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2012 Tax Return Form 1040

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2012 Tax Return Form 1040

2012 tax return form 1040 6. 2012 tax return form 1040   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. 2012 tax return form 1040 Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. 2012 tax return form 1040 Also use basis to figure depreciation, amortization, depletion, and casualty losses. 2012 tax return form 1040 If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. 2012 tax return form 1040 Only the basis allocated to the business or investment use of the property can be depreciated. 2012 tax return form 1040 Your original basis in property is adjusted (increased or decreased) by certain events. 2012 tax return form 1040 For example, if you make improvements to the property, increase your basis. 2012 tax return form 1040 If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. 2012 tax return form 1040 Keep accurate records of all items that affect the basis of your assets. 2012 tax return form 1040 For information on keeping records, see chapter 1. 2012 tax return form 1040 Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. 2012 tax return form 1040 Cost Basis The basis of property you buy is usually its cost. 2012 tax return form 1040 Cost is the amount you pay in cash, debt obligations, other property, or services. 2012 tax return form 1040 Your cost includes amounts you pay for sales tax, freight, installation, and testing. 2012 tax return form 1040 The basis of real estate and business assets will include other items, discussed later. 2012 tax return form 1040 Basis generally does not include interest payments. 2012 tax return form 1040 However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. 2012 tax return form 1040 You also may have to capitalize (add to basis) certain other costs related to buying or producing property. 2012 tax return form 1040 Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. 2012 tax return form 1040 Loans with low or no interest. 2012 tax return form 1040   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. 2012 tax return form 1040 You generally have unstated interest if your interest rate is less than the applicable federal rate. 2012 tax return form 1040 See the discussion of unstated interest in Publication 537, Installment Sales. 2012 tax return form 1040 Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. 2012 tax return form 1040 If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. 2012 tax return form 1040 Some of these expenses are discussed next. 2012 tax return form 1040 Lump sum purchase. 2012 tax return form 1040   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. 2012 tax return form 1040 Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. 2012 tax return form 1040 Figure the basis of each asset by multiplying the lump sum by a fraction. 2012 tax return form 1040 The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 2012 tax return form 1040 Fair market value (FMV). 2012 tax return form 1040   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 2012 tax return form 1040 Sales of similar property on or about the same date may help in figuring the FMV of the property. 2012 tax return form 1040 If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. 2012 tax return form 1040 Real estate taxes. 2012 tax return form 1040   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 2012 tax return form 1040   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. 2012 tax return form 1040 Whether or not you reimburse the seller, do not include that amount in the basis of your property. 2012 tax return form 1040 Settlement costs. 2012 tax return form 1040   Your basis includes the settlement fees and closing costs for buying the property. 2012 tax return form 1040 See Publication 551 for a detailed list of items you can and cannot include in basis. 2012 tax return form 1040   Do not include fees and costs for getting a loan on the property. 2012 tax return form 1040 Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 2012 tax return form 1040 Points. 2012 tax return form 1040   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. 2012 tax return form 1040 You may be able to deduct the points currently or over the term of the loan. 2012 tax return form 1040 For more information about deducting points, see Points in chapter 4 of Publication 535. 2012 tax return form 1040 Assumption of a mortgage. 2012 tax return form 1040   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. 2012 tax return form 1040 Example. 2012 tax return form 1040 If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. 2012 tax return form 1040 Constructing assets. 2012 tax return form 1040   If you build property or have assets built for you, your expenses for this construction are part of your basis. 2012 tax return form 1040 Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 2012 tax return form 1040   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. 2012 tax return form 1040 You must capitalize them (include them in the asset's basis). 2012 tax return form 1040 Employee wages paid for the construction work, reduced by any employment credits allowed. 2012 tax return form 1040 Depreciation on equipment you own while it is used in the construction. 2012 tax return form 1040 Operating and maintenance costs for equipment used in the construction. 2012 tax return form 1040 The cost of business supplies and materials used in the construction. 2012 tax return form 1040    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 2012 tax return form 1040 Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. 2012 tax return form 1040 To determine the basis of these assets or separate items, there must be an allocation of basis. 2012 tax return form 1040 Group of assets acquired. 2012 tax return form 1040   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. 2012 tax return form 1040 Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 2012 tax return form 1040 You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. 2012 tax return form 1040 If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 2012 tax return form 1040 Farming business acquired. 2012 tax return form 1040   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. 2012 tax return form 1040 Generally, reduce the purchase price by any cash received. 2012 tax return form 1040 Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. 2012 tax return form 1040 See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. 2012 tax return form 1040 Transplanted embryo. 2012 tax return form 1040   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. 2012 tax return form 1040 Allocate the rest of the purchase price to the basis of the calf. 2012 tax return form 1040 Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. 2012 tax return form 1040 Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. 2012 tax return form 1040 You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 2012 tax return form 1040 Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. 2012 tax return form 1040 However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. 2012 tax return form 1040 You produce property if you construct, build, install, manufacture, develop, improve, or create the property. 2012 tax return form 1040 You are not subject to the uniform capitalization rules if the property is produced for personal use. 2012 tax return form 1040 In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. 2012 tax return form 1040 Plants. 2012 tax return form 1040   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. 2012 tax return form 1040 Animals. 2012 tax return form 1040   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. 2012 tax return form 1040 The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. 2012 tax return form 1040 Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. 2012 tax return form 1040 For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. 2012 tax return form 1040 For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. 2012 tax return form 1040 Exceptions. 2012 tax return form 1040   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. 2012 tax return form 1040   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. 2012 tax return form 1040 See Accrual Method Required under Accounting Methods in chapter 2. 2012 tax return form 1040   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. 2012 tax return form 1040 If you make this election, special rules apply. 2012 tax return form 1040 This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. 2012 tax return form 1040 This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. 2012 tax return form 1040    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. 2012 tax return form 1040 See chapter 7, for additional information on depreciation. 2012 tax return form 1040 Example. 2012 tax return form 1040 You grow trees that have a preproductive period of more than 2 years. 2012 tax return form 1040 The trees produce an annual crop. 2012 tax return form 1040 You are an individual and the uniform capitalization rules apply to your farming business. 2012 tax return form 1040 You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. 2012 tax return form 1040 You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. 2012 tax return form 1040 Preproductive period of more than 2 years. 2012 tax return form 1040   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. 2012 tax return form 1040 Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. 2012 tax return form 1040 Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. 2012 tax return form 1040 More information. 2012 tax return form 1040   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. 2012 tax return form 1040 263A-4. 2012 tax return form 1040 Table 6-1. 2012 tax return form 1040 Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. 2012 tax return form 1040 Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. 2012 tax return form 1040 The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. 2012 tax return form 1040 Increases to Basis Increase the basis of any property by all items properly added to a capital account. 2012 tax return form 1040 These include the cost of any improvements having a useful life of more than 1 year. 2012 tax return form 1040 The following costs increase the basis of property. 2012 tax return form 1040 The cost of extending utility service lines to property. 2012 tax return form 1040 Legal fees, such as the cost of defending and perfecting title. 2012 tax return form 1040 Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. 2012 tax return form 1040 Assessments for items such as paving roads and building ditches that increase the value of the property assessed. 2012 tax return form 1040 Do not deduct these expenses as taxes. 