8863 The tractor had an adjusted basis of $3,300. 2012 tax form 8863 Its FMV was $28,000 just before the fire and $10,000 immediately afterward. 2012 tax form 8863 The barn had an adjusted basis of $28,000. 2012 tax form 8863 Its FMV was $55,000 just before the fire and $25,000 immediately afterward. 2012 tax form 8863 You received insurance reimbursements of $2,100 on the tractor and $26,000 on the barn. 2012 tax form 8863 Figure your deductible casualty loss separately for the two items of property. 2012 tax form 8863     Tractor Barn 1) Adjusted basis $3,300 $28,000 2) FMV before fire $28,000 $55,000 3) FMV after fire 10,000 25,000 4) Decrease in FMV  (line 2 − line 3) $18,000 $30,000 5) Loss (lesser of line 1 or line 4) $3,300 $28,000 6) Minus: Insurance 2,100 26,000 7) Deductible casualty loss $1,200 $2,000 8) Total deductible casualty loss $3,200 Exception for personal-use real property. 2012 tax form 8863   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. 2012 tax form 8863 Figure the loss using the smaller of the following. 2012 tax form 8863 The decrease in FMV of the entire property. 2012 tax form 8863 The adjusted basis of the entire property. 2012 tax form 8863 Example. 2012 tax form 8863 You bought a farm in 1990 for $160,000. 2012 tax form 8863 The adjusted basis of the residential part is now $128,000. 2012 tax form 8863 In 2013, a windstorm blew down shade trees and three ornamental trees planted at a cost of $7,500 on the residential part. 2012 tax form 8863 The adjusted basis of the residential part includes the $7,500. 2012 tax form 8863 The fair market value (FMV) of the residential part immediately before the storm was $400,000, and $385,000 immediately after the storm. 2012 tax form 8863 The trees were not covered by insurance. 2012 tax form 8863 1) Adjusted basis $128,000 2) FMV before the storm $400,000 3) FMV after the storm 385,000 4) Decrease in FMV (line 2 − line 3) $15,000 5) Loss before insurance (lesser of line 1 or line 4) $15,000 6) Minus: Insurance -0- 7) Amount of loss $15,000 Insurance and other reimbursements. 2012 tax form 8863   If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. 2012 tax form 8863 You do not have a casualty or theft loss to the extent you are reimbursed. 2012 tax form 8863   If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. 2012 tax form 8863 You must reduce your loss even if you do not receive payment until a later tax year. 2012 tax form 8863    Do not subtract from your loss any insurance payments you receive for living expenses if you lose the use of your main home or are denied access to it because of a casualty. 2012 tax form 8863 You may have to include a portion of these payments in your income. 2012 tax form 8863 See Insurance payments for living expenses in Publication 547 for details. 2012 tax form 8863 Disaster relief. 2012 tax form 8863   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. 2012 tax form 8863 Excludable cash gifts you receive also do not reduce your casualty loss if there are no limits on how you can use the money. 2012 tax form 8863   Generally, disaster relief grants received under the Robert T. 2012 tax form 8863 Stafford Disaster Relief and Emergency Assistance Act are not included in your income. 2012 tax form 8863 See Federal disaster relief grants , later, under Disaster Area Losses . 2012 tax form 8863   Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster are not taxable income to you. 2012 tax form 8863 See Qualified disaster relief payments , later, under Disaster Area Losses . 2012 tax form 8863 Reimbursement received after deducting loss. 2012 tax form 8863   If you figure your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. 2012 tax form 8863 Actual reimbursement less than expected. 2012 tax form 8863   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. 2012 tax form 8863 Actual reimbursement more than expected. 2012 tax form 8863   If you later receive more reimbursement than you expected after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. 2012 tax form 8863 However, if any part of your original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. 2012 tax form 8863 Do not refigure your tax for the year you claimed the deduction. 2012 tax form 8863 See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. 2012 tax form 8863 If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. 2012 tax form 8863 See Figuring a Gain in Publication 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or theft. 2012 tax form 8863 Actual reimbursement same as expected. 2012 tax form 8863   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. 2012 tax form 8863 Lump-sum reimbursement. 2012 tax form 8863   If you have a casualty or theft loss of several assets at the same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to the fair market value of each asset at the time of the loss. 2012 tax form 8863 Figure the gain or loss separately for each asset that has a separate basis. 2012 tax form 8863 Adjustments to basis. 2012 tax form 8863   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. 2012 tax form 8863 The result is your adjusted basis in the property. 2012 tax form 8863 Amounts you spend on repairs to restore your property to its pre-casualty condition increase your adjusted basis. 2012 tax form 8863 See Adjusted Basis in chapter 6 for more information. 2012 tax form 8863 Example. 2012 tax form 8863 You built a new silo for $25,000. 2012 tax form 8863 This is the basis in your silo because that is the total cost you incurred to build it. 2012 tax form 8863 During the year, a tornado damaged your silo and your allowable casualty loss deduction was $1,000. 2012 tax form 8863 In addition, your insurance company reimbursed you $4,000 for the damage and you spent $6,000 to restore the silo to its pre-casualty condition. 2012 tax form 8863 Your adjusted basis in the silo after the casualty is $26,000 ($25,000 - $1,000 - $4,000 + $6,000). 2012 tax form 8863 Deduction Limits on Losses of Personal-Use Property Casualty and theft losses of property held for personal use may be deductible if you itemize deductions on Schedule A (Form 1040). 2012 tax form 8863 There are two limits on the deduction for casualty or theft loss of personal-use property. 2012 tax form 8863 You figure these limits on Form 4684. 2012 tax form 8863 $100 rule. 2012 tax form 8863   You must reduce each casualty or theft loss on personal-use property by $100. 2012 tax form 8863 This rule applies after you have subtracted any reimbursement. 2012 tax form 8863 10% rule. 2012 tax form 8863   You must further reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. 2012 tax form 8863 Apply this rule after you reduce each loss by $100. 2012 tax form 8863 Adjusted gross income is on line 38 of Form 1040. 2012 tax form 8863 Example. 2012 tax form 8863 In June, you discovered that your house had been burglarized. 2012 tax form 8863 Your loss after insurance reimbursement was $2,000. 2012 tax form 8863 Your adjusted gross income for the year you discovered the burglary is $57,000. 2012 tax form 8863 Figure your theft loss deduction as follows: 1. 2012 tax form 8863 Loss after insurance $2,000 2. 2012 tax form 8863 Subtract $100 100 3. 2012 tax form 8863 Loss after $100 rule $1,900 4. 2012 tax form 8863 Subtract 10% (. 2012 tax form 8863 10) × $57,000 AGI $5,700 5. 2012 tax form 8863 Theft loss deduction -0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($5,700). 2012 tax form 8863    If you have a casualty or theft gain in addition to a loss, you will have to make a special computation before you figure your 10% limit. 2012 tax form 8863 See 10% Rule in Publication 547. 2012 tax form 8863 When Loss Is Deductible Generally, you can deduct casualty losses that are not reimbursable only in the tax year in which they occur. 2012 tax form 8863 You generally can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. 2012 tax form 8863 However, losses in federally declared disaster areas are subject to different rules. 2012 tax form 8863 See Disaster Area Losses , later, for an exception. 2012 tax form 8863 If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. 2012 tax form 8863 Leased property. 2012 tax form 8863   If you lease property from someone else, you can deduct a loss on the property in the year your liability for the loss is fixed. 2012 tax form 8863 This is true even if the loss occurred or the liability was paid in a different year. 2012 tax form 8863 You are not entitled to a deduction until your liability under the lease can be determined with reasonable accuracy. 2012 tax form 8863 Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned. 2012 tax form 8863 Example. 2012 tax form 8863 Robert leased a tractor from First Implement, Inc. 2012 tax form 8863 , for use in his farm business. 2012 tax form 8863 The tractor was destroyed by a tornado in June 2012. 2012 tax form 8863 The loss was not insured. 2012 tax form 8863 First Implement billed Robert for the fair market value of the tractor on the date of the loss. 2012 tax form 8863 Robert disagreed with the bill and refused to pay it. 2012 tax form 8863 First Implement later filed suit in court against Robert. 2012 tax form 8863 In 2013, Robert and First Implement agreed to settle the suit for $20,000, and the court entered a judgment in favor of First Implement. 2012 tax form 8863 Robert paid $20,000 in June 2013. 2012 tax form 8863 He can claim the $20,000 as a loss on his 2013 tax return. 2012 tax form 8863 Net operating loss (NOL). 2012 tax form 8863   If your deductions, including casualty or theft loss deductions, are more than your income for the year, you may have an NOL. 2012 tax form 8863 An NOL can be carried back or carried forward and deducted from income in other years. 2012 tax form 8863 See Publication 536 for more information on NOLs. 2012 tax form 8863 Proof of Loss To deduct a casualty or theft loss, you must be able to prove that there was a casualty or theft. 2012 tax form 8863 You must have records to support the amount you claim for the loss. 2012 tax form 8863 Casualty loss proof. 2012 tax form 8863   For a casualty loss, your records should show all the following information. 