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Amend Return

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Amend Return

Amend return 8. Amend 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 return Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Amend 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 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 return Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Amend return This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Amend return A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Amend return An exchange is a transfer of property for other property or services. Amend return Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Amend 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 return If the adjusted basis of the property is more than the amount you realize, you will have a loss. Amend return Basis and adjusted basis. Amend return   The basis of property you buy is usually its cost. Amend return The adjusted basis of property is basis plus certain additions and minus certain deductions. Amend return See chapter 6 for more information about basis and adjusted basis. Amend return Amount realized. Amend 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 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 return   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Amend return Amount recognized. Amend 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 return A recognized gain is a gain you must include in gross income and report on your income tax return. Amend return A recognized loss is a loss you deduct from gross income. Amend return However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Amend return See Like-Kind Exchanges next. Amend return Also, a loss from the disposition of property held for personal use is not deductible. Amend return Like-Kind Exchanges Certain exchanges of property are not taxable. Amend return This means any gain from the exchange is not recognized, and any loss cannot be deducted. Amend return Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Amend return The exchange of property for the same kind of property is the most common type of nontaxable exchange. Amend return To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Amend return Qualifying property. Amend return Like-kind property. Amend return These two requirements are discussed later. Amend return Multiple-party transactions. Amend return   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Amend 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 return Receipt of title from third party. Amend 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 return Basis of property received. Amend 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 return See chapter 6 for more information. Amend return Money paid. Amend 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 return The basis of the property received is the basis of the property given up, increased by the money paid. Amend return Example. Amend return You traded an old tractor with an adjusted basis of $15,000 for a new one. Amend return The new tractor costs $300,000. Amend return You were allowed $80,000 for the old tractor and paid $220,000 cash. Amend 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 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 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 return Reporting the exchange. Amend return   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Amend return The Instructions for Form 8824 explain how to report the details of the exchange. Amend 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 return You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Amend return See chapter 9 for more information. Amend return Qualifying property. Amend 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 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 return Nonqualifying property. Amend return   The rules for like-kind exchanges do not apply to exchanges of the following property. Amend return Property you use for personal purposes, such as your home and family car. Amend return Stock in trade or other property held primarily for sale, such as crops and produce. Amend return Stocks, bonds, or notes. Amend return However, see Qualifying property above. Amend return Other securities or evidences of indebtedness, such as accounts receivable. Amend return Partnership interests. Amend return However, you may have a nontaxable exchange under other rules. Amend return See Other Nontaxable Exchanges in chapter 1 of Publication 544. Amend return Like-kind property. Amend return   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Amend return Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Amend return Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Amend return For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Amend 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 return An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Amend return The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Amend return For example, the exchange of a bull for a cow is not a like-kind exchange. Amend 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 return    Note. Amend return Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Amend return Personal property. Amend return   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Amend return Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Amend return Property classified in any General Asset Class may not be classified within a Product Class. Amend 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 return General Asset Classes. Amend return   General Asset Classes describe the types of property frequently used in many businesses. Amend return They include, but are not limited to, the following property. Amend return Office furniture, fixtures, and equipment (asset class 00. Amend return 11). Amend return Information systems, such as computers and peripheral equipment (asset class 00. Amend return 12). Amend return Data handling equipment except computers (asset class 00. Amend return 13). Amend return Automobiles and taxis (asset class 00. Amend return 22). Amend return Light general purpose trucks (asset class 00. Amend return 241). Amend return Heavy general purpose trucks (asset class 00. Amend return 242). Amend return Tractor units for use over-the-road (asset class 00. Amend return 26). Amend return Trailers and trailer-mounted containers (asset class 00. Amend return 27). Amend return Industrial steam and electric generation and/or distribution systems (asset class 00. Amend return 4). Amend return Product Classes. Amend 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 return The latest version of the manual can be accessed at www. Amend return census. Amend return gov/eos/www/naics/. Amend return Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Amend return ntis. Amend return gov/products/naics. Amend return aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Amend return A CD-ROM version with search and retrieval software is also available from NTIS. Amend return    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Amend return Partially nontaxable exchange. Amend 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 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 return A loss is not deductible. Amend return Example 1. Amend 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 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 return However, only $10,000, the cash received, is recognized (included in income). Amend return Example 2. Amend 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 return Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Amend return Example 3. Amend return Assume in Example 1 that the FMV of the land you received was only $15,000. Amend return Your $5,000 loss is not recognized. Amend return Unlike property given up. Amend 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 return The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Amend return Like-kind exchanges between related persons. Amend return   Special rules apply to like-kind exchanges between related persons. Amend return These rules affect both direct and indirect exchanges. Amend 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 return The gain or loss on the original exchange must be recognized as of the date of the later disposition. Amend 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 return Related persons. Amend return   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Amend 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 return   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Amend return Example. Amend return You used a grey pickup truck in your farming business. Amend return Your sister used a red pickup truck in her landscaping business. Amend return In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Amend return At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Amend return The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Amend 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 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 return However, because this was a like-kind exchange, you recognized no gain. Amend 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 return She recognized gain only to the extent of the money she received, $200. Amend 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 return In 2013, you sold the red pickup truck to a third party for $7,000. Amend return Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Amend return On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Amend 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 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 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 return Exceptions to the rules for related persons. Amend return   The following property dispositions are excluded from these rules. Amend return Dispositions due to the death of either related person. Amend return Involuntary conversions. Amend 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 return Multiple property exchanges. Amend 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 return However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Amend return Transfer and receive properties in two or more exchange groups. Amend return Transfer or receive more than