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Amend A Tax Return

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Amend A Tax Return

Amend a tax return Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. Amend a tax return Proc. Amend a tax return 2013-16 Table of Contents SECTION 1. Amend a tax return PURPOSE SECTION 2. Amend a tax return BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. Amend a tax return BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. Amend a tax return FEDERAL INCOME TAX TREATMENT SECTION 5. Amend a tax return INFORMATION-REPORTING OBLIGATIONS SECTION 6. Amend a tax return HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. Amend a tax return PENALTY RELIEF FOR 2012 SECTION 8. Amend a tax return SCOPE AND EFFECTIVE DATE SECTION 9. Amend a tax return DRAFTING INFORMATION SECTION 1. Amend a tax return PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). Amend a tax return Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). Amend a tax return In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. Amend a tax return Current plans call for HAMP to continue accepting new borrowers through the end of 2013. Amend a tax return The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. Amend a tax return SECTION 2. Amend a tax return BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . Amend a tax return 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Amend a tax return A description of the program can be found at www. Amend a tax return makinghomeaffordable. Amend a tax return gov. Amend a tax return . Amend a tax return 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. Amend a tax return These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. Amend a tax return . Amend a tax return 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. Amend a tax return The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. Amend a tax return However, as noted in section 2. Amend a tax return 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. Amend a tax return (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. Amend a tax return ”) . Amend a tax return 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. Amend a tax return . Amend a tax return 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. Amend a tax return The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. Amend a tax return (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. Amend a tax return ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). Amend a tax return Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. Amend a tax return Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. Amend a tax return . Amend a tax return 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. Amend a tax return (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. Amend a tax return ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. Amend a tax return . Amend a tax return 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). Amend a tax return If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. Amend a tax return These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. Amend a tax return The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. Amend a tax return The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. Amend a tax return For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. Amend a tax return ” . Amend a tax return 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). Amend a tax return . Amend a tax return 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. Amend a tax return 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. Amend a tax return . Amend a tax return 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. Amend a tax return SECTION 3. Amend a tax return BACKGROUND—APPLICABLE PROVISIONS OF LAW . Amend a tax return 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. Amend a tax return See § 61(a)(12). Amend a tax return . Amend a tax return 02 Under § 1. Amend a tax return 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. Amend a tax return In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. Amend a tax return However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. Amend a tax return See § 1. Amend a tax return 1001-3(c)(6). Amend a tax return . Amend a tax return 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. Amend a tax return 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. Amend a tax return If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. Amend a tax return See also § 1. Amend a tax return 61-12(c). Amend a tax return . Amend a tax return 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. Amend a tax return If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. Amend a tax return See, e. Amend a tax return g. Amend a tax return , §§ 1. Amend a tax return 1272-1(c)(5) and 1. Amend a tax return 1274-2(d). Amend a tax return . Amend a tax return 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. Amend a tax return Section 108(a)(1)(E) and 108(a)(1)(B). Amend a tax return (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. Amend a tax return ) . Amend a tax return 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. Amend a tax return . Amend a tax return 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. Amend a tax return See §§ 108(h) and 163(h)(3)(B)(i). Amend a tax return . Amend a tax return 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). Amend a tax return Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. Amend a tax return . Amend a tax return 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. Amend a tax return . Amend a tax return 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. Amend a tax return Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. Amend a tax return . Amend a tax return 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. Amend a tax return See § 108(h)(1). Amend a tax return If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). Amend a tax return See § 108(b). Amend a tax return For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Amend a tax return . Amend a tax return 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Amend a tax return See Form 982 instructions and Publication 4681. Amend a tax return This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. Amend a tax return . Amend a tax return 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. Amend a tax return See Notice 2003-18, 2003-1 C. Amend a tax return B. Amend a tax return 699, and Rev. Amend a tax return Rul. Amend a tax return 79-356, 1979-2 C. Amend a tax return B. Amend a tax return 28. Amend a tax return However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). Amend a tax return See Rev. Amend a tax return Rul. Amend a tax return 2005-46, 2005-2 C. Amend a tax return B. Amend a tax return 120, and Rev. Amend a tax return Rul. Amend a tax return 75-246, 1975-1 C. Amend a tax return B. Amend a tax return 24. Amend a tax return . Amend a tax return 14 Under § 451 and § 1. Amend a tax return 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. Amend a tax return . Amend a tax return 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. Amend a tax return See § 6041(a) and (d) and § 1. Amend a tax return 6041-1(a)(1) and (b). Amend a tax return . Amend a tax return 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. Amend a tax return See § 6050P(a)-(c) and §§ 1. Amend a tax return 6050P-1(a) and 1. Amend a tax return 6050P-2(a) and (d). Amend a tax return . Amend a tax return 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. Amend a tax return These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. Amend a tax return Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. Amend a tax return ” . Amend a tax return 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. Amend a tax return These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. Amend a tax return Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. Amend a tax return SECTION 4. Amend a tax return FEDERAL INCOME TAX TREATMENT . Amend a tax return 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. Amend a tax return See § 1. Amend a tax return 1001-3. Amend a tax return At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. Amend a tax return See also § 61(a)(12) and § 1. Amend a tax return 61-12(c). Amend a tax return . Amend a tax return 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. Amend a tax return Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. Amend a tax return Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. Amend a tax return . Amend a tax return 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. Amend a tax return Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. Amend a tax return . Amend a tax return 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. Amend a tax return Therefore, for purposes of § 1. Amend a tax return 1001-3, the date of the modification is the date of the permanent modification. Amend a tax return . Amend a tax return 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. Amend a tax return 01 of this revenue procedure for the taxable year in which the permanent modification occurs. Amend a tax return Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. Amend a tax return The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. Amend a tax return . Amend a tax return 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. Amend a tax return . Amend a tax return 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. Amend a tax return This is consistent with Rev. Amend a tax return Rul. Amend a tax return 2009-19, 2009-28 I. Amend a tax return R. Amend a tax return B. Amend a tax return 111, which addressed the treatment of Pay-for-Performance Success Payments. Amend a tax return . Amend a tax return 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. Amend a tax return If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. Amend a tax return . Amend a tax return 09 As described in section 2. Amend a tax return 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. Amend a tax return To the extent that the HAMP-PRA borrower is described in section 4. Amend a tax return 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. Amend a tax return To the extent that the HAMP-PRA borrower is described in section 4. Amend a tax return 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. Amend a tax return SECTION 5. Amend a tax return INFORMATION-REPORTING OBLIGATIONS . Amend a tax return 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. Amend a tax return A copy of this form is required to be furnished to the borrower. Amend a tax return . Amend a tax return 02 As stated in sections 4. Amend a tax return 01 and 4. Amend a tax return 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. Amend a tax return . Amend a tax return 03 An investor is an applicable entity that is required under § 1. Amend a tax return 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. Amend a tax return Under § 1. Amend a tax return 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. Amend a tax return Identifiable events determine when Forms 1099-C have to be issued. Amend a tax return Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. Amend a tax return This rule under § 1. Amend a tax return 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. Amend a tax return . Amend a tax return 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. Amend a tax return That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). Amend a tax return . Amend a tax return 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Amend a tax return 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. Amend a tax return Under § 6041, these payments are not subject to information reporting. Amend a tax return See Notice 2011-14, 2011-11 I. Amend a tax return R. Amend a tax return B. Amend a tax return 544, 546. Amend a tax return . Amend a tax return 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Amend a tax return 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. Amend a tax return The payment is subject to the information reporting requirements of § 6041, as described in section 3. Amend a tax return 15 of this revenue procedure. Amend a tax return Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. Amend a tax return SECTION 6. Amend a tax return HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . Amend a tax return 01 In general. Amend a tax return The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). Amend a tax return As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. Amend a tax return Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. Amend a tax return A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. Amend a tax return 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. Amend a tax return Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. Amend a tax return 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. Amend a tax return . Amend a tax return 02 HAMP-PRA borrower options. Amend a tax return A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. Amend a tax return 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. Amend a tax return If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. Amend a tax return 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. Amend a tax return . Amend a tax return 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. Amend a tax return (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. Amend a tax return (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. Amend a tax return 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. Amend a tax return 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. Amend a tax return This section 6. Amend a tax return 03(2) applies only if the change to reporting the discharge using the method described in section 6. Amend a tax return 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. Amend a tax return To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. Amend a tax return (3) Example. Amend a tax return The following example illustrates the application of section 6. Amend a tax return 03(2) of this revenue procedure. Amend a tax return In 2010, B’s basis in B’s principal residence was $330,000. Amend a tax return In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. Amend a tax return B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). Amend a tax return The trial period plan effective date also fell in 2010. Amend a tax return B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. Amend a tax return 02(2) of this revenue procedure. Amend a tax return That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. Amend a tax return The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. Amend a tax return For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. Amend a tax return 02(1) of this revenue procedure. Amend a tax return Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. Amend a tax return 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). Amend a tax return (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. Amend a tax return 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. Amend a tax return 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. Amend a tax return Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. Amend a tax return 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. Amend a tax return Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. Amend a tax return (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. Amend a tax return 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. Amend a tax return The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. Amend a tax return (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. Amend a tax return The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). Amend a tax return The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. Amend a tax return . Amend a tax return 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. Amend a tax return (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. Amend a tax return Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. Amend a tax return Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. Amend a tax return If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. Amend a tax return (2) A HAMP-PRA borrower who has been using the method described in section 6. Amend a tax return 02(1) of this revenue procedure may change to the method described in section 6. Amend a tax return 02(2) but must comply with the consistency and open-year requirements described in section 6. Amend a tax return 01 of this revenue procedure. Amend a tax return SECTION 7. Amend a tax return PENALTY RELIEF FOR 2012 . Amend a tax return 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. Amend a tax return 03 through 5. Amend a tax return 04 and section 8. Amend a tax return 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. Amend a tax return 01 through 4. Amend a tax return 04 of this revenue