2012 tax form 8863 The type of casualty (car accident, fire, storm, etc. 2012 tax form 8863 ) and when it occurred. 2012 tax form 8863 That the loss was a direct result of the casualty. 2012 tax form 8863 That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. 2012 tax form 8863 Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. 2012 tax form 8863 Theft loss proof. 2012 tax form 8863   For a theft loss, your records should show all the following information. 2012 tax form 8863 When you discovered your property was missing. 2012 tax form 8863 That your property was stolen. 2012 tax form 8863 That you were the owner of the property. 2012 tax form 8863 Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. 2012 tax form 8863 Figuring a Gain A casualty or theft may result in a taxable gain. 2012 tax form 8863 If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. 2012 tax form 8863 You generally report your gain as income in the year you receive the reimbursement. 2012 tax form 8863 However, depending on the type of property you receive, you may not have to report your gain. 2012 tax form 8863 See Postponing Gain , later. 2012 tax form 8863 Your gain is figured as follows: The amount you receive, minus Your adjusted basis in the property at the time of the casualty or theft. 2012 tax form 8863 Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. 2012 tax form 8863 Amount you receive. 2012 tax form 8863   The amount you receive includes any money plus the value of any property you receive, minus any expenses you have in obtaining reimbursement. 2012 tax form 8863 It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. 2012 tax form 8863 Example. 2012 tax form 8863 A tornado severely damaged your barn. 2012 tax form 8863 The adjusted basis of the barn was $25,000. 2012 tax form 8863 Your insurance company reimbursed you $40,000 for the damaged barn. 2012 tax form 8863 However, you had legal expenses of $2,000 to collect that insurance. 2012 tax form 8863 Your insurance minus your expenses to collect the insurance is more than your adjusted basis in the barn, so you have a gain. 2012 tax form 8863 1) Insurance reimbursement $40,000 2) Legal expenses 2,000 3) Amount received  (line 1 − line 2) $38,000 4) Adjusted basis 25,000 5) Gain on casualty (line 3 − line 4) $13,000 Other Involuntary Conversions In addition to casualties and thefts, other events cause involuntary conversions of property. 2012 tax form 8863 Some of these are discussed in the following paragraphs. 2012 tax form 8863 Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes. 2012 tax form 8863 You report the gain or deduct the loss on your tax return for the year you realize it. 2012 tax form 8863 However, depending on the type of property you receive, you may not have to report your gain on the involuntary conversion. 2012 tax form 8863 See Postponing Gain , later. 2012 tax form 8863 Condemnation Condemnation is the process by which private property is legally taken for public use without the owner's consent. 2012 tax form 8863 The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take property. 2012 tax form 8863 The owner receives a condemnation award (money or property) in exchange for the property taken. 2012 tax form 8863 A condemnation is a forced sale, the owner being the seller and the condemning authority being the buyer. 2012 tax form 8863 Threat of condemnation. 2012 tax form 8863   Treat the sale of your property under threat of condemnation as a condemnation, provided you have reasonable grounds to believe that your property will be condemned. 2012 tax form 8863 Main home condemned. 2012 tax form 8863   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. 2012 tax form 8863 For information on this exclusion, see Publication 523. 2012 tax form 8863 If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. 2012 tax form 8863 See Postponing Gain , later. 2012 tax form 8863 (You cannot deduct a loss from the condemnation of your main home. 2012 tax form 8863 ) More information. 2012 tax form 8863   For information on how to figure the gain or loss on condemned property, see chapter 1 in Publication 544. 2012 tax form 8863 Also see Postponing Gain , later, to find out if you can postpone reporting the gain. 2012 tax form 8863 Irrigation Project The sale or other disposition of property located within an irrigation project to conform to the acreage limits of federal reclamation laws is an involuntary conversion. 2012 tax form 8863 Livestock Losses Diseased livestock. 2012 tax form 8863   If your livestock die from disease, or are destroyed, sold, or exchanged because of disease, even though the disease is not of epidemic proportions, treat these occurrences as involuntary conversions. 2012 tax form 8863 If the livestock were raised or purchased for resale, follow the rules for livestock discussed earlier under Farming Losses . 2012 tax form 8863 Otherwise, figure the gain or loss from these conversions using the rules discussed under Determining Gain or Loss in chapter 8. 2012 tax form 8863 If you replace the livestock, you may be able to postpone reporting the gain. 2012 tax form 8863 See Postponing Gain below. 2012 tax form 8863 Reporting dispositions of diseased livestock. 2012 tax form 8863   If you choose to postpone reporting gain on the disposition of diseased livestock, you must attach a statement to your return explaining that the livestock were disposed of because of disease. 2012 tax form 8863 You must also include other information on this statement. 2012 tax form 8863 See How To Postpone Gain , later, under Postponing Gain . 2012 tax form 8863 Weather-related sales of livestock. 2012 tax form 8863   If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes solely because of drought, flood, or other weather-related conditions, treat the sale or exchange as an involuntary conversion. 2012 tax form 8863 Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. 2012 tax form 8863 Figure the gain or loss using the rules discussed under Determining Gain or Loss in chapter 8. 2012 tax form 8863 If you replace the livestock, you may be able to postpone reporting the gain. 2012 tax form 8863 See Postponing Gain below. 2012 tax form 8863 Example. 2012 tax form 8863 It is your usual business practice to sell five of your dairy animals during the year. 2012 tax form 8863 This year you sold 20 dairy animals because of drought. 2012 tax form 8863 The sale of 15 animals is treated as an involuntary conversion. 2012 tax form 8863    If you do not replace the livestock, you may be able to report the gain in the following year's income. 2012 tax form 8863 This rule also applies to other livestock (including poultry). 2012 tax form 8863 See Sales Caused by Weather-Related Conditions in chapter 3. 2012 tax form 8863 Tree Seedlings If, because of an abnormal drought, the failure of planted tree seedlings is greater than normally anticipated, you may have a deductible loss. 2012 tax form 8863 Treat the loss as a loss from an involuntary conversion. 2012 tax form 8863 The loss equals the previously capitalized reforestation costs you had to duplicate on replanting. 2012 tax form 8863 You deduct the loss on the return for the year the seedlings died. 2012 tax form 8863 Postponing Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed, stolen, or other involuntarily converted property. 2012 tax form 8863 Your basis in the new property is generally the same as your adjusted basis in the property it replaces. 2012 tax form 8863 You must ordinarily report the gain on your stolen, destroyed, or other involuntarily converted property if you receive money or unlike property as reimbursement. 2012 tax form 8863 However, you can choose to postpone reporting the gain if you purchase replacement property similar or related in service or use to your destroyed, stolen, or other involuntarily converted property within a specific replacement period. 2012 tax form 8863 If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. 2012 tax form 8863 To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. 2012 tax form 8863 If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. 2012 tax form 8863 Example 1. 2012 tax form 8863 In 1985, you constructed a barn to store farm equipment at a cost of $20,000. 2012 tax form 8863 In 1987, you added a silo to the barn at a cost of $15,000 to store grain. 2012 tax form 8863 In May of this year, the property was worth $100,000. 2012 tax form 8863 In June the barn and silo were destroyed by a tornado. 2012 tax form 8863 At the time of the tornado, you had an adjusted basis of $0 in the property. 2012 tax form 8863 You received $85,000 from the insurance company. 2012 tax form 8863 You had a gain of $85,000 ($85,000 – $0). 2012 tax form 8863 You spent $80,000 to rebuild the barn and silo. 2012 tax form 8863 Since this is less than the insurance proceeds received, you must include $5,000 ($85,000 – $80,000) in your income. 2012 tax form 8863 Example 2. 2012 tax form 8863 In 1970, you bought a cabin in the mountains for your personal use at a cost of $18,000. 2012 tax form 8863 You made no further improvements or additions to it. 2012 tax form 8863 When a storm destroyed the cabin this January, the cabin was worth $250,000. 2012 tax form 8863 You received $146,000 from the insurance company in March. 2012 tax form 8863 You had a gain of $128,000 ($146,000 − $18,000). 2012 tax form 8863 You spent $144,000 to rebuild the cabin. 2012 tax form 8863 Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. 2012 tax form 8863 Buying replacement property from a related person. 2012 tax form 8863   You cannot postpone reporting a gain from a casualty, theft, or other involuntary conversion if you buy the replacement property from a related person (discussed later). 2012 tax form 8863 This rule applies to the following taxpayers. 2012 tax form 8863 C corporations. 2012 tax form 8863 Partnerships in which more than 50% of the capital or profits interest is owned by C corporations. 2012 tax form 8863 Individuals, partnerships (other than those in (2) above), and S corporations if the total realized gain for the tax year on all involuntarily converted properties on which there are realized gains is more than $100,000. 