2012 tax return form 1040 However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. 2012 tax return form 1040 If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 2012 tax return form 1040 See chapter 7. 2012 tax return form 1040 Deducting vs. 2012 tax return form 1040 capitalizing costs. 2012 tax return form 1040   Do not add to your basis costs you can deduct as current expenses. 2012 tax return form 1040 For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. 2012 tax return form 1040 However, you can elect either to deduct or to capitalize certain other costs. 2012 tax return form 1040 See chapter 7 in Publication 535. 2012 tax return form 1040 Decreases to Basis The following are some items that reduce the basis of property. 2012 tax return form 1040 Section 179 deduction. 2012 tax return form 1040 Deductions previously allowed or allowable for amortization, depreciation, and depletion. 2012 tax return form 1040 Alternative motor vehicle credit. 2012 tax return form 1040 See Form 8910. 2012 tax return form 1040 Alternative fuel vehicle refueling property credit. 2012 tax return form 1040 See Form 8911. 2012 tax return form 1040 Residential energy efficient property credits. 2012 tax return form 1040 See Form 5695. 2012 tax return form 1040 Investment credit (part or all) taken. 2012 tax return form 1040 Casualty and theft losses and insurance reimbursements. 2012 tax return form 1040 Payments you receive for granting an easement. 2012 tax return form 1040 Exclusion from income of subsidies for energy conservation measures. 2012 tax return form 1040 Certain canceled debt excluded from income. 2012 tax return form 1040 Rebates from a manufacturer or seller. 2012 tax return form 1040 Patronage dividends received from a cooperative association as a result of a purchase of property. 2012 tax return form 1040 See Patronage Dividends in chapter 3. 2012 tax return form 1040 Gas-guzzler tax. 2012 tax return form 1040 See Form 6197. 2012 tax return form 1040 Some of these items are discussed next. 2012 tax return form 1040 For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. 2012 tax return form 1040 Depreciation and section 179 deduction. 2012 tax return form 1040   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. 2012 tax return form 1040 For more information on these deductions, see chapter 7. 2012 tax return form 1040 Section 179 deduction. 2012 tax return form 1040   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 2012 tax return form 1040 Depreciation. 2012 tax return form 1040   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. 2012 tax return form 1040 If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 2012 tax return form 1040 If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 2012 tax return form 1040   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. 2012 tax return form 1040   See chapter 7 for information on figuring the depreciation you should have claimed. 2012 tax return form 1040   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. 2012 tax return form 1040 Casualty and theft losses. 2012 tax return form 1040   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. 2012 tax return form 1040 Also, decrease it by any deductible loss not covered by insurance. 2012 tax return form 1040 See chapter 11 for information about figuring your casualty or theft loss. 2012 tax return form 1040   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. 2012 tax return form 1040 To make this determination, compare the repaired property to the property before the casualty. 2012 tax return form 1040 Easements. 2012 tax return form 1040   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. 2012 tax return form 1040 It reduces the basis of the affected part of the property. 2012 tax return form 1040 If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 2012 tax return form 1040 See Easements and rights-of-way in chapter 3. 2012 tax return form 1040 Exclusion from income of subsidies for energy conservation measures. 2012 tax return form 1040   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. 2012 tax return form 1040 Reduce the basis of the property by the excluded amount. 2012 tax return form 1040 Canceled debt excluded from income. 2012 tax return form 1040   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 2012 tax return form 1040 A debt includes any indebtedness for which you are liable or which attaches to property you hold. 2012 tax return form 1040   You can exclude your canceled debt from income if the debt is any of the following. 2012 tax return form 1040 Debt canceled in a bankruptcy case or when you are insolvent. 2012 tax return form 1040 Qualified farm debt. 2012 tax return form 1040 Qualified real property business debt (provided you are not a C corporation). 2012 tax return form 1040 Qualified principal residence indebtedness. 2012 tax return form 1040 Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. 2012 tax return form 1040 If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 2012 tax return form 1040 If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. 2012 tax return form 1040   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. 2012 tax return form 1040 For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. 2012 tax return form 1040 For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. 2012 tax return form 1040 For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 2012 tax return form 1040 Basis Other Than Cost There are times when you cannot use cost as basis. 2012 tax return form 1040 In these situations, the fair market value or the adjusted basis of property may be used. 2012 tax return form 1040 Examples are discussed next. 2012 tax return form 1040 Property changed from personal to business or rental use. 2012 tax return form 1040   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 2012 tax return form 1040 An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. 2012 tax return form 1040   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 2012 tax return form 1040   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. 2012 tax return form 1040 The basis for figuring a gain is your adjusted basis in the property when you sell the property. 2012 tax return form 1040 Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 2012 tax return form 1040 Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . 2012 tax return form 1040 Property received for services. 2012 tax return form 1040   If you receive property for services, include the property's FMV in income. 2012 tax return form 1040 The amount you include in income becomes your basis. 2012 tax return form 1040 If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 2012 tax return form 1040 Example. 2012 tax return form 1040 George Smith is an accountant and also operates a farming business. 2012 tax return form 1040 George agreed to do some accounting work for his neighbor in exchange for a dairy cow. 2012 tax return form 1040 The accounting work and the cow are each worth $1,500. 2012 tax return form 1040 George must include $1,500 in income for his accounting services. 2012 tax return form 1040 George's basis in the cow is $1,500. 2012 tax return form 1040 Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. 2012 tax return form 1040 A taxable gain or deductible loss also is known as a recognized gain or loss. 2012 tax return form 1040 A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. 2012 tax return form 1040 If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. 2012 tax return form 1040 Example. 2012 tax return form 1040 You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. 2012 tax return form 1040 You must report a taxable gain of $4,000 for the land. 2012 tax return form 1040 The tractor has a basis of $6,000. 2012 tax return form 1040 Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. 2012 tax return form 1040 Similar or related property. 2012 tax return form 1040   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. 2012 tax return form 1040 However, make the following adjustments. 2012 tax return form 1040 Decrease the basis by the following amounts. 2012 tax return form 1040 Any loss you recognize on the involuntary conversion. 2012 tax return form 1040 Any money you receive that you do not spend on similar property. 2012 tax return form 1040 Increase the basis by the following amounts. 2012 tax return form 1040 Any gain you recognize on the involuntary conversion. 2012 tax return form 1040 Any cost of acquiring the replacement property. 2012 tax return form 1040 Money or property not similar or related. 2012 tax return form 1040   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. 2012 tax return form 1040 Allocating the basis. 2012 tax return form 1040   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 2012 tax return form 1040 Basis for depreciation. 2012 tax return form 1040   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. 2012 tax return form 1040 For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 2012 tax return form 1040 For more information about involuntary conversions, see chapter 11. 2012 tax return form 1040 Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 2012 tax return form 1040 A nontaxable gain or loss also is known as an unrecognized gain or loss. 2012 tax return form 1040 If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 2012 tax return form 1040 Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 2012 tax return form 1040 For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 2012 tax return form 1040 There must also be an exchange of like-kind property. 2012 tax return form 1040 For more information, see Like-Kind Exchanges in  chapter 8. 2012 tax return form 1040 The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 You traded a truck you used in your farming business for a new smaller truck to use in farming. 2012 tax return form 1040 The adjusted basis of the old truck was $10,000. 2012 tax return form 1040 The FMV of the new truck is $30,000. 2012 tax return form 1040 Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). 2012 tax return form 1040 You use both the field cultivator and the planter in your farming business. 2012 tax return form 1040 The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. 2012 tax return form 1040   Exchange expenses generally are the closing costs that you pay. 2012 tax return form 1040 They include such items as brokerage commissions, attorney fees, and deed preparation fees. 2012 tax return form 1040 Add them to the basis of the like-kind property you receive. 2012 tax return form 1040 Property plus cash. 2012 tax return form 1040   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. 2012 tax return form 1040 Example. 2012 tax return form 1040 You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. 