procedure) that is required to be reported for 2012. Amend a tax return (2) Not later than March 28, 2013, a statement is sent to the Service. Amend a tax return It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. Amend a tax return 01(1) of this revenue procedure. Amend a tax return The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . Amend a tax return 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. Amend a tax return 06 and 8. Amend a tax return 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. Amend a tax return . Amend a tax return 03 Section 8. Amend a tax return 03 and 8. Amend a tax return 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. Amend a tax return SECTION 8. Amend a tax return SCOPE AND EFFECTIVE DATE . Amend a tax return 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. Amend a tax return . Amend a tax return 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. Amend a tax return . Amend a tax return 03 Because of the effective date in section 8. Amend a tax return 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. Amend a tax return 03 through 5. Amend a tax return 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. Amend a tax return 03 through 5. Amend a tax return 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. Amend a tax return . Amend a tax return 04 Because of the effective date in section 8. Amend a tax return 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. Amend a tax return 06 of this revenue procedure. Amend a tax return SECTION 9. Amend a tax return DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. Amend a tax return Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. Amend a tax return Pflanz and Sheldon A. Amend a tax return Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. Amend a tax return Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). Amend a tax return For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). Amend a tax return Prev  Up  Next   Home   More Internal Revenue Bulletins
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The Amend A Tax Return

Amend a tax return 8. Amend a tax return   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Amend a tax return Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Amend a tax return Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Amend a tax return Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Amend a tax return Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Amend a tax return This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Amend a tax return A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Amend a tax return An exchange is a transfer of property for other property or services. Amend a tax return Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Amend a tax return If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Amend a tax return If the adjusted basis of the property is more than the amount you realize, you will have a loss. Amend a tax return Basis and adjusted basis. Amend a tax return   The basis of property you buy is usually its cost. Amend a tax return The adjusted basis of property is basis plus certain additions and minus certain deductions. Amend a tax return See chapter 6 for more information about basis and adjusted basis. Amend a tax return Amount realized. Amend a tax return   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Amend a tax return The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Amend a tax return   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Amend a tax return Amount recognized. Amend a tax return   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Amend a tax return A recognized gain is a gain you must include in gross income and report on your income tax return. Amend a tax return A recognized loss is a loss you deduct from gross income. Amend a tax return However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Amend a tax return See Like-Kind Exchanges next. Amend a tax return Also, a loss from the disposition of property held for personal use is not deductible. Amend a tax return Like-Kind Exchanges Certain exchanges of property are not taxable. Amend a tax return This means any gain from the exchange is not recognized, and any loss cannot be deducted. Amend a tax return Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Amend a tax return The exchange of property for the same kind of property is the most common type of nontaxable exchange. Amend a tax return To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Amend a tax return Qualifying property. Amend a tax return Like-kind property. Amend a tax return These two requirements are discussed later. Amend a tax return Multiple-party transactions. Amend a tax return   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Amend a tax return Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Amend a tax return Receipt of title from third party. Amend a tax return   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Amend a tax return Basis of property received. Amend a tax return   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Amend a tax return See chapter 6 for more information. Amend a tax return Money paid. Amend a tax return   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Amend a tax return The basis of the property received is the basis of the property given up, increased by the money paid. Amend a tax return Example. Amend a tax return You traded an old tractor with an adjusted basis of $15,000 for a new one. Amend a tax return The new tractor costs $300,000. Amend a tax return You were allowed $80,000 for the old tractor and paid $220,000 cash. Amend a tax return You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Amend a tax return If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Amend a tax return In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Amend a tax return Reporting the exchange. Amend a tax return   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Amend a tax return The Instructions for Form 8824 explain how to report the details of the exchange. Amend a tax return   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Amend a tax return You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Amend a tax return See chapter 9 for more information. Amend a tax return Qualifying property. Amend a tax return   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Amend a tax return Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Amend a tax return Nonqualifying property. Amend a tax return   The rules for like-kind exchanges do not apply to exchanges of the following property. Amend a tax return Property you use for personal purposes, such as your home and family car. Amend a tax return Stock in trade or other property held primarily for sale, such as crops and produce. Amend a tax return Stocks, bonds, or notes. Amend a tax return However, see Qualifying property above. Amend a tax return Other securities or evidences of indebtedness, such as accounts receivable. Amend a tax return Partnership interests. Amend a tax return However, you may have a nontaxable exchange under other rules. Amend a tax return See Other Nontaxable Exchanges in chapter 1 of Publication 544. Amend a tax return Like-kind property. Amend a tax return   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Amend a tax return Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Amend a tax return Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Amend a tax return For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Amend a tax return   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Amend a tax return An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Amend a tax return The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Amend a tax return For example, the exchange of a bull for a cow is not a like-kind exchange. Amend a tax return An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Amend a tax return    Note. Amend a tax return Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Amend a tax return Personal property. Amend a tax return   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Amend a tax return Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Amend a tax return Property classified in any General Asset Class may not be classified within a Product Class. Amend a tax return Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Amend a tax return General Asset Classes. Amend a tax return   General Asset Classes describe the types of property frequently used in many businesses. Amend