2012 tax form 8863 For involuntary conversions described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. 2012 tax form 8863 If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. 2012 tax form 8863 If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. 2012 tax form 8863 Exception. 2012 tax form 8863   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the involuntarily converted property. 2012 tax form 8863 Related persons. 2012 tax form 8863   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. 2012 tax form 8863 For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. 2012 tax form 8863 Death of a taxpayer. 2012 tax form 8863   If a taxpayer dies after having a gain, but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. 2012 tax form 8863 The executor of the estate or the person succeeding to the funds from the involuntary conversion cannot postpone reporting the gain by buying replacement property. 2012 tax form 8863 Replacement Property You must buy replacement property for the specific purpose of replacing your property. 2012 tax form 8863 Your replacement property must be similar or related in service or use to the property it replaces. 2012 tax form 8863 You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. 2012 tax form 8863 If you spend the money you receive for other purposes, and borrow money to buy replacement property, you can still choose to postpone reporting the gain if you meet the other requirements. 2012 tax form 8863 Property you acquire by gift or inheritance does not qualify as replacement property. 2012 tax form 8863 Owner-user. 2012 tax form 8863   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. 2012 tax form 8863 Examples of property that functions in the same way as the property it replaces are a home that replaces another home, a dairy cow that replaces another dairy cow, and farm land that replaces other farm land. 2012 tax form 8863 A grinding mill that replaces a tractor does not qualify. 2012 tax form 8863 Neither does a breeding or draft animal that replaces a dairy cow. 2012 tax form 8863 Soil or other environmental contamination. 2012 tax form 8863   If, because of soil or other environmental contamination, it is not feasible for you to reinvest your insurance money or other proceeds from destroyed or damaged livestock in property similar or related in service or use to the livestock, you can treat other property (including real property) used for farming purposes, as property similar or related in service or use to the destroyed or damaged livestock. 2012 tax form 8863 Weather-related conditions. 2012 tax form 8863   If, because of drought, flood, or other weather-related conditions, it is not feasible for you to reinvest the insurance money or other proceeds in property similar or related in service or use to the livestock, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the livestock you disposed of. 2012 tax form 8863 Example. 2012 tax form 8863 Each year you normally sell 25 cows from your beef herd. 2012 tax form 8863 However, this year you had to sell 50 cows. 2012 tax form 8863 This is because a severe drought significantly reduced the amount of hay and pasture yield needed to feed your herd for the rest of the year. 2012 tax form 8863 Because, as a result of the severe drought, it is not feasible for you to use the proceeds from selling the extra cows to buy new cows, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the cows you sold. 2012 tax form 8863 Standing crop destroyed by casualty. 2012 tax form 8863   If a storm or other casualty destroyed your standing crop and you use the insurance money to acquire either another standing crop or a harvested crop, this purchase qualifies as replacement property. 2012 tax form 8863 The costs of planting and raising a new crop qualify as replacement costs for the destroyed crop only if you use the crop method of accounting (discussed in chapter 2). 2012 tax form 8863 In that case, the costs of bringing the new crop to the same level of maturity as the destroyed crop qualify as replacement costs to the extent they are incurred during the replacement period. 2012 tax form 8863 Timber loss. 2012 tax form 8863   Standing timber you bought with the proceeds from the sale of timber downed as a result of a casualty, such as high winds, earthquakes, or volcanic eruptions, qualifies as replacement property. 2012 tax form 8863 If you bought the standing timber within the replacement period, you can postpone reporting the gain. 2012 tax form 8863 Business or income-producing property located in a federally declared disaster area. 2012 tax form 8863   If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. 2012 tax form 8863 For more information, see Disaster Area Losses in Publication 547. 2012 tax form 8863 Substituting replacement property. 2012 tax form 8863   Once you have acquired qualified replacement property that you designate as replacement property in a statement attached to your tax return, you cannot substitute other qualified replacement property. 2012 tax form 8863 This is true even if you acquire the other property within the replacement period. 2012 tax form 8863 However, if you discover that the original replacement property was not qualified replacement property, you can, within the replacement period, substitute the new qualified replacement property. 2012 tax form 8863 Basis of replacement property. 2012 tax form 8863   You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. 2012 tax form 8863 In this way, tax on the gain is postponed until you dispose of the replacement property. 2012 tax form 8863 Replacement Period To postpone reporting your gain, you must buy replacement property within a specified period of time. 2012 tax form 8863 This is the replacement period. 2012 tax form 8863 The replacement period begins on the date your property was damaged, destroyed, stolen, sold, or exchanged. 2012 tax form 8863 The replacement period generally ends 2 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. 2012 tax form 8863 Example. 2012 tax form 8863 You are a calendar year taxpayer. 2012 tax form 8863 While you were on vacation, farm equipment that cost $2,200 was stolen from your farm. 2012 tax form 8863 You discovered the theft when you returned to your farm on November 11, 2012. 2012 tax form 8863 Your insurance company investigated the theft and did not settle your claim until January 5, 2013, when they paid you $3,000. 2012 tax form 8863 You first realized a gain from the reimbursement for the theft during 2013, so you have until December 31, 2015, to replace the property. 2012 tax form 8863 Main home in disaster area. 2012 tax form 8863   For your main home (or its contents) located in a federally declared disaster area, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. 2012 tax form 8863 See Disaster Area Losses , later. 2012 tax form 8863 Property in the Midwestern disaster areas. 2012 tax form 8863   For property located in the Midwestern disaster areas (defined in Table 4 in the 2008 Publication 547) that was destroyed, damaged, stolen, or condemned, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. 2012 tax form 8863 This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Midwestern disaster areas. 2012 tax form 8863 Property in the Kansas disaster area. 2012 tax form 8863   For property located in the Kansas disaster area that was destroyed, damaged, stolen, or condemned after May 3, 2007, as a result of the Kansas storms and tornadoes, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. 2012 tax form 8863 This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Kansas disaster area. 2012 tax form 8863 Property in the Hurricane Katrina disaster area. 2012 tax form 8863   For property located in the Hurricane Katrina disaster area that was destroyed, damaged, stolen, or condemned after August 24, 2005, as a result of Hurricane Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. 2012 tax form 8863 This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. 2012 tax form 8863 Weather-related sales of livestock in an area eligible for federal assistance. 2012 tax form 8863   For the sale or exchange of livestock due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. 2012 tax form 8863 The IRS may extend the replacement period on a regional basis if the weather-related conditions continue for longer than 3 years. 2012 tax form 8863   For information on extensions of the replacement period because of persistent drought, see Notice 2006-82, 2006-39 I. 2012 tax form 8863 R. 2012 tax form 8863 B. 2012 tax form 8863 529, available at  www. 2012 tax form 8863 irs. 2012 tax form 8863 gov/irb/2006-39_IRB/ar11. 2012 tax form 8863 html. 2012 tax form 8863 For a list of counties for which exceptional, extreme, or severe drought was reported during the 12 months ending August 31, 2013, see Notice 2013-62, available at IRS. 2012 tax form 8863 gov. 2012 tax form 8863 Condemnation. 2012 tax form 8863   The replacement period for a condemnation begins on the earlier of the following dates. 2012 tax form 8863 The date on which you disposed of the condemned property. 2012 tax form 8863 The date on which the threat of condemnation began. 2012 tax form 8863 The replacement period generally ends 2 years after the close of the first tax year in which any part of the gain on the condemnation is realized. 2012 tax form 8863 But see Main home in disaster area , Property in the Midwestern disaster areas , Property in the Kansas disaster area , and Property in the Hurricane Katrina disaster area , earlier, for exceptions. 2012 tax form 8863 Business or investment real property. 2012 tax form 8863   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the close of the first tax year in which any part of the gain on the condemnation is realized. 2012 tax form 8863 Extension. 2012 tax form 8863   You can apply for an extension of the replacement period. 2012 tax form 8863 Send your written application to the Internal Revenue Service Center where you file your tax return. 2012 tax form 8863 See your tax return instructions for the address. 2012 tax form 8863 Include all the details about your need for an extension. 2012 tax form 8863 Make your application before the end of the replacement period. 