2012 tax return form 1040 Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). 2012 tax return form 1040 Special rules for related persons. 2012 tax return form 1040   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 2012 tax return form 1040 Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. 2012 tax return form 1040 Each person reports it on the tax return filed for the year in which the later disposition occurred. 2012 tax return form 1040 If this rule applies, the basis of the property received in the original exchange will be its FMV. 2012 tax return form 1040 For more information, see chapter 8. 2012 tax return form 1040 Exchange of business property. 2012 tax return form 1040   Exchanging the property of one business for the property of another business generally is a multiple property exchange. 2012 tax return form 1040 For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 2012 tax return form 1040 Basis for depreciation. 2012 tax return form 1040   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. 2012 tax return form 1040 For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 2012 tax return form 1040 Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. 2012 tax return form 1040 The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. 2012 tax return form 1040 Decrease the basis by the following amounts. 2012 tax return form 1040 Any money you receive. 2012 tax return form 1040 Any loss you recognize on the exchange. 2012 tax return form 1040 Increase the basis by the following amounts. 2012 tax return form 1040 Any additional costs you incur. 2012 tax return form 1040 Any gain you recognize on the exchange. 2012 tax return form 1040 If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. 2012 tax return form 1040 You realize a gain of $40,000. 2012 tax return form 1040 This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). 2012 tax return form 1040 Include your gain in income (recognize gain) only to the extent of the cash received. 2012 tax return form 1040 Your basis in the land you received is figured as follows. 2012 tax return form 1040 Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. 2012 tax return form 1040 You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. 2012 tax return form 1040 You realize a gain of $7,250. 2012 tax return form 1040 This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). 2012 tax return form 1040 You include all the gain in your income (recognize gain) because the gain is less than the cash you received. 2012 tax return form 1040 Your basis in the truck you received is figured as follows. 2012 tax return form 1040 Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. 2012 tax return form 1040   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 2012 tax return form 1040 The rest is the basis of the like-kind property. 2012 tax return form 1040 Example. 2012 tax return form 1040 You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. 2012 tax return form 1040 You also received $1,000 cash and a truck that had an FMV of $3,000. 2012 tax return form 1040 The truck is unlike property. 2012 tax return form 1040 You realized a gain of $1,500. 2012 tax return form 1040 This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). 2012 tax return form 1040 You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 2012 tax return form 1040 Your basis in the properties you received is figured as follows. 2012 tax return form 1040 Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). 2012 tax return form 1040 This is the truck's FMV. 2012 tax return form 1040 The rest ($12,500) is the basis of the tractor. 2012 tax return form 1040 Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 2012 tax return form 1040 Example. 2012 tax return form 1040 You used a tractor on your farm for 3 years. 2012 tax return form 1040 Its adjusted basis is $22,000 and its FMV is $40,000. 2012 tax return form 1040 You are interested in a new tractor, which sells for $60,000. 2012 tax return form 1040 Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. 2012 tax return form 1040 Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). 2012 tax return form 1040 However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. 2012 tax return form 1040 Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). 2012 tax return form 1040 Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. 2012 tax return form 1040 Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. 2012 tax return form 1040 You also must know its FMV at the time it was given to you and any gift tax paid on it. 2012 tax return form 1040 FMV equal to or greater than donor's adjusted basis. 2012 tax return form 1040   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. 2012 tax return form 1040 Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 2012 tax return form 1040   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. 2012 tax return form 1040 See Adjusted Basis , earlier. 2012 tax return form 1040   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. 2012 tax return form 1040 Figure the increase by multiplying the gift tax paid by the following fraction. 2012 tax return form 1040 Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. 2012 tax return form 1040 The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 2012 tax return form 1040 Example. 2012 tax return form 1040 In 2013, you received a gift of property from your mother that had an FMV of $50,000. 2012 tax return form 1040 Her adjusted basis was $20,000. 2012 tax return form 1040 The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). 2012 tax return form 1040 She paid a gift tax of $7,320. 2012 tax return form 1040 Your basis, $26,076, is figured as follows. 2012 tax return form 1040 Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . 2012 tax return form 1040 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. 2012 tax return form 1040 If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. 2012 tax return form 1040 However, your basis cannot exceed the FMV of the gift when it was given to you. 2012 tax return form 1040 FMV less than donor's adjusted basis. 2012 tax return form 1040   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 2012 tax return form 1040 Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 2012 tax return form 1040 Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. 2012 tax return form 1040 (See Adjusted Basis , earlier. 2012 tax return form 1040 )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. 2012 tax return form 1040 Example. 2012 tax return form 1040 You received farmland as a gift from your parents when they retired from farming. 2012 tax return form 1040 At the time of the gift, the land had an FMV of $80,000. 2012 tax return form 1040 Your parents' adjusted basis was $100,000. 2012 tax return form 1040 After you received the land, no events occurred that would increase or decrease your basis. 2012 tax return form 1040 If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. 2012 tax return form 1040 If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. 2012 tax return form 1040 If the sales price is between $80,000 and $100,000, you have neither gain nor loss. 2012 tax return form 1040 For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. 2012 tax return form 1040 If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. 2012 tax return form 1040 Business property. 2012 tax return form 1040   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 2012 tax return form 1040 Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. 2012 tax return form 1040 The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. 2012 tax return form 1040 However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. 2012 tax return form 1040 The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. 2012 tax return form 1040 For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. 2012 tax return form 1040 Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. 2012 tax return form 1040 If a federal estate return is filed, you can use its appraised value. 2012 tax return form 1040 The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. 2012 tax return form 1040 For information on the alternate valuation, see the Instructions for Form 706. 2012 tax return form 1040 The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. 2012 tax return form 1040 If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 2012 tax return form 1040 Special-use valuation method. 2012 tax return form 1040   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. 2012 tax return form 1040 If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. 2012 tax return form 1040 If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. 2012 tax return form 1040 The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 2012 tax return form 1040   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 2012 tax return form 1040 Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. 2012 tax return form 1040 Figure all FMVs without regard to the special-use valuation. 2012 tax return form 1040   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. 2012 tax return form 1040 This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. 2012 tax return form 1040 The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. 2012 tax return form 1040   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 2012 tax return form 1040 To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. 2012 tax return form 1040 If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 2012 tax return form 1040 The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. 2012 tax return form 1040   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. 2012 tax return form 1040   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. 2012 tax return form 1040 Property inherited from a decedent who died in 2010. 2012 tax return form 1040   If you inherited property from a decedent who died in 2010, different rules may apply. 2012 tax return form 1040 See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. 2012 tax return form 1040 Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. 2012 tax return form 1040 Partner's basis. 2012 tax return form 1040   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. 2012 tax return form 1040 However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. 2012 tax return form 1040 For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. 2012 tax return form 1040 Shareholder's basis. 2012 tax return form 1040   The basis of property distributed by a corporation to a shareholder is its fair market value. 2012 tax return form 1040 For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 2012 tax return form 1040 Prev  Up  Next   Home   More Online Publications
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Beware: Offers to Skip a Payment