a tax return They include, but are not limited to, the following property. Amend a tax return Office furniture, fixtures, and equipment (asset class 00. Amend a tax return 11). Amend a tax return Information systems, such as computers and peripheral equipment (asset class 00. Amend a tax return 12). Amend a tax return Data handling equipment except computers (asset class 00. Amend a tax return 13). Amend a tax return Automobiles and taxis (asset class 00. Amend a tax return 22). Amend a tax return Light general purpose trucks (asset class 00. Amend a tax return 241). Amend a tax return Heavy general purpose trucks (asset class 00. Amend a tax return 242). Amend a tax return Tractor units for use over-the-road (asset class 00. Amend a tax return 26). Amend a tax return Trailers and trailer-mounted containers (asset class 00. Amend a tax return 27). Amend a tax return Industrial steam and electric generation and/or distribution systems (asset class 00. Amend a tax return 4). Amend a tax return Product Classes. Amend a tax return   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Amend a tax return The latest version of the manual can be accessed at www. Amend a tax return census. Amend a tax return gov/eos/www/naics/. Amend a tax return Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Amend a tax return ntis. Amend a tax return gov/products/naics. Amend a tax return aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Amend a tax return A CD-ROM version with search and retrieval software is also available from NTIS. Amend a tax return    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Amend a tax return Partially nontaxable exchange. Amend a tax return   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Amend a tax return You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Amend a tax return A loss is not deductible. Amend a tax return Example 1. Amend a tax return You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Amend a tax return You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Amend a tax return However, only $10,000, the cash received, is recognized (included in income). Amend a tax return Example 2. Amend a tax return Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Amend a tax return Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Amend a tax return Example 3. Amend a tax return Assume in Example 1 that the FMV of the land you received was only $15,000. Amend a tax return Your $5,000 loss is not recognized. Amend a tax return Unlike property given up. Amend a tax return   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Amend a tax return The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Amend a tax return Like-kind exchanges between related persons. Amend a tax return   Special rules apply to like-kind exchanges between related persons. Amend a tax return These rules affect both direct and indirect exchanges. Amend a tax return Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Amend a tax return The gain or loss on the original exchange must be recognized as of the date of the later disposition. Amend a tax return The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Amend a tax return Related persons. Amend a tax return   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Amend a tax return ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Amend a tax return   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Amend a tax return Example. Amend a tax return You used a grey pickup truck in your farming business. Amend a tax return Your sister used a red pickup truck in her landscaping business. Amend a tax return In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Amend a tax return At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Amend a tax return The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Amend a tax return You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Amend a tax return Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Amend a tax return However, because this was a like-kind exchange, you recognized no gain. Amend a tax return Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Amend a tax return She recognized gain only to the extent of the money she received, $200. Amend a tax return Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Amend a tax return In 2013, you sold the red pickup truck to a third party for $7,000. Amend a tax return Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Amend a tax return On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Amend a tax return You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Amend a tax return In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Amend a tax return Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Amend a tax return Exceptions to the rules for related persons. Amend a tax return   The following property dispositions are excluded from these rules. Amend a tax return Dispositions due to the death of either related person. Amend a tax return Involuntary conversions. Amend a tax return Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Amend a tax return Multiple property exchanges. Amend a tax return   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Amend a tax return However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Amend a tax return Transfer and receive properties in two or more exchange groups. Amend a tax return Transfer or receive more than one property within a single exchange group. Amend a tax return   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Amend a tax return Deferred exchange. Amend a tax return   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Amend a tax return A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Amend a tax return The property you receive is replacement property. Amend a tax return The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Amend a tax return In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Amend a tax return   For more information see Deferred Exchanges in chapter 1 of Publication 544. Amend a tax return Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Amend a tax return This rule does not apply if the recipient is a nonresident alien. Amend a tax return Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Amend a tax return Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Amend a tax return The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Amend a tax return This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Amend a tax return This rule applies for determining loss as well as gain. Amend a tax return Any gain recognized on a transfer in trust increases the basis. Amend a tax return For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Amend a tax return Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Amend a tax return You may also have a capital gain if your section 1231 transactions result in a net gain. Amend a tax return See Section 1231 Gains and Losses in  chapter 9. Amend a tax return To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Amend a tax return Your net capital gains may be taxed at a lower tax rate than ordinary income. Amend a tax return See Capital Gains Tax Rates , later. Amend a tax return Your deduction for a net capital loss may be limited. Amend a tax return See Treatment of Capital Losses , later. Amend a tax return Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Amend a tax return The following items are examples of capital assets. Amend a tax return A home owned and occupied by you and your family. Amend a tax return Household furnishings. Amend a tax return A car used for pleasure. Amend a tax return If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Amend a tax return Stocks and bonds. Amend a tax return However, there are special rules for gains on qualified small business stock. Amend a tax return For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Amend a tax return Personal-use property. Amend a tax return   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Amend a tax return Loss from the sale or exchange of personal-use property is not deductible. Amend a tax return You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Amend a tax return For information on casualties and thefts, see chapter 11. Amend a tax return Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Amend a tax return The time you own an asset before disposing of it is the holding period. Amend a tax return If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Amend a tax return Report it in Part I of Schedule D (Form 1040). Amend a tax return