2012 tax form 8863 However, you can file an application within a reasonable time after the replacement period ends if you can show a good reason for the delay. 2012 tax form 8863 You will get an extension of the replacement period if you can show reasonable cause for not making the replacement within the regular period. 2012 tax form 8863 How To Postpone Gain You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. 2012 tax form 8863 You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain. 2012 tax form 8863 Required statement. 2012 tax form 8863   You should attach a statement to your return for the year you have the gain. 2012 tax form 8863 This statement should include all the following information. 2012 tax form 8863 The date and details of the casualty, theft, or other involuntary conversion. 2012 tax form 8863 The insurance or other reimbursement you received. 2012 tax form 8863 How you figured the gain. 2012 tax form 8863 Replacement property acquired before return filed. 2012 tax form 8863   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items. 2012 tax form 8863 The replacement property. 2012 tax form 8863 The postponed gain. 2012 tax form 8863 The basis adjustment that reflects the postponed gain. 2012 tax form 8863 Any gain you are reporting as income. 2012 tax form 8863 Replacement property acquired after return filed. 2012 tax form 8863   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period. 2012 tax form 8863   You should then attach another statement to your return for the year in which you buy the replacement property. 2012 tax form 8863 This statement should contain detailed information on the replacement property. 2012 tax form 8863 If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. 2012 tax form 8863 Include in the statement detailed information on the replacement property bought in that year. 2012 tax form 8863 Reporting weather-related sales of livestock. 2012 tax form 8863   If you choose to postpone reporting the gain on weather-related sales or exchanges of livestock, show all the following information on a statement attached to your return for the tax year in which you first realize any of the gain. 2012 tax form 8863 Evidence of the weather-related conditions that forced the sale or exchange of the livestock. 2012 tax form 8863 The gain realized on the sale or exchange. 2012 tax form 8863 The number and kind of livestock sold or exchanged. 2012 tax form 8863 The number of livestock of each kind you would have sold or exchanged under your usual business practice. 2012 tax form 8863   Show all the following information and the preceding information on the return for the year in which you replace the livestock. 2012 tax form 8863 The dates you bought the replacement property. 2012 tax form 8863 The cost of the replacement property. 2012 tax form 8863 Description of the replacement property (for example, the number and kind of the replacement livestock). 2012 tax form 8863 Amended return. 2012 tax form 8863   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations. 2012 tax form 8863 You do not acquire replacement property within the replacement period, plus extensions. 2012 tax form 8863 On this amended return, you must report the gain and pay any additional tax due. 2012 tax form 8863 You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. 2012 tax form 8863 On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due. 2012 tax form 8863 Disaster Area Losses Special rules apply to federally declared disaster area losses. 2012 tax form 8863 A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. 2012 tax form 8863 Stafford Disaster Relief and Emergency Assistance Act. 2012 tax form 8863 It includes a major disaster or emergency declaration under the act. 2012 tax form 8863 A list of the areas warranting public or individual assistance (or both) under the Act is available at the Federal Emergency Management Agency (FEMA) web site at www. 2012 tax form 8863 fema. 2012 tax form 8863 gov. 2012 tax form 8863 This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. 2012 tax form 8863 For other special rules, see Disaster Area Losses in Publication 547. 2012 tax form 8863 When to deduct the loss. 2012 tax form 8863   You generally must deduct a casualty loss in the year it occurred. 2012 tax form 8863 However, if you have a deductible loss from a disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. 2012 tax form 8863 If you make this choice, the loss is treated as having occurred in the preceding year. 2012 tax form 8863    Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund. 2012 tax form 8863   You must make the choice to take your casualty loss for the disaster in the preceding year by the later of the following dates. 2012 tax form 8863 The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred. 2012 tax form 8863 The due date (with extensions) for the return for the preceding tax year. 2012 tax form 8863 Federal disaster relief grants. 2012 tax form 8863   Do not include post-disaster relief grants received under the Robert T. 2012 tax form 8863 Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. 2012 tax form 8863 Do not deduct casualty losses or medical expenses to the extent they are specifically reimbursed by these disaster relief grants. 2012 tax form 8863 If the casualty loss was specifically reimbursed by the grant and you received the grant after the year in which you deducted the casualty loss, see Reimbursement received after deducting loss , earlier. 2012 tax form 8863 Unemployment assistance payments under the Act are taxable unemployment compensation. 2012 tax form 8863 Qualified disaster relief payments. 2012 tax form 8863   Qualified disaster relief payments are not included in the income of individuals to the extent any expenses compensated by these payments are not otherwise compensated for by insurance or other reimbursement. 2012 tax form 8863 These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). 2012 tax form 8863 No withholding applies to these payments. 2012 tax form 8863   Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses. 2012 tax form 8863 Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster. 2012 tax form 8863 Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. 2012 tax form 8863 (A personal residence can be a rented residence or one you own. 2012 tax form 8863 ) Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster. 2012 tax form 8863   Qualified disaster relief payments include amounts paid by a federal, state, or local government in connection with a federally declared disaster to individuals affected by the disaster. 2012 tax form 8863    Qualified disaster relief payments do not include: Payments for expenses otherwise paid for by insurance or other reimbursements, or Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation. 2012 tax form 8863 Qualified disaster mitigation payments. 2012 tax form 8863   Qualified disaster mitigation payments made under the Robert T. 2012 tax form 8863 Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not included in income. 2012 tax form 8863 These are payments you, as a property owner, receive to reduce the risk of future damage to your property. 2012 tax form 8863 You cannot increase your basis in property, or take a deduction or credit, for expenditures made with respect to those payments. 2012 tax form 8863 Sale of property under hazard mitigation program. 2012 tax form 8863   Generally, if you sell or otherwise transfer property, you must recognize any gain or loss for tax purposes unless the property is your main home. 2012 tax form 8863 You report the gain or deduct the loss on your tax return for the year you realize it. 2012 tax form 8863 (You cannot deduct a loss on personal-use property unless the loss resulted from a casualty, as discussed earlier. 2012 tax form 8863 ) However, if you sell or otherwise transfer property to the Federal Government, a state or local government, or an Indian tribal government under a hazard mitigation program, you can choose to postpone reporting the gain if you buy qualifying replacement property within a certain period of time. 2012 tax form 8863 See Postponing Gain , earlier, for the rules that apply. 2012 tax form 8863 Other federal assistance programs. 2012 tax form 8863    For more information about other federal assistance programs, see Crop Insurance and Crop Disaster Payments and Feed Assistance and Payments in chapter 3 earlier. 2012 tax form 8863 Postponed tax deadlines. 2012 tax form 8863   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. 2012 tax form 8863 The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA. 2012 tax form 8863   If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). 2012 tax form 8863 Go to http://www. 2012 tax form 8863 irs. 2012 tax form 8863 gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. 2012 tax form 8863 Who is eligible. 2012 tax form 8863   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. 2012 tax form 8863 Any individual whose main home is located in a covered disaster area (defined next). 2012 tax form 8863 Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. 2012 tax form 8863 Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area. 2012 tax form 8863 Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. 2012 tax form 8863 The main home or principal place of business does not have to be located in the covered disaster area. 2012 tax form 8863 Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. 2012 tax form 8863 The spouse on a joint return with a taxpayer who is eligible for postponements. 2012 tax form 8863 Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose necessary records to meet a postponed tax deadline are located in the covered disaster area. 2012 tax form 8863 Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. 2012 tax form 8863 Any other person determined by the IRS to be affected by a federally declared disaster. 2012 tax form 8863 Covered disaster area. 2012 tax form 8863   This is an area of a federally declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year. 2012 tax form 8863 Abatement of interest and penalties. 