If your credit company invites you to skip a monthly payment without a penalty, it is not doing you a favor. You will still owe finance charges on your unpaid balance. And interest could be adding up on any purchases you make after the due date you skipped.

Beware: Teaser Rates

Some cards are advertised with very low introductory interest rates called teasers. The rate is good for a short period of time. If you know you can pay what you owe while the low rate is in effect, it could be a good deal. But if the teaser time runs out and you still owe money, you could end up paying a higher rate than you might have without the special introductory rate. Just one late payment could also cancel the teaser rate.

Beware: Credit Insurance

When you take out a loan for a big purchase, a salesperson may try to sell you credit insurance. Your credit card company may also encourage you to purchase credit insurance. The coverage may be promoted as a way for you to protect yourself if your property is damaged or lost. Other credit insurance offers promises to make loan payments if you are laid off, become disabled or die. It is almost always better to buy regular property, life or disability insurance instead of credit insurance.

Be Alert: 'Credit Repair' Scams

Beware! Before you sign up for fee based credit repair services, beware. Many of the promised services are either illegal or ones you can do for free by yourself. Before you sign up to work with these companies, here are some tidbits to keep in mind:

  • A credit repair company must give you a copy of the "Consumer Credit File Rights under State and Federal Law" before you sign a contract.
  • The company cannot perform any services until you have signed a written contract and completed a three day waiting period, during which time you can cancel the contract without paying any fees.
  • The company cannot charge you until it has completed the promised services, according to the Credit Repair Organizations Act.
  • It is illegal to erase timely and accurate negative information contained in your credit history.
  • Suggestions that you create a new credit history (also called file segregation) by requesting an Employer Identification Number from the IRS are also illegal.
  • You can work to solve your own credit challenges, by requesting a free copy of your credit report, and by working with creditors to dispute incorrect information.

CARD Act Protections for Consumers

The Credit Card Accountability Responsibility & Disclosure (CARD) Act brought about sweeping protections for consumers. Among other things, your credit card company:

Fees

  • Cannot change rates or fees without sending you a notice 45 days in advance in most cases.
  • Must give you the option of rejecting a fee increase, but be aware that the credit card company may close your account if you reject the fee increase and may require a higher monthly payment.
  • Cannot charge you a late payment fee of more than $25, regardless of how much you owe- unless one of your last six payments was late or the credit card company can justify a higher fee based on the cost of late payments.
  • Cannot charge a late payment fee that is greater than your minimum payment.
  • Cannot charge you an inactivity fee for not using your card.
  • Cannot charge you more than one fee for a single late payment or any other violation of your cardholder agreement.
  • Cannot charge you over-the-limit transaction fees unless you opt in, stating that you want to allow transactions that take you over your credit card limit. If the credit card company allows the transaction without your opt-in, it cannot charge you a fee.
  • Can impose only one fee per billing cycle for transactions that take you over your credit limit if you opt in to over-the-limit transactions. You can revoke your opt-in at any time.