If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Amend a tax return Report it in Part II of Schedule D (Form 1040). Amend a tax return Holding period. Amend a tax return   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Amend a tax return The day you disposed of the property is part of your holding period. Amend a tax return Example. Amend a tax return If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Amend a tax return If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Amend a tax return Inherited property. Amend a tax return   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Amend a tax return This rule does not apply to livestock used in a farm business. Amend a tax return See Holding period under Livestock , later. Amend a tax return Nonbusiness bad debt. Amend a tax return   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Amend a tax return See chapter 4 of Publication 550. Amend a tax return Nontaxable exchange. Amend a tax return   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Amend a tax return That is, it begins on the same day as your holding period for the old property. Amend a tax return Gift. Amend a tax return   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Amend a tax return Real property. Amend a tax return   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Amend a tax return   However, taking possession of real property under an option agreement is not enough to start the holding period. Amend a tax return The holding period cannot start until there is an actual contract of sale. Amend a tax return The holding period of the seller cannot end before that time. Amend a tax return Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Amend a tax return Net short-term capital gain or loss. Amend a tax return   Combine your short-term capital gains and losses. Amend a tax return Do this by adding all of your short-term capital gains. Amend a tax return Then add all of your short-term capital losses. Amend a tax return Subtract the lesser total from the greater. Amend a tax return The difference is your net short-term capital gain or loss. Amend a tax return Net long-term capital gain or loss. Amend a tax return   Follow the same steps to combine your long-term capital gains and losses. Amend a tax return The result is your net long-term capital gain or loss. Amend a tax return Net gain. Amend a tax return   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Amend a tax return However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Amend a tax return See Capital Gains Tax Rates , later. Amend a tax return Net loss. Amend a tax return   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Amend a tax return But there are limits on how much loss you can deduct and when you can deduct it. Amend a tax return See Treatment of Capital Losses next. Amend a tax return Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Amend a tax return For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Amend a tax return If your other income is low, you may not be able to use the full $3,000. Amend a tax return The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Amend a tax return Capital loss carryover. Amend a tax return   Generally, you have a capital loss carryover if either of the following situations applies to you. Amend a tax return Your net loss on Schedule D (Form 1040), is more than the yearly limit. Amend a tax return Your taxable income without your deduction for exemptions is less than zero. Amend a tax return If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Amend a tax return    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Amend a tax return Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Amend a tax return These lower rates are called the maximum capital gains rates. Amend a tax return The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Amend a tax return See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Amend a tax return Also see Publication 550. Amend a tax return Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Amend a tax return A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Amend a tax return Property held for sale in the ordinary course of your farm business. Amend a tax return   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Amend a tax return Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Amend a tax return The treatment of this property is discussed in chapter 3. Amend a tax return Land and depreciable properties. Amend a tax return   Land and depreciable property you use in farming are not capital assets. Amend a tax return Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Amend a tax return However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Amend a tax return The sales of these business assets are reported on Form 4797. Amend a tax return See chapter 9 for more information. Amend a tax return Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Amend a tax return Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Amend a tax return A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Amend a tax return The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Amend a tax return A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Amend a tax return Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Amend a tax return Hedging transactions. Amend a tax return Transactions that are not hedging transactions. Amend a tax return Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Amend a tax return There is a limit on the amount of capital losses you can deduct each year. Amend a tax return Hedging transactions are not subject to the mark-to-market rules. Amend a tax return If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Amend a tax return They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Amend a tax return The gain or loss on the termination of these hedges is generally ordinary gain or loss. Amend a tax return Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Amend a tax return Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Amend a tax return Examples include fuel and feed. Amend a tax return If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Amend a tax return Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Amend a tax return It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Amend a tax return Retain the identification of each hedging transaction with your books and records. Amend a tax return Also, identify the item(s) or aggregate risk that is being hedged in your records. Amend a tax return Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Amend a tax return For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Amend a tax return Accounting methods for hedging transactions. Amend a tax return   The accounting method you use for a hedging transaction must clearly reflect income. Amend a tax return This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Amend a tax return There are requirements and limits on the method you can use for certain hedging transactions. Amend a tax return See Regulations section 1. Amend a tax return 446-4(e) for those requirements and limits. Amend a tax return   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Amend a tax return Cash method. Amend a tax return Farm-price method. Amend a tax return Unit-livestock-price method. Amend a tax return   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Amend a tax return   Your books and records must describe the accounting method used for each type of hedging transaction. Amend a tax return They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Amend a tax return You must make the additional identification no more than 35 days after entering into the hedging transaction. Amend a tax return Example of a hedging transaction. Amend a tax return   You file your income tax returns on the cash method. Amend a tax return On July 2 you anticipate a yield of 50,000 bushels of corn this year. Amend a tax return The December futures price is $5. Amend a tax return 75 a bushel, but there are indications that by harvest time the price will drop. Amend a tax return To protect yourself against a drop in the price, you enter into the following hedging transaction. Amend a tax return You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Amend a tax return 75 a bushel. Amend a tax return   The price did not drop as anticipated but rose to $6 a bushel. Amend a tax return In November, you sell your crop at a local elevator for $6 a bushel. Amend a tax return You also close out your futures position by buying ten