2012 tax form 8863   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines. 2012 tax form 8863 Reporting Gains and Losses You will have to file one or more of the following forms to report your gains or losses from involuntary conversions. 2012 tax form 8863 Form 4684. 2012 tax form 8863   Use this form to report your gains and losses from casualties and thefts. 2012 tax form 8863 Form 4797. 2012 tax form 8863   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. 2012 tax form 8863 Also use this form if you have a gain from a casualty or theft on trade, business or income-producing property held for more than 1 year and you have to recapture some or all of your gain as ordinary income. 2012 tax form 8863 Form 8949. 2012 tax form 8863   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. 2012 tax form 8863 Schedule A (Form 1040). 2012 tax form 8863   Use this form to deduct your losses from casualties and thefts of personal-use property and income-producing property, that you reported on Form 4684. 2012 tax form 8863 Schedule D (Form 1040). 2012 tax form 8863   Use this form to carry over the following gains. 2012 tax form 8863 Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year. 2012 tax form 8863 Net gain shown on Form 4684 from the casualty or theft of personal-use property. 2012 tax form 8863    Also use this form to figure the overall gain or loss from transactions reported on Form 8949. 2012 tax form 8863 Schedule F (Form 1040). 2012 tax form 8863   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 32, if you use the cash method of accounting and have not otherwise deducted these losses. 2012 tax form 8863 Prev  Up  Next   Home   More Online Publications
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Strategic Plan and Other References

IRS Strategic Plan, Fiscal Years 2009-2013
The plan outlines how the IRS will improve service to taxpayers and enforcement of the law over the next five years.

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Budget in Brief FY 2014
This summarizes how the budget request will enable the agency to meet its strategic goals: improve customer service and enhance enforcement of the tax laws.

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Green Book
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Priority Guidance Plan
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Get an overview of the four primary operating divisions and the other principal offices in the IRS organization.

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Quarterly report of IRS Equal Employment Opportunity internal complaint activity, posted in accordance with the Notification and Federal Employee Antidiscrimination and Retaliation (No FEAR) Act of 2002. (PDF file, maintained on the US Department of the Treasury's web site.)

IRS Oversight Organizations
A listing of federal agencies, House and Senate committees, advisory boards and advocacy panels that perform IRS oversight functions.

Workforce of Tomorrow Report
Publication 4783, a report from the Workforce of Tomorrow Task Force, contains recommendations on how the IRS can become the best place to work in federal government and ensure that it has the leadership and workforce it needs in the future.

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The 2012 Tax Form 8863

2012 tax form 8863 3. 2012 tax form 8863   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. 2012 tax form 8863 Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. 2012 tax form 8863 Its treatment as ordinary or capital is determined under rules for section 1231 transactions. 2012 tax form 8863 When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. 2012 tax form 8863 Any remaining gain is a section 1231 gain. 2012 tax form 8863 Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. 2012 tax form 8863 Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). 2012 tax form 8863 Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. 2012 tax form 8863 If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). 2012 tax form 8863 Do not take that gain into account as section 1231 gain. 2012 tax form 8863 Section 1231 transactions. 2012 tax form 8863   The following transactions result in gain or loss subject to section 1231 treatment. 2012 tax form 8863 Sales or exchanges of real property or depreciable personal property. 2012 tax form 8863 This property must be used in a trade or business and held longer than 1 year. 2012 tax form 8863 Generally, property held for the production of rents or royalties is considered to be used in a trade or business. 2012 tax form 8863 Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). 2012 tax form 8863 Sales or exchanges of leaseholds. 2012 tax form 8863 The leasehold must be used in a trade or business and held longer than 1 year. 2012 tax form 8863 Sales or exchanges of cattle and horses. 2012 tax form 8863 The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. 2012 tax form 8863 Sales or exchanges of other livestock. 2012 tax form 8863 This livestock does not include poultry. 2012 tax form 8863 It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. 2012 tax form 8863 Sales or exchanges of unharvested crops. 2012 tax form 8863 The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. 2012 tax form 8863 You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). 2012 tax form 8863 Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. 2012 tax form 8863 Cutting of timber or disposal of timber, coal, or iron ore. 2012 tax form 8863 The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. 2012 tax form 8863 Condemnations. 2012 tax form 8863 The condemned property must have been held longer than 1 year. 2012 tax form 8863 It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. 2012 tax form 8863 It cannot be property held for personal use. 2012 tax form 8863 Casualties and thefts. 2012 tax form 8863 The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). 2012 tax form 8863 You must have held the property longer than 1 year. 2012 tax form 8863 However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. 2012 tax form 8863 For more information on casualties and thefts, see Publication 547. 2012 tax form 8863 Property for sale to customers. 2012 tax form 8863   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. 2012 tax form 8863 If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. 2012 tax form 8863 Example. 2012 tax form 8863 You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. 2012 tax form 8863 Customers make deposits on the reels, which you refund if the reels are returned within a year. 2012 tax form 8863 If they are not returned, you keep each deposit as the agreed-upon sales price. 2012 tax form 8863 Most reels are returned within the 1-year period. 2012 tax form 8863 You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. 2012 tax form 8863 Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. 2012 tax form 8863 Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. 2012 tax form 8863 Copyrights. 2012 tax form 8863    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). 2012 tax form 8863 The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. 2012 tax form 8863 Treatment as ordinary or capital. 2012 tax form 8863   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. 2012 tax form 8863 If you have a net section 1231 loss, it is ordinary loss. 2012 tax form 8863 If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. 2012 tax form 8863 The rest, if any, is long-term capital gain. 2012 tax form 8863 Nonrecaptured section 1231 losses. 2012 tax form 8863   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. 2012 tax form 8863 Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. 2012 tax form 8863 These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. 2012 tax form 8863 Example. 2012 tax form 8863 In 2013, Ben has a $2,000 net section 1231 gain. 2012 tax form 8863 To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. 2012 tax form 8863 From 2008 through 2012 he had the following section 1231 gains and losses. 2012 tax form 8863 Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. 2012 tax form 8863 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. 2012 tax form 8863 To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. 2012 tax form 8863 This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. 2012 tax form 8863 On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. 2012 tax form 8863 Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. 2012 tax form 8863 Whether the adjusted basis was figured using depreciation or amortization another person claimed. 2012 tax form 8863 Corporate distributions. 2012 tax form 8863   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. 2012 tax form 8863 General asset accounts. 2012 tax form 8863   Different rules apply to dispositions of property you depreciated using a general asset account. 2012 tax form 8863 For information on these rules, see Publication 946. 2012 tax form 8863 Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. 2012 tax form 8863 See Gain Treated as Ordinary Income, later. 2012 tax form 8863 Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. 2012 tax form 8863 See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. 2012 tax form 8863 Section 1245 property defined. 2012 tax form 8863   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. 2012 tax form 8863 Personal property (either tangible or intangible). 2012 tax form 8863 Other tangible property (except buildings and their structural components) used as any of the following. 2012 tax form 8863 See Buildings and structural components below. 2012 tax form 8863 An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. 2012 tax form 8863 A research facility in any of the activities in (a). 2012 tax form 8863 A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). 2012 tax form 8863 That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. 2012 tax form 8863 Amortization of certified pollution control facilities. 2012 tax form 8863 The section 179 expense deduction. 2012 tax form 8863 Deduction for clean-fuel vehicles and certain refueling property. 2012 tax form 8863 Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. 2012 tax form 8863 Deduction for certain qualified refinery property. 