Payments

  • Has to tell you how long it will take to pay off your balance if you make only minimum payments.
  • Must mail or deliver your credit card bill at least 21 days before your payment is due.
  • Must apply any payments above the minimum required amount to the balance with the highest interest rate, if you have more than one rate.

Interest Rates

  • Cannot increase your rate for the first 12 months after you open an account unless you have a variable interest rate or an introductory rate; you are more than 60 days late paying your bill; or you are in a workout agreement and don't make payments as arranged.
  • Cannot charge higher rates for purchases made before you receive notice of a new rate.
  • Cannot use the double-cycle billing method when calculating interest; interest can only be charged on balances within the current billing cycle.
  • Cannot increase your Annual Percentage Rate (APR) without explaining why it is doing so. If your credit card company increases your APR, it generally must re-evaluate that rate increase every six months. Under some circumstances, it may have to reduce your rate after the evaluation.

What's more, a credit card company can grant credit cards to consumers under age 21 only if they can show they are able to make payments or have a cosigner for the card. The Federal Reserve has more information about CARD Act protections.

The 2012 Tax Return Form 1040

2012 tax return form 1040 23. 2012 tax return form 1040   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. 2012 tax return form 1040 Mortgage proceeds used for business or investment. 2012 tax return form 1040 Introduction This chapter discusses what interest expenses you can deduct. 2012 tax return form 1040 Interest is the amount you pay for the use of borrowed money. 2012 tax return form 1040 The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). 2012 tax return form 1040 Home mortgage interest, including certain points and mortgage insurance premiums. 2012 tax return form 1040 Investment interest. 2012 tax return form 1040 This chapter explains these deductions. 2012 tax return form 1040 It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. 2012 tax return form 1040 Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. 2012 tax return form 1040 Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). 2012 tax return form 1040 The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. 2012 tax return form 1040 You can deduct home mortgage interest if all the following conditions are met. 2012 tax return form 1040 You file Form 1040 and itemize deductions on Schedule A (Form 1040). 2012 tax return form 1040 The mortgage is a secured debt on a qualified home in which you have an ownership interest. 2012 tax return form 1040 (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. 2012 tax return form 1040 The term “qualified home” means your main home or second home. 2012 tax return form 1040 For details, see Publication 936. 2012 tax return form 1040 )  Both you and the lender must intend that the loan be repaid. 2012 tax return form 1040 Amount Deductible In most cases, you can deduct all of your home mortgage interest. 2012 tax return form 1040 How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. 2012 tax return form 1040 Fully deductible interest. 2012 tax return form 1040   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. 2012 tax return form 1040 (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. 2012 tax return form 1040 )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). 2012 tax return form 1040 Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). 2012 tax return form 1040 Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). 2012 tax return form 1040 The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. 2012 tax return form 1040   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. 2012 tax return form 1040    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. 2012 tax return form 1040 Figure 23-A. 2012 tax return form 1040 Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. 2012 tax return form 1040 Figure 23-A. 2012 tax return form 1040 Is My Interest Fully Deductible? Limits on deduction. 2012 tax return form 1040   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. 2012 tax return form 1040 If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. 2012 tax return form 1040 Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. 2012 tax return form 1040 It also describes certain special situations that may affect your deduction. 2012 tax return form 1040 Late payment charge on mortgage payment. 2012 tax return form 1040   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. 2012 tax return form 1040 Mortgage prepayment penalty. 2012 tax return form 1040   If you pay off your home mortgage early, you may have to pay a penalty. 2012 tax return form 1040 You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. 2012 tax return form 1040 Sale of home. 2012 tax return form 1040   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. 2012 tax return form 1040 Example. 2012 tax return form 1040 John and Peggy Harris sold their home on May 7. 2012 tax return form 1040 Through April 30, they made home mortgage interest payments of $1,220. 2012 tax return form 1040 The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. 2012 tax return form 1040 Their mortgage interest deduction is $1,270 ($1,220 + $50). 2012 tax return form 1040 Prepaid interest. 2012 tax return form 1040   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. 2012 tax return form 1040 You can deduct in each year only the interest that qualifies as home mortgage interest for that year. 2012 tax return form 1040 However, there is an exception that applies to points, discussed later. 2012 tax return form 1040 Mortgage interest credit. 2012 tax return form 1040   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. 2012 tax return form 1040 Figure the credit on Form 8396, Mortgage Interest Credit. 2012 tax return form 1040 If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. 2012 tax return form 1040   For more information on the credit, see chapter 37. 2012 tax return form 1040 Ministers' and military housing allowance. 2012 tax return form 1040   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. 2012 tax return form 1040 Hardest Hit Fund and Emergency Homeowners' Loan Programs. 2012 tax return form 1040   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. 2012 tax return form 1040 You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. 2012 tax return form 1040 You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. 2012 tax return form 1040 If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). 2012 tax return form 1040 However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. 2012 tax return form 1040 Mortgage assistance payments under section 235 of the National Housing Act. 2012 tax return form 1040   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. 2012 tax return form 1040 You cannot deduct the interest that is paid for you. 2012 tax return form 1040 No other effect on taxes. 2012 tax return form 1040   Do not include these mortgage assistance payments in your income. 2012 tax return form 1040 Also, do not use these payments to reduce other deductions, such as real estate taxes. 2012 tax return form 1040 Divorced or separated individuals. 2012 tax return form 1040   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. 2012 tax return form 1040 See the discussion of Payments for jointly-owned home in chapter 18. 2012 tax return form 1040 Redeemable ground rents. 2012 tax return form 1040   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. 2012 tax return form 1040   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. 2012 tax return form 1040 For more information, see Publication 936. 2012 tax return form 1040 Nonredeemable ground rents. 2012 tax return form 1040   Payments on a nonredeemable ground rent are not mortgage interest. 2012 tax return form 1040 You can deduct them as rent if they are a business expense or if they are for rental property. 2012 tax return form 1040 Reverse mortgages. 2012 tax return form 1040   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. 2012 tax return form 1040 With a reverse mortgage, you retain title to your home. 2012 tax return form 1040 Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. 2012 tax return form 1040 Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. 2012 tax return form 1040 Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. 2012 tax return form 1040 Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. 2012 tax return form 1040 Rental payments. 2012 tax return form 1040   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. 