December contracts for $6 a bushel. Amend a tax return You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Amend a tax return   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Amend a tax return Your loss on the hedge is 25 cents a bushel. Amend a tax return In effect, the net selling price of your corn is $5. Amend a tax return 75 a bushel. Amend a tax return   Report the results of your futures transactions and your sale of corn separately on Schedule F. Amend a tax return See the instructions for the 2013 Schedule F (Form 1040). Amend a tax return   The loss on your futures transactions is $13,900, figured as follows. Amend a tax return July 2 - Sold December corn futures (50,000 bu. Amend a tax return @$5. Amend a tax return 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Amend a tax return @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Amend a tax return   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Amend a tax return × $6). Amend a tax return Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Amend a tax return   Assume you were right and the price went down 25 cents a bushel. Amend a tax return In effect, you would still net $5. Amend a tax return 75 a bushel, figured as follows. Amend a tax return Sold cash corn, per bushel $5. Amend a tax return 50 Gain on hedge, per bushel . Amend a tax return 25 Net price, per bushel $5. Amend a tax return 75       The gain on your futures transactions would have been $11,100, figured as follows. Amend a tax return July 2 - Sold December corn futures (50,000 bu. Amend a tax return @$5. Amend a tax return 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Amend a tax return @$5. Amend a tax return 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Amend a tax return   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Amend a tax return Livestock This part discusses the sale or exchange of livestock used in your farm business. Amend a tax return Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Amend a tax return However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Amend a tax return See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Amend a tax return The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Amend a tax return The sale of this livestock is reported on Schedule F. Amend a tax return See chapter 3. Amend a tax return Also, special rules apply to sales or exchanges caused by weather-related conditions. Amend a tax return See chapter 3. Amend a tax return Holding period. Amend a tax return   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Amend a tax return Livestock. Amend a tax return   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Amend a tax return Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Amend a tax return Livestock used in farm business. Amend a tax return   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Amend a tax return The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Amend a tax return An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Amend a tax return However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Amend a tax return Example 1. Amend a tax return You discover an animal that you intend to use for breeding purposes is sterile. Amend a tax return You dispose of it within a reasonable time. Amend a tax return This animal was held for breeding purposes. Amend a tax return Example 2. Amend a tax return You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Amend a tax return These young animals were held for breeding or dairy purposes. Amend a tax return Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Amend a tax return See Sales Caused by Weather-Related Conditions in chapter 3. Amend a tax return Example 3. Amend a tax return You are in the business of raising hogs for slaughter. Amend a tax return Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Amend a tax return You sell the brood sows after obtaining the litter. Amend a tax return Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Amend a tax return Example 4. Amend a tax return You are in the business of raising registered cattle for sale to others for use as breeding cattle. Amend a tax return The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Amend a tax return Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Amend a tax return Such use does not demonstrate that you are holding the cattle for breeding purposes. Amend a tax return However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Amend a tax return The same applies to hog and sheep breeders. Amend a tax return Example 5. Amend a tax return You breed, raise, and train horses for racing purposes. Amend a tax return Every year you cull horses from your racing stable. Amend a tax return In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Amend a tax return These horses are all considered held for sporting purposes. Amend a tax return Figuring gain or loss on the cash method. Amend a tax return   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Amend a tax return Raised livestock. Amend a tax return   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Amend a tax return Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Amend a tax return The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Amend a tax return However, see Uniform Capitalization Rules in chapter 6. Amend a tax return Purchased livestock. Amend a tax return   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Amend a tax return Example. Amend a tax return A farmer sold a breeding cow on January 8, 2013, for $1,250. Amend a tax return Expenses of the sale were $125. Amend a tax return The cow was bought July 2, 2009, for $1,300. Amend a tax return Depreciation (not less than the amount allowable) was $867. Amend a tax return Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Amend a tax return Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Amend a tax return Any loss on the disposition of such property is treated as a long-term capital loss. Amend a tax return Converted wetland. Amend a tax return   This is generally land that was drained or filled to make the production of agricultural commodities possible. Amend a tax return It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Amend a tax return   A wetland (before conversion) is land that meets all the following conditions. Amend a tax return It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Amend a tax return It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Amend a tax return It supports, under normal circumstances, mostly plants that grow in saturated soil. Amend a tax return Highly erodible cropland. Amend a tax return   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Amend a tax return Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Amend a tax return Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Amend a tax return Successor. Amend a tax return   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Amend a tax return Timber Standing timber you held as investment property is a capital asset. Amend a tax return Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Amend a tax return If you held the timber primarily for sale to customers, it is not a capital asset. Amend a tax return Gain or loss on its sale is ordinary business income or loss. Amend a tax return It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Amend a tax return See the Instructions for Schedule F (Form 1040). Amend a tax return Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Amend a tax return Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Amend a tax return , are ordinary farm income and expenses reported on Schedule F. Amend a tax return Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Amend a tax return Timber considered cut. Amend a tax return   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Amend a tax return This is true whether the timber is cut under contract or whether you cut it yourself. Amend a tax return Christmas trees. Amend a tax return   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Amend a tax return They qualify for both rules discussed below. Amend a tax return Election to treat cutting as a sale or exchange. Amend a tax return   Under the general rule, the cutting of timber results in no gain or loss. Amend a tax return It is not until a sale or exchange occurs that gain or loss is realized. Amend a tax return But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Amend a tax return Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Amend a tax return Any later sale results in