2012 tax form 8863 Deduction for qualified energy efficient commercial building property. 2012 tax form 8863 Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. 2012 tax form 8863 (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). 2012 tax form 8863 ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). 2012 tax form 8863 Expenditures to remove architectural and transportation barriers to the handicapped and elderly. 2012 tax form 8863 Deduction for qualified tertiary injectant expenses. 2012 tax form 8863 Certain reforestation expenditures. 2012 tax form 8863 Deduction for election to expense qualified advanced mine safety equipment property. 2012 tax form 8863 Single purpose agricultural (livestock) or horticultural structures. 2012 tax form 8863 Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. 2012 tax form 8863 Any railroad grading or tunnel bore. 2012 tax form 8863 Buildings and structural components. 2012 tax form 8863   Section 1245 property does not include buildings and structural components. 2012 tax form 8863 The term building includes a house, barn, warehouse, or garage. 2012 tax form 8863 The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. 2012 tax form 8863   Do not treat a structure that is essentially machinery or equipment as a building or structural component. 2012 tax form 8863 Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. 2012 tax form 8863   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. 2012 tax form 8863 Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. 2012 tax form 8863 Facility for bulk storage of fungible commodities. 2012 tax form 8863   This term includes oil or gas storage tanks and grain storage bins. 2012 tax form 8863 Bulk storage means the storage of a commodity in a large mass before it is used. 2012 tax form 8863 For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. 2012 tax form 8863 To be fungible, a commodity must be such that one part may be used in place of another. 2012 tax form 8863   Stored materials that vary in composition, size, and weight are not fungible. 2012 tax form 8863 Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. 2012 tax form 8863 For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. 2012 tax form 8863 Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. 2012 tax form 8863 The depreciation and amortization allowed or allowable on the property. 2012 tax form 8863 The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). 2012 tax form 8863 A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. 2012 tax form 8863 For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. 2012 tax form 8863 See Gifts and Transfers at Death, later. 2012 tax form 8863 Use Part III of Form 4797 to figure the ordinary income part of the gain. 2012 tax form 8863 Depreciation taken on other property or taken by other taxpayers. 2012 tax form 8863   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. 2012 tax form 8863 Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. 2012 tax form 8863 Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). 2012 tax form 8863 Depreciation and amortization. 2012 tax form 8863   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. 2012 tax form 8863 Ordinary depreciation deductions. 2012 tax form 8863 Any special depreciation allowance you claimed. 2012 tax form 8863 Amortization deductions for all the following costs. 2012 tax form 8863 Acquiring a lease. 2012 tax form 8863 Lessee improvements. 2012 tax form 8863 Certified pollution control facilities. 2012 tax form 8863 Certain reforestation expenses. 2012 tax form 8863 Section 197 intangibles. 2012 tax form 8863 Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. 2012 tax form 8863 Franchises, trademarks, and trade names acquired before August 11, 1993. 2012 tax form 8863 The section 179 deduction. 2012 tax form 8863 Deductions for all the following costs. 2012 tax form 8863 Removing barriers to the disabled and the elderly. 2012 tax form 8863 Tertiary injectant expenses. 2012 tax form 8863 Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). 2012 tax form 8863 Environmental cleanup costs. 2012 tax form 8863 Certain reforestation expenses. 2012 tax form 8863 Qualified disaster expenses. 2012 tax form 8863 Any basis reduction for the investment credit (minus any basis increase for credit recapture). 2012 tax form 8863 Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). 2012 tax form 8863 Example. 2012 tax form 8863 You file your returns on a calendar year basis. 2012 tax form 8863 In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. 2012 tax form 8863 You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. 2012 tax form 8863 You did not take the section 179 deduction. 2012 tax form 8863 You sold the truck in May 2013 for $7,000. 2012 tax form 8863 The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). 2012 tax form 8863 Figure the gain treated as ordinary income as follows. 2012 tax form 8863 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. 2012 tax form 8863   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. 2012 tax form 8863   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. 2012 tax form 8863 Depreciation allowed or allowable. 2012 tax form 8863   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. 2012 tax form 8863 However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. 2012 tax form 8863 If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. 2012 tax form 8863   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. 2012 tax form 8863 Multiple asset accounts. 2012 tax form 8863   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. 2012 tax form 8863 Example. 2012 tax form 8863 In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. 2012 tax form 8863 All of the depreciation was recorded in a single depreciation account. 2012 tax form 8863 After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. 2012 tax form 8863 You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. 2012 tax form 8863 However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. 2012 tax form 8863 Normal retirement. 2012 tax form 8863   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. 2012 tax form 8863 Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. 2012 tax form 8863 To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. 2012 tax form 8863 Section 1250 property defined. 2012 tax form 8863   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. 2012 tax form 8863 It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. 2012 tax form 8863 A fee simple interest in land is not included because it is not depreciable. 2012 tax form 8863   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. 2012 tax form 8863 Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. 2012 tax form 8863 For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. 2012 tax form 8863 For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. 2012 tax form 8863 If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. 2012 tax form 8863 You will not have additional depreciation if any of the following conditions apply to the property disposed of. 2012 tax form 8863 You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. 2012 tax form 8863 In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. 2012 tax form 8863 The property was residential low-income rental property you held for 162/3 years or longer. 2012 tax form 8863 For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. 2012 tax form 8863 You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. 2012 tax form 8863 The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. 2012 tax form 8863 These properties are depreciated using the straight line method. 2012 tax form 8863 In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. 2012 tax form 8863 Depreciation taken by other taxpayers or on other property. 2012 tax form 8863   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). 2012 tax form 8863 Example. 2012 tax form 8863 Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. 2012 tax form 8863 Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. 2012 tax form 8863 On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. 2012 tax form 8863 At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). 2012 tax form 8863 Depreciation allowed or allowable. 2012 tax form 8863   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. 2012 tax form 8863 If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. 2012 tax form 8863 Retired or demolished property. 2012 tax form 8863   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. 2012 tax form 8863 Example. 2012 tax form 8863 A wing of your building is totally destroyed by fire. 2012 tax form 8863 The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. 2012 tax form 8863 Figuring straight line depreciation. 2012 tax form 8863   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. 2012 tax form 8863 If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. 2012 tax form 8863   Salvage value and useful life are not used for the ACRS method of depreciation. 2012 tax form 8863 Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. 2012 tax form 8863   The straight line method is applied without any basis reduction for the investment credit. 2012 tax form 8863 Property held by lessee. 2012 tax form 8863   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. 2012 tax form 8863 This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. 2012 tax form 8863 The same rule applies to the cost of acquiring a lease. 2012 tax form 8863   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. 2012 tax form 8863 However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. 2012 tax form 8863 Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. 2012 tax form 8863 The percentages for these types of real property are as follows. 2012 tax form 8863 Nonresidential real property. 2012 tax form 8863   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. 2012 tax form 8863 For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. 2012 tax form 8863 Residential rental property. 2012 tax form 8863   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. 