2012 tax return form 1040 This is true even if the settlement papers call them interest. 2012 tax return form 1040 You cannot deduct these payments as home mortgage interest. 2012 tax return form 1040 Mortgage proceeds invested in tax-exempt securities. 2012 tax return form 1040   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. 2012 tax return form 1040 “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. 2012 tax return form 1040 Refunds of interest. 2012 tax return form 1040   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. 2012 tax return form 1040 If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. 2012 tax return form 1040 However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. 2012 tax return form 1040 This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. 2012 tax return form 1040    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. 2012 tax return form 1040 For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. 2012 tax return form 1040   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. 2012 tax return form 1040 Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. 2012 tax return form 1040 Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. 2012 tax return form 1040 A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. 2012 tax return form 1040 See Points paid by the seller , later. 2012 tax return form 1040 General Rule You generally cannot deduct the full amount of points in the year paid. 2012 tax return form 1040 Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. 2012 tax return form 1040 See Deduction Allowed Ratably , next. 2012 tax return form 1040 For exceptions to the general rule, see Deduction Allowed in Year Paid , later. 2012 tax return form 1040 Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. 2012 tax return form 1040 You use the cash method of accounting. 2012 tax return form 1040 This means you report income in the year you receive it and deduct expenses in the year you pay them. 2012 tax return form 1040 Most individuals use this method. 2012 tax return form 1040 Your loan is secured by a home. 2012 tax return form 1040 (The home does not need to be your main home. 2012 tax return form 1040 ) Your loan period is not more than 30 years. 2012 tax return form 1040 If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. 2012 tax return form 1040 Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. 2012 tax return form 1040 Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. 2012 tax return form 1040 (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. 2012 tax return form 1040 ) Your loan is secured by your main home. 2012 tax return form 1040 (Your main home is the one you ordinarily live in most of the time. 2012 tax return form 1040 ) Paying points is an established business practice in the area where the loan was made. 2012 tax return form 1040 The points paid were not more than the points generally charged in that area. 2012 tax return form 1040 You use the cash method of accounting. 2012 tax return form 1040 This means you report income in the year you receive it and deduct expenses in the year you pay them. 2012 tax return form 1040 (If you want more information about this method, see Accounting Methods in chapter 1. 2012 tax return form 1040 ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. 2012 tax return form 1040 The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. 2012 tax return form 1040 The funds you provided are not required to have been applied to the points. 2012 tax return form 1040 They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. 2012 tax return form 1040 You cannot have borrowed these funds from your lender or mortgage broker. 2012 tax return form 1040 You use your loan to buy or build your main home. 2012 tax return form 1040 The points were computed as a percentage of the principal amount of the mortgage. 2012 tax return form 1040 The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. 2012 tax return form 1040 The points may be shown as paid from either your funds or the seller's. 2012 tax return form 1040 Figure 23-B. 2012 tax return form 1040 Are My Points Fully Deductible This Year? Please click here for the text description of the image. 2012 tax return form 1040 Figure 23-B. 2012 tax return form 1040 Are My Points Fully Deductible This Year? Note. 2012 tax return form 1040 If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. 2012 tax return form 1040 Home improvement loan. 2012 tax return form 1040   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. 2012 tax return form 1040 Second home. 2012 tax return form 1040 You cannot fully deduct in the year paid points you pay on loans secured by your second home. 2012 tax return form 1040 You can deduct these points only over the life of the loan. 2012 tax return form 1040 Refinancing. 2012 tax return form 1040   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. 2012 tax return form 1040 This is true even if the new mortgage is secured by your main home. 2012 tax return form 1040   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. 2012 tax return form 1040 You can deduct the rest of the points over the life of the loan. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 In 1998, Bill Fields got a mortgage to buy a home. 2012 tax return form 1040 In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. 2012 tax return form 1040 The mortgage is secured by his home. 2012 tax return form 1040 To get the new loan, he had to pay three points ($3,000). 2012 tax return form 1040 Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. 2012 tax return form 1040 Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. 2012 tax return form 1040 The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. 2012 tax return form 1040 Bill's first payment on the new loan was due July 1. 2012 tax return form 1040 He made six payments on the loan in 2013 and is a cash basis taxpayer. 2012 tax return form 1040 Bill used the funds from the new mortgage to repay his existing mortgage. 2012 tax return form 1040 Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. 2012 tax return form 1040 He cannot deduct all of the points in 2013. 2012 tax return form 1040 He can deduct two points ($2,000) ratably over the life of the loan. 2012 tax return form 1040 He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. 2012 tax return form 1040 The other point ($1,000) was a fee for services and is not deductible. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. 2012 tax return form 1040 Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. 2012 tax return form 1040 His deduction is $500 ($2,000 × 25%). 2012 tax return form 1040 Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. 2012 tax return form 1040 This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. 2012 tax return form 1040 The total amount Bill deducts in 2013 is $550 ($500 + $50). 2012 tax return form 1040 Special Situations This section describes certain special situations that may affect your deduction of points. 2012 tax return form 1040 Original issue discount. 2012 tax return form 1040   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. 2012 tax return form 1040 This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. 2012 tax return form 1040 Amounts charged for services. 2012 tax return form 1040   Amounts charged by the lender for specific services connected to the loan are not interest. 2012 tax return form 1040 Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. 2012 tax return form 1040 You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. 2012 tax return form 1040 Points paid by the seller. 2012 tax return form 1040   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 2012 tax return form 1040 Treatment by seller. 2012 tax return form 1040   The seller cannot deduct these fees as interest. 2012 tax return form 1040 But they are a selling expense that reduces the amount realized by the seller. 2012 tax return form 1040 See chapter 15 for information on selling your home. 2012 tax return form 1040 Treatment by buyer. 2012 tax return form 1040    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. 2012 tax return form 1040 If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. 2012 tax return form 1040 If any of those tests are not met, the buyer deducts the points over the life of the loan. 2012 tax return form 1040   For information about basis, see chapter 13. 2012 tax return form 1040 Funds provided are less than points. 2012 tax return form 1040   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. 2012 tax return form 1040 In addition, you can deduct any points paid by the seller. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). 