ordinary business income or loss. Amend a tax return See the example below. Amend a tax return   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Amend a tax return Making the election. Amend a tax return   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Amend a tax return You do not have to make the election in the first year you cut the timber. Amend a tax return You can make it in any year to which the election would apply. Amend a tax return If the timber is partnership property, the election is made on the partnership return. Amend a tax return This election cannot be made on an amended return. Amend a tax return   Once you have made the election, it remains in effect for all later years unless you revoke it. Amend a tax return Election under section 631(a) may be revoked. Amend a tax return   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Amend a tax return The prior election (and revocation) is disregarded for purposes of making a subsequent election. Amend a tax return See Form T (Timber), Forest Activities Schedule, for more information. Amend a tax return Gain or loss. Amend a tax return   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Amend a tax return   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Amend a tax return Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Amend a tax return 611-3. Amend a tax return   Depletion of timber is discussed in chapter 7. Amend a tax return Example. Amend a tax return   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Amend a tax return It had an adjusted basis for depletion of $40 per MBF. Amend a tax return You are a calendar year taxpayer. Amend a tax return On January 1, 2013, the timber had a FMV of $350 per MBF. Amend a tax return It was cut in April for sale. Amend a tax return On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Amend a tax return You report the difference between the FMV and your adjusted basis for depletion as a gain. Amend a tax return This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Amend a tax return You figure your gain as follows. Amend a tax return FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Amend a tax return Outright sales of timber. Amend a tax return   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Amend a tax return However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Amend a tax return Cutting contract. Amend a tax return   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Amend a tax return You are the owner of the timber. Amend a tax return You held the timber longer than 1 year before its disposal. Amend a tax return You kept an economic interest in the timber. Amend a tax return   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Amend a tax return   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Amend a tax return Include this amount on Form 4797 along with your other section 1231 gains or losses. Amend a tax return Date of disposal. Amend a tax return   The date of disposal is the date the timber is cut. Amend a tax return However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Amend a tax return   This election applies only to figure the holding period of the timber. Amend a tax return It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Amend a tax return   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Amend a tax return The statement must identify the advance payments subject to the election and the contract under which they were made. Amend a tax return   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Amend a tax return Attach the statement to the amended return and write “Filed pursuant to section 301. Amend a tax return 9100-2” at the top of the statement. Amend a tax return File the amended return at the same address the original return was filed. Amend a tax return Owner. Amend a tax return   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Amend a tax return You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Amend a tax return Tree stumps. Amend a tax return   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Amend a tax return Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Amend a tax return However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Amend a tax return Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Amend a tax return   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Amend a tax return Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Amend a tax return If you have a gain from the sale, you may be allowed to exclude the gain on your home. Amend a tax return For more information, see Publication 523, Selling Your Home. Amend a tax return The gain on the sale of your business property is taxable. Amend a tax return A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Amend a tax return Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Amend a tax return See chapter 9. Amend a tax return Losses from personal-use property, other than casualty or theft losses, are not deductible. Amend a tax return If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Amend a tax return See chapter 10 for information about installment sales. Amend a tax return When you sell your farm, the gain or loss on each asset is figured separately. Amend a tax return The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Amend a tax return Each of the assets sold must be classified as one of the following. Amend a tax return Capital asset held 1 year or less. Amend a tax return Capital asset held longer than 1 year. Amend a tax return Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Amend a tax return Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Amend a tax return Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Amend a tax return Allocation of consideration paid for a farm. Amend a tax return   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Amend a tax return The residual method is required only if the group of assets sold constitutes a trade or business. Amend a tax return This method determines gain or loss from the transfer of each asset. Amend a tax return It also determines the buyer's basis in the business assets. Amend a tax return For more information, see Sale of a Business in chapter 2 of Publication 544. Amend a tax return Property used in farm operation. Amend a tax return   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Amend a tax return Recognized gains and losses on business property must be reported on your return for the year of the sale. Amend a tax return If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Amend a tax return Example. Amend a tax return You sell your farm, including your main home, which you have owned since December 2001. Amend a tax return You realize gain on the sale as follows. Amend a tax return   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Amend a tax return All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Amend a tax return Treat the balance as section 1231 gain. Amend a tax return The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Amend a tax return Partial sale. Amend a tax return   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Amend a tax return You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Amend a tax return For a detailed discussion on installment sales, see Publication 544. Amend a tax return Adjusted basis of the part sold. Amend a tax return   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Amend a tax return , on the part sold. Amend a tax return If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Amend a tax return Example. Amend a tax return You bought a 600-acre farm for $700,000. Amend a tax return The farm included land and buildings. Amend a tax return The purchase contract designated $600,000 of the purchase price to the land. Amend a tax return You later sold 60 acres of land on which you had installed a fence. Amend a tax return Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Amend a tax return Use this amount to determine your gain or loss on the sale of the 60 acres. Amend a tax return Assessed values for local property taxes. Amend a tax return   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Amend a tax return Example. Amend a tax return Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Amend a tax return However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Amend a tax return The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Amend a tax return Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Amend a tax return The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Amend a tax