2012 tax form 8863 The percentage for periods before 1976 is zero. 2012 tax form 8863 Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. 2012 tax form 8863 Low-income housing. 2012 tax form 8863    Low-income housing includes all the following types of residential rental property. 2012 tax form 8863 Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. 2012 tax form 8863 Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. 2012 tax form 8863 Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. 2012 tax form 8863 Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. 2012 tax form 8863   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. 2012 tax form 8863 If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. 2012 tax form 8863 Foreclosure. 2012 tax form 8863   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. 2012 tax form 8863 Example. 2012 tax form 8863 On June 1, 2001, you acquired low-income housing property. 2012 tax form 8863 On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. 2012 tax form 8863 The property qualifies for a reduced applicable percentage because it was held more than 100 full months. 2012 tax form 8863 The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. 2012 tax form 8863 Therefore, 70% of the additional depreciation is treated as ordinary income. 2012 tax form 8863 Holding period. 2012 tax form 8863   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. 2012 tax form 8863 For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. 2012 tax form 8863 If you sold it on January 2, 2013, the holding period is exactly 192 full months. 2012 tax form 8863 The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. 2012 tax form 8863 Holding period for constructed, reconstructed, or erected property. 2012 tax form 8863   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. 2012 tax form 8863 Property acquired by gift or received in a tax-free transfer. 2012 tax form 8863   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. 2012 tax form 8863   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. 2012 tax form 8863 See Low-Income Housing With Two or More Elements, next. 2012 tax form 8863 Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. 2012 tax form 8863 The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. 2012 tax form 8863 The following are the types of separate elements. 2012 tax form 8863 A separate improvement (defined below). 2012 tax form 8863 The basic section 1250 property plus improvements not qualifying as separate improvements. 2012 tax form 8863 The units placed in service at different times before all the section 1250 property is finished. 2012 tax form 8863 For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. 2012 tax form 8863 As a result, the apartment house consists of three separate elements. 2012 tax form 8863 The 36-month test for separate improvements. 2012 tax form 8863   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. 2012 tax form 8863 Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. 2012 tax form 8863 Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). 2012 tax form 8863 $5,000. 2012 tax form 8863 The 1-year test. 2012 tax form 8863   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. 2012 tax form 8863 The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. 2012 tax form 8863 In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. 2012 tax form 8863 Example. 2012 tax form 8863 The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. 2012 tax form 8863 During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. 2012 tax form 8863 The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. 2012 tax form 8863 However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. 2012 tax form 8863 Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. 2012 tax form 8863 Addition to the capital account. 2012 tax form 8863   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. 2012 tax form 8863   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. 2012 tax form 8863 For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. 2012 tax form 8863 The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. 2012 tax form 8863 The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. 2012 tax form 8863   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. 2012 tax form 8863 If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. 2012 tax form 8863 Unadjusted basis. 2012 tax form 8863   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. 2012 tax form 8863 However, the cost of components retired before that date is not included in the unadjusted basis. 2012 tax form 8863 Holding period. 2012 tax form 8863   Use the following guidelines for figuring the applicable percentage for property with two or more elements. 2012 tax form 8863 The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. 2012 tax form 8863 The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. 2012 tax form 8863 The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. 2012 tax form 8863   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. 2012 tax form 8863 Use the first day of a calendar month that is closest to the middle of the tax year. 2012 tax form 8863 If there are two first days of a month that are equally close to the middle of the year, use the earlier date. 2012 tax form 8863 Figuring ordinary income attributable to each separate element. 2012 tax form 8863   Figure ordinary income attributable to each separate element as follows. 2012 tax form 8863   Step 1. 2012 tax form 8863 Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. 2012 tax form 8863   Step 2. 2012 tax form 8863 Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). 2012 tax form 8863   Step 3. 2012 tax form 8863 Multiply the result in Step 2 by the applicable percentage for the element. 2012 tax form 8863 Example. 2012 tax form 8863 You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. 2012 tax form 8863 The property consisted of four elements (W, X, Y, and Z). 2012 tax form 8863 Step 1. 2012 tax form 8863 The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. 2012 tax form 8863 The sum of the additional depreciation for all the elements is $24,000. 2012 tax form 8863 Step 2. 2012 tax form 8863 The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. 2012 tax form 8863 Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). 2012 tax form 8863 $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. 2012 tax form 8863 Step 3. 2012 tax form 8863 The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. 2012 tax form 8863 From these facts, the sum of the ordinary income for each element is figured as follows. 2012 tax form 8863   Step 1 Step 2 Step 3 Ordinary Income W . 2012 tax form 8863 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . 2012 tax form 8863 25 5,000 92% 4,600 Z . 2012 tax form 8863 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. 2012 tax form 8863 In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. 2012 tax form 8863 In any other disposition of the property, figure the fair market value that is more than the adjusted basis. 2012 tax form 8863 Figure the additional depreciation for the periods after 1975. 2012 tax form 8863 Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. 2012 tax form 8863 Stop here if this is residential rental property or if (2) is equal to or more than (1). 2012 tax form 8863 This is the gain treated as ordinary income because of additional depreciation. 2012 tax form 8863 Subtract (2) from (1). 2012 tax form 8863 Figure the additional depreciation for periods after 1969 but before 1976. 2012 tax form 8863 Add the lesser of (4) or (5) to the result in (3). 2012 tax form 8863 This is the gain treated as ordinary income because of additional depreciation. 2012 tax form 8863 A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. 2012 tax form 8863 Use Form 4797, Part III, to figure the ordinary income part of the gain. 2012 tax form 8863 Corporations. 2012 tax form 8863   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. 2012 tax form 8863 The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. 2012 tax form 8863 Report this additional ordinary income on Form 4797, Part III, line 26 (f). 2012 tax form 8863 Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. 2012 tax form 8863 This applies even if no payments are received in that year. 2012 tax form 8863 If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. 2012 tax form 8863 For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. 2012 tax form 8863 If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. 2012 tax form 8863 To do this, allocate the selling price and the payments you receive in the year of sale to each asset. 2012 tax form 8863 Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. 2012 tax form 8863 For a detailed discussion of installment sales, see Publication 537. 2012 tax form 8863 Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. 2012 tax form 8863 However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. 2012 tax form 8863 For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. 2012 tax form 8863 See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. 2012 tax form 8863 Part gift and part sale or exchange. 2012 tax form 8863   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. 2012 tax form 8863 If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. 2012 tax form 8863 However, see Bargain sale to charity, later. 2012 tax form 8863 Example. 2012 tax form 8863 You transferred depreciable personal property to your son for $20,000. 2012 tax form 8863 When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. 2012 tax form 8863 You took depreciation of $30,000. 2012 tax form 8863 You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. 2012 tax form 8863 You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. 2012 tax form 8863 You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. 2012 tax form 8863 Gift to charitable organization. 2012 tax form 8863   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. 2012 tax form 8863 Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. 2012 tax form 8863   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. 2012 tax form 8863 For more information, see Giving Property That Has Increased in Value in Publication 526. 