2012 tax return form 1040 You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. 2012 tax return form 1040 Of the $1,000 charged for points, you can deduct $750 in the year paid. 2012 tax return form 1040 You spread the remaining $250 over the life of the mortgage. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. 2012 tax return form 1040 In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). 2012 tax return form 1040 You spread the remaining $250 over the life of the mortgage. 2012 tax return form 1040 You must reduce the basis of your home by the $1,000 paid by the seller. 2012 tax return form 1040 Excess points. 2012 tax return form 1040   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. 2012 tax return form 1040 You must spread any additional points over the life of the mortgage. 2012 tax return form 1040 Mortgage ending early. 2012 tax return form 1040   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. 2012 tax return form 1040 However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. 2012 tax return form 1040 Instead, deduct the remaining balance over the term of the new loan. 2012 tax return form 1040    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. 2012 tax return form 1040 Example. 2012 tax return form 1040 Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. 2012 tax return form 1040 He deducts $200 points per year. 2012 tax return form 1040 Through 2012, Dan has deducted $2,200 of the points. 2012 tax return form 1040 Dan prepaid his mortgage in full in 2013. 2012 tax return form 1040 He can deduct the remaining $800 of points in 2013. 2012 tax return form 1040 Limits on deduction. 2012 tax return form 1040   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . 2012 tax return form 1040 See Publication 936 for details. 2012 tax return form 1040 Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. 2012 tax return form 1040 The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. 2012 tax return form 1040 Qualified mortgage insurance. 2012 tax return form 1040   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). 2012 tax return form 1040   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. 2012 tax return form 1040 If provided by the Rural Housing Service, it is commonly known as a guarantee fee. 2012 tax return form 1040 These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. 2012 tax return form 1040 Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. 2012 tax return form 1040 Special rules for prepaid mortgage insurance. 2012 tax return form 1040   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. 2012 tax return form 1040 You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. 2012 tax return form 1040 No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. 2012 tax return form 1040 This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. 2012 tax return form 1040 See the Example below. 2012 tax return form 1040 Example. 2012 tax return form 1040 Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. 2012 tax return form 1040 Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. 2012 tax return form 1040 Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. 2012 tax return form 1040 Ryan's adjusted gross income (AGI) for 2012 is $76,000. 2012 tax return form 1040 Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. 2012 tax return form 1040 For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. 2012 tax return form 1040 In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). 2012 tax return form 1040 Limit on deduction. 2012 tax return form 1040   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. 2012 tax return form 1040 See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. 2012 tax return form 1040 If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. 2012 tax return form 1040 Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. 2012 tax return form 1040 You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. 2012 tax return form 1040 A governmental unit is a person for purposes of furnishing the statement. 2012 tax return form 1040 The statement for each year should be sent to you by January 31 of the following year. 2012 tax return form 1040 A copy of this form will also be sent to the IRS. 2012 tax return form 1040 The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. 2012 tax return form 1040 However, it should not show any interest that was paid for you by a government agency. 2012 tax return form 1040 As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. 2012 tax return form 1040 However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. 2012 tax return form 1040 See Points , earlier, to determine whether you can deduct points not shown on Form 1098. 2012 tax return form 1040 Prepaid interest on Form 1098. 2012 tax return form 1040   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. 2012 tax return form 1040 However, you cannot deduct the prepaid amount for January 2014 in 2013. 2012 tax return form 1040 (See Prepaid interest , earlier. 2012 tax return form 1040 ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. 2012 tax return form 1040 You will include the interest for January 2014 with the other interest you pay for 2014. 2012 tax return form 1040 See How To Report , later. 2012 tax return form 1040 Refunded interest. 2012 tax return form 1040   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. 2012 tax return form 1040 See Refunds of interest , earlier. 2012 tax return form 1040 Mortgage insurance premiums. 2012 tax return form 1040   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. 2012 tax return form 1040 See Mortgage Insurance Premiums, earlier. 2012 tax return form 1040 Investment Interest This section discusses interest expenses you may be able to deduct as an investor. 2012 tax return form 1040 If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 2012 tax return form 1040 You can deduct investment interest subject to the limit discussed later. 2012 tax return form 1040 However, you cannot deduct interest you incurred to produce tax-exempt income. 2012 tax return form 1040 Nor can you deduct interest expenses on straddles. 2012 tax return form 1040 Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. 2012 tax return form 1040 Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 2012 tax return form 1040 It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). 2012 tax return form 1040 Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 2012 tax return form 1040 Partners, shareholders, and beneficiaries. 2012 tax return form 1040   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 2012 tax return form 1040 Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. 2012 tax return form 1040 Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 2012 tax return form 1040 The allocation is not affected by the use of property that secures the debt. 2012 tax return form 1040 Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. 2012 tax return form 1040 You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. 2012 tax return form 1040 The interest carried over is treated as investment interest paid or accrued in that next year. 2012 tax return form 1040 You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 2012 tax return form 1040 Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 2012 tax return form 1040 Investment income. 2012 tax return form 1040    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 2012 tax return form 1040 Investment income does not include Alaska Permanent Fund dividends. 2012 tax return form 1040 It also does not include qualified dividends or net capital gain unless you choose to include them. 2012 tax return form 1040 Choosing to include qualified dividends. 2012 tax return form 1040   Investment income generally does not include qualified dividends, discussed in chapter 8. 2012 tax return form 1040 However, you can choose to include all or part of your qualified dividends in investment income. 2012 tax return form 1040   You make this choice by completing Form 4952, line 4g, according to its instructions. 2012 tax return form 1040   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. 2012 tax return form 1040 Choosing to include net capital gain. 2012 tax return form 1040   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 2012 tax return form 1040 However, you can choose to include all or part of your net capital gain in investment income. 2012 tax return form 1040    You make this choice by completing Form 4952, line 4g, according to its instructions. 2012 tax return form 1040   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. 2012 tax return form 1040    Before making either choice, consider the overall effect on your tax liability. 