return Sale of your home. Amend a tax return   Your home is a capital asset and not property used in the trade or business of farming. Amend a tax return If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Amend a tax return Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Amend a tax return   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Amend a tax return For more information on basis, see chapter 6. Amend a tax return More information. Amend a tax return   For more information on selling your home, see Publication 523. Amend a tax return Gain from condemnation. Amend a tax return   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Amend a tax return However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Amend a tax return Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Amend a tax return The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Amend a tax return This is true even if you voluntarily return the property to the lender. Amend a tax return You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Amend a tax return Buyer's (borrower's) gain or loss. Amend a tax return   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Amend a tax return The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Amend a tax return See Determining Gain or Loss , earlier. Amend a tax return Worksheet 8-1. Amend a tax return Worksheet for Foreclosures andRepossessions Part 1. Amend a tax return Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Amend a tax return Complete this part only if you were personally liable for the debt. Amend a tax return Otherwise, go to Part 2. Amend a tax return   1. Amend a tax return Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Amend a tax return Enter the Fair Market Value of the transferred property   3. Amend a tax return Ordinary income from cancellation of debt upon foreclosure or repossession. Amend a tax return * Subtract line 2 from line 1. Amend a tax return If zero or less, enter -0-   Part 2. Amend a tax return Figure your gain or loss from foreclosure or repossession. Amend a tax return   4. Amend a tax return If you completed Part 1, enter the smaller of line 1 or line 2. Amend a tax return If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Amend a tax return Enter any proceeds you received from the foreclosure sale   6. Amend a tax return Add lines 4 and 5   7. Amend a tax return Enter the adjusted basis of the transferred property   8. Amend a tax return Gain or loss from foreclosure or repossession. Amend a tax return Subtract line 7  from line 6   * The income may not be taxable. Amend a tax return See Cancellation of debt . Amend a tax return    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Amend a tax return Amount realized on a nonrecourse debt. Amend a tax return   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Amend a tax return The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Amend a tax return Example 1. Amend a tax return Ann paid $200,000 for land used in her farming business. Amend a tax return She paid $15,000 down and borrowed the remaining $185,000 from a bank. Amend a tax return Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Amend a tax return The bank foreclosed on the loan 2 years after Ann stopped making payments. Amend a tax return When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Amend a tax return The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Amend a tax return She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Amend a tax return She has a $20,000 deductible loss. Amend a tax return Example 2. Amend a tax return Assume the same facts as in Example 1 except the FMV of the land was $210,000. Amend a tax return The result is the same. Amend a tax return The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Amend a tax return Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Amend a tax return Amount realized on a recourse debt. Amend a tax return   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Amend a tax return   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Amend a tax return The amount realized does not include the canceled debt that is your income from cancellation of debt. Amend a tax return See Cancellation of debt , later. Amend a tax return Example 3. Amend a tax return Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Amend a tax return In this case, the amount she realizes is $170,000. Amend a tax return This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Amend a tax return Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Amend a tax return She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Amend a tax return She is also treated as receiving ordinary income from cancellation of debt. Amend a tax return That income is $10,000 ($180,000 − $170,000). Amend a tax return This is the part of the canceled debt not included in the amount realized. Amend a tax return She reports this as other income on Schedule F, line 8. Amend a tax return Seller's (lender's) gain or loss on repossession. Amend a tax return   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Amend a tax return For more information, see Repossession in Publication 537, Installment Sales. Amend a tax return Cancellation of debt. Amend a tax return   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Amend a tax return This income is separate from any gain or loss realized from the foreclosure or repossession. Amend a tax return Report the income from cancellation of a business debt on Schedule F, line 8. Amend a tax return Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Amend a tax return    You can use Worksheet 8-1 to figure your income from cancellation of debt. Amend a tax return   However, income from cancellation of debt is not taxed if any of the following apply. Amend a tax return The cancellation is intended as a gift. Amend a tax return The debt is qualified farm debt (see chapter 3). Amend a tax return The debt is qualified real property business debt (see chapter 5 of Publication 334). Amend a tax return You are insolvent or bankrupt (see  chapter 3). Amend a tax return The debt is qualified principal residence indebtedness (see chapter 3). Amend a tax return   Use Form 982 to report the income exclusion. Amend a tax return Abandonment The abandonment of property is a disposition of property. Amend a tax return You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Amend a tax return Business or investment property. Amend a tax return   Loss from abandonment of business or investment property is deductible as a loss. Amend a tax return Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Amend a tax return If your adjusted basis is more than the amount you realize (if any), then you have a loss. Amend a tax return If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Amend a tax return This rule also applies to leasehold improvements the lessor made for the lessee. Amend a tax return However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Amend a tax return   If the abandoned property is secured by debt, special rules apply. Amend a tax return The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Amend a tax return For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Amend a tax return The abandonment loss is deducted in the tax year in which the loss is sustained. Amend a tax return Report the loss on Form 4797, Part II, line 10. Amend a tax return Personal-use property. Amend a tax return   You cannot deduct any loss from abandonment of your home or other property held for personal use. Amend a tax return Canceled debt. Amend a tax return   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Amend a tax return This income is separate from any loss realized from abandonment of the property. Amend a tax return Report income from cancellation of a debt related to a business or rental activity as business or rental income. Amend a tax return Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Amend a tax return   However, income from cancellation of debt is not taxed in certain circumstances. Amend a tax return See Cancellation of debt earlier under Foreclosure or Repossession . Amend a tax return Forms 1099-A and 1099-C. Amend a tax return   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Amend a tax return However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Amend a tax return The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Amend a tax return For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Amend a tax return Prev  Up  Next   Home   More Online Publications