2012 tax form 8863 Bargain sale to charity. 2012 tax form 8863   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. 2012 tax form 8863 First, figure the ordinary income as if you had sold the property at its fair market value. 2012 tax form 8863 Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. 2012 tax form 8863 See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. 2012 tax form 8863 Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. 2012 tax form 8863 Example. 2012 tax form 8863 You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. 2012 tax form 8863 Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. 2012 tax form 8863 If you had sold the property at its fair market value, your ordinary income would have been $5,000. 2012 tax form 8863 Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). 2012 tax form 8863 Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. 2012 tax form 8863 For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. 2012 tax form 8863 However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. 2012 tax form 8863 Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. 2012 tax form 8863 Example 1. 2012 tax form 8863 Janet Smith owned depreciable property that, upon her death, was inherited by her son. 2012 tax form 8863 No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. 2012 tax form 8863 However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. 2012 tax form 8863 Example 2. 2012 tax form 8863 The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. 2012 tax form 8863 If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. 2012 tax form 8863 Ordinary income from depreciation must be reported by the trust on the transfer. 2012 tax form 8863 Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. 2012 tax form 8863 For information on like-kind exchanges and involuntary conversions, see chapter 1. 2012 tax form 8863 Depreciable personal property. 2012 tax form 8863   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. 2012 tax form 8863 The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. 2012 tax form 8863 The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. 2012 tax form 8863 Example 1. 2012 tax form 8863 You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. 2012 tax form 8863 The old machine cost you $5,000 two years ago. 2012 tax form 8863 You took depreciation deductions of $3,950. 2012 tax form 8863 Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. 2012 tax form 8863 Example 2. 2012 tax form 8863 You bought office machinery for $1,500 two years ago and deducted $780 depreciation. 2012 tax form 8863 This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). 2012 tax form 8863 You choose to postpone reporting gain, but replacement machinery cost you only $1,000. 2012 tax form 8863 Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. 2012 tax form 8863 All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. 2012 tax form 8863 Example 3. 2012 tax form 8863 A fire destroyed office machinery you bought for $116,000. 2012 tax form 8863 The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. 2012 tax form 8863 You received a $117,000 insurance payment, realizing a gain of $92,640. 2012 tax form 8863 You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. 2012 tax form 8863 $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. 2012 tax form 8863 The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. 2012 tax form 8863 The amount you must report as ordinary income on the transaction is $12,000, figured as follows. 2012 tax form 8863 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. 2012 tax form 8863 Depreciable real property. 2012 tax form 8863   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. 2012 tax form 8863 The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. 2012 tax form 8863 The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. 2012 tax form 8863   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. 2012 tax form 8863 Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. 2012 tax form 8863 Example. 2012 tax form 8863 The state paid you $116,000 when it condemned your depreciable real property for public use. 2012 tax form 8863 You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). 2012 tax form 8863 You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. 2012 tax form 8863 You choose to postpone reporting the gain. 2012 tax form 8863 If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. 2012 tax form 8863 The ordinary income to be reported is $6,000, which is the greater of the following amounts. 2012 tax form 8863 The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. 2012 tax form 8863 The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. 2012 tax form 8863   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. 2012 tax form 8863 Basis of property acquired. 2012 tax form 8863   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. 2012 tax form 8863   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). 2012 tax form 8863 However, if you acquired both depreciable real property and other property, allocate the total basis as follows. 2012 tax form 8863 Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. 2012 tax form 8863 Add the fair market value (or cost) of the other property acquired to the result in (1). 2012 tax form 8863 Divide the result in (1) by the result in (2). 2012 tax form 8863 Multiply the total basis by the result in (3). 2012 tax form 8863 This is the basis of the depreciable real property acquired. 2012 tax form 8863 If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). 2012 tax form 8863 Subtract the result in (4) from the total basis. 2012 tax form 8863 This is the basis of the other property acquired. 2012 tax form 8863 If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). 2012 tax form 8863 Example 1. 2012 tax form 8863 In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. 2012 tax form 8863 The property's adjusted basis was $38,400, with additional depreciation of $14,932. 2012 tax form 8863 On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. 2012 tax form 8863 Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). 2012 tax form 8863 You chose to postpone reporting the gain under the involuntary conversion rules. 2012 tax form 8863 Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. 2012 tax form 8863 The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. 2012 tax form 8863 The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. 2012 tax form 8863 If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. 2012 tax form 8863 Example 2. 2012 tax form 8863 John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. 2012 tax form 8863 He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. 2012 tax form 8863 He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. 2012 tax form 8863 Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. 2012 tax form 8863 The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. 2012 tax form 8863 The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. 2012 tax form 8863 The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. 2012 tax form 8863 The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. 2012 tax form 8863 4. 2012 tax form 8863 The basis of the depreciable real property is $12,000. 2012 tax form 8863 This is the $30,000 total basis multiplied by the 0. 2012 tax form 8863 4 figured in (3). 2012 tax form 8863 The basis of the other property (land) is $18,000. 2012 tax form 8863 This is the $30,000 total basis minus the $12,000 figured in (4). 2012 tax form 8863 The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. 2012 tax form 8863 Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. 2012 tax form 8863 Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. 2012 tax form 8863 See chapter 2. 2012 tax form 8863 In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. 2012 tax form 8863 In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. 2012 tax form 8863 These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. 2012 tax form 8863 The comparison should take into account all the following facts and circumstances. 2012 tax form 8863 The original cost and reproduction cost of construction, erection, or production. 2012 tax form 8863 The remaining economic useful life. 2012 tax form 8863 The state of obsolescence. 2012 tax form 8863 The anticipated expenditures required to maintain, renovate, or modernize the properties. 2012 tax form 8863 Like-kind exchanges and involuntary conversions. 2012 tax form 8863   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. 2012 tax form 8863 The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. 2012 tax form 8863 The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. 2012 tax form 8863   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. 2012 tax form 8863 The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. 2012 tax form 8863 If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. 2012 tax form 8863 Example. 2012 tax form 8863 A fire destroyed your property with a total fair market value of $50,000. 2012 tax form 8863 It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. 2012 tax form 8863 You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. 2012 tax form 8863 The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. 2012 tax form 8863 You choose to postpone reporting your gain from the involuntary conversion. 2012 tax form 8863 You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. 2012 tax form 8863 The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. 2012 tax form 8863 The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. 2012 tax form 8863 The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. 2012 tax form 8863 Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. 2012 tax form 8863 The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. 2012 tax form 8863 All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. 2012 tax form 8863 Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. 2012 tax form 8863 However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 2012 tax form 8863 Prev  Up  Next   Home   More Online Publications