2012 tax return form 1040 Compare your tax if you make one or both of these choices with your tax if you do not. 2012 tax return form 1040 Investment income of child reported on parent's return. 2012 tax return form 1040    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. 2012 tax return form 1040 If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. 2012 tax return form 1040 Child's qualified dividends. 2012 tax return form 1040   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. 2012 tax return form 1040 However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 2012 tax return form 1040   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). 2012 tax return form 1040 Child's Alaska Permanent Fund dividends. 2012 tax return form 1040   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 2012 tax return form 1040 To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. 2012 tax return form 1040 Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. 2012 tax return form 1040 Subtract the result from the amount on Form 8814, line 12. 2012 tax return form 1040 Child's capital gain distributions. 2012 tax return form 1040    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. 2012 tax return form 1040 However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 2012 tax return form 1040   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). 2012 tax return form 1040 Investment expenses. 2012 tax return form 1040   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 2012 tax return form 1040 Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. 2012 tax return form 1040 Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. 2012 tax return form 1040 Losses from passive activities. 2012 tax return form 1040   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). 2012 tax return form 1040 See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. 2012 tax return form 1040 Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. 2012 tax return form 1040 Exception to use of Form 4952. 2012 tax return form 1040   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 2012 tax return form 1040 Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 2012 tax return form 1040 You do not have any other deductible investment expenses. 2012 tax return form 1040 You have no carryover of investment interest expense from 2012. 2012 tax return form 1040 If you meet all of these tests, you can deduct all of your investment interest. 2012 tax return form 1040 More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. 2012 tax return form 1040 Items You Cannot Deduct Some interest payments are not deductible. 2012 tax return form 1040 Certain expenses similar to interest also are not deductible. 2012 tax return form 1040 Nondeductible expenses include the following items. 2012 tax return form 1040 Personal interest (discussed later). 2012 tax return form 1040 Service charges (however, see Other Expenses (Line 23) in chapter 28). 2012 tax return form 1040 Annual fees for credit cards. 2012 tax return form 1040 Loan fees. 2012 tax return form 1040 Credit investigation fees. 2012 tax return form 1040 Interest to purchase or carry tax-exempt securities. 2012 tax return form 1040 Penalties. 2012 tax return form 1040   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. 2012 tax return form 1040 Personal Interest Personal interest is not deductible. 2012 tax return form 1040 Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. 2012 tax return form 1040 It includes the following items. 2012 tax return form 1040 Interest on car loans (unless you use the car for business). 2012 tax return form 1040 Interest on federal, state, or local income tax. 2012 tax return form 1040 Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. 2012 tax return form 1040 Late payment charges by a public utility. 2012 tax return form 1040 You may be able to deduct interest you pay on a qualified student loan. 2012 tax return form 1040 For details, see Publication 970, Tax Benefits for Education. 2012 tax return form 1040 Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. 2012 tax return form 1040 However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. 2012 tax return form 1040 You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. 2012 tax return form 1040 You do this by tracing disbursements of the debt proceeds to specific uses. 2012 tax return form 1040 For details on how to do this, see chapter 4 of Publication 535. 2012 tax return form 1040 How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. 2012 tax return form 1040 Where you deduct your interest expense generally depends on how you use the loan proceeds. 2012 tax return form 1040 See Table 23-1 for a summary of where to deduct your interest expense. 2012 tax return form 1040 Home mortgage interest and points. 2012 tax return form 1040   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. 2012 tax return form 1040 If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. 2012 tax return form 1040 Attach a statement explaining the difference and print “See attached” next to line 10. 2012 tax return form 1040    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. 2012 tax return form 1040 If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. 2012 tax return form 1040 The seller must give you this number and you must give the seller your TIN. 2012 tax return form 1040 A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. 2012 tax return form 1040 Failure to meet any of these requirements may result in a $50 penalty for each failure. 2012 tax return form 1040 The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. 2012 tax return form 1040 See Social Security Number (SSN) in chapter 1 for more information about TINs. 2012 tax return form 1040    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. 2012 tax return form 1040   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. 2012 tax return form 1040 More than one borrower. 2012 tax return form 1040   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. 2012 tax return form 1040 Show how much of the interest each of you paid, and give the name and address of the person who received the form. 2012 tax return form 1040 Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. 2012 tax return form 1040 Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. 2012 tax return form 1040   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. 2012 tax return form 1040 You should let each of the other borrowers know what his or her share is. 2012 tax return form 1040 Mortgage proceeds used for business or investment. 2012 tax return form 1040    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. 2012 tax return form 1040 It shows where to deduct the part of your excess interest that is for those activities. 2012 tax return form 1040 Investment interest. 2012 tax return form 1040    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. 2012 tax return form 1040 Amortization of bond premium. 2012 tax return form 1040   There are various ways to treat the premium you pay to buy taxable bonds. 2012 tax return form 1040 See Bond Premium Amortization in Publication 550. 2012 tax return form 1040 Income-producing rental or royalty interest. 2012 tax return form 1040   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). 2012 tax return form 1040 Example. 2012 tax return form 1040 You rent out part of your home and borrow money to make repairs. 2012 tax return form 1040 You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). 2012 tax return form 1040 Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. 2012 tax return form 1040 Table 23-1. 2012 tax return form 1040 Where To Deduct Your Interest Expense IF you have . 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 THEN deduct it on . 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 AND for more information go to . 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. 2012 tax return form 1040 deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. 2012 tax return form 1040 deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. 2012 tax return form 1040 deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. 2012 tax return form 1040 deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. 2012 tax return form 1040 deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. 2012 tax return form 1040 deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. 2012 tax return form 1040 deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. 2012 tax return form 1040 deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. 2012 tax return form 1040 personal interest not deductible. 2012 tax return form 1040 Prev  Up  Next   Home   More Online Publications