one property within a single exchange group. Amend return   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Amend return Deferred exchange. Amend return   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Amend 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 return The property you receive is replacement property. Amend 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 return In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Amend return   For more information see Deferred Exchanges in chapter 1 of Publication 544. Amend 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 return This rule does not apply if the recipient is a nonresident alien. Amend 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 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 return The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Amend 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 return This rule applies for determining loss as well as gain. Amend return Any gain recognized on a transfer in trust increases the basis. Amend return For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Amend 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 return You may also have a capital gain if your section 1231 transactions result in a net gain. Amend return See Section 1231 Gains and Losses in  chapter 9. Amend 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 return Your net capital gains may be taxed at a lower tax rate than ordinary income. Amend return See Capital Gains Tax Rates , later. Amend return Your deduction for a net capital loss may be limited. Amend return See Treatment of Capital Losses , later. Amend return Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Amend return The following items are examples of capital assets. Amend return A home owned and occupied by you and your family. Amend return Household furnishings. Amend return A car used for pleasure. Amend 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 return Stocks and bonds. Amend return However, there are special rules for gains on qualified small business stock. Amend 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 return Personal-use property. Amend return   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Amend return Loss from the sale or exchange of personal-use property is not deductible. Amend return You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Amend return For information on casualties and thefts, see chapter 11. Amend 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 return The time you own an asset before disposing of it is the holding period. Amend return If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Amend return Report it in Part I of Schedule D (Form 1040). Amend return If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Amend return Report it in Part II of Schedule D (Form 1040). Amend return Holding period. Amend return   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Amend return The day you disposed of the property is part of your holding period. Amend return Example. Amend return If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Amend 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 return Inherited property. Amend 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 return This rule does not apply to livestock used in a farm business. Amend return See Holding period under Livestock , later. Amend return Nonbusiness bad debt. Amend return   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Amend return See chapter 4 of Publication 550. Amend return Nontaxable exchange. Amend 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 return That is, it begins on the same day as your holding period for the old property. Amend return Gift. Amend 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 return Real property. Amend 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 return   However, taking possession of real property under an option agreement is not enough to start the holding period. Amend return The holding period cannot start until there is an actual contract of sale. Amend return The holding period of the seller cannot end before that time. Amend 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 return Net short-term capital gain or loss. Amend return   Combine your short-term capital gains and losses. Amend return Do this by adding all of your short-term capital gains. Amend return Then add all of your short-term capital losses. Amend return Subtract the lesser total from the greater. Amend return The difference is your net short-term capital gain or loss. Amend return Net long-term capital gain or loss. Amend return   Follow the same steps to combine your long-term capital gains and losses. Amend return The result is your net long-term capital gain or loss. Amend return Net gain. Amend return   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Amend 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 return See Capital Gains Tax Rates , later. Amend return Net loss. Amend return   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Amend return But there are limits on how much loss you can deduct and when you can deduct it. Amend return See Treatment of Capital Losses next. Amend 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 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 return If your other income is low, you may not be able to use the full $3,000. Amend return The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Amend return Capital loss carryover. Amend return   Generally, you have a capital loss carryover if either of the following situations applies to you. Amend return Your net loss on Schedule D (Form 1040), is more than the yearly limit. Amend return Your taxable income without your deduction for exemptions is less than zero. Amend 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 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 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 return These lower rates are called the maximum capital gains rates. Amend 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 return See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Amend return Also see Publication 550. Amend return Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Amend return A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Amend return Property held for sale in the ordinary course of your farm business. Amend return   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Amend 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 return The treatment of this property is discussed in chapter 3. Amend return Land and depreciable properties. Amend return   Land and depreciable property you use in farming are not capital assets. Amend return Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Amend 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 return The sales of these business assets are reported on Form 4797. Amend return See chapter 9 for more information. Amend 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 return Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Amend 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 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 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 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 return Hedging transactions. Amend return Transactions that are not hedging transactions. Amend 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 return There is a limit on the amount of capital losses you can deduct each year. Amend return Hedging transactions are not subject to the mark-to-market rules. Amend 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 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 return The gain or loss on the termination of these hedges is generally ordinary gain or loss. Amend 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 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 return Examples include fuel and feed. Amend 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 return Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Amend return It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Amend return Retain the identification of each hedging transaction with your books and records. Amend return Also, identify the item(s) or aggregate risk that is being hedged in your records. Amend 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 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 return Accounting methods for hedging transactions. Amend return   The accounting method you use for a hedging transaction must clearly reflect income. Amend 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 return There are requirements and limits on the method you can use for certain hedging transactions. Amend return See Regulations section 1. Amend return 446-4(e) for those requirements and limits. Amend 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 return Cash method. Amend return Farm-price method. Amend return Unit-livestock-price method. Amend return   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Amend return   Your books and records must describe the accounting method used for each type of hedging transaction. Amend return They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Amend return You must make the additional identification no more than 35 days after entering into the hedging transaction. Amend return Example of a hedging transaction. Amend return   You file your income tax returns on the cash method. Amend return On July 2 you anticipate a yield of 50,000 bushels of corn this year. Amend return The December futures price is $5. Amend return 75 a bushel, but there are indications that by harvest time the price will drop. Amend return To protect yourself against a drop in the price, you enter into the following hedging transaction. Amend return You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Amend return 75 a bushel. Amend return   The price did not drop as anticipated but rose to $6 a bushel. Amend return In November, you sell your crop at a local elevator for $6 a bushel. Amend return You also close out your futures position by buying ten December contracts for $6 a bushel. Amend 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 return   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Amend return Your loss on the hedge is 25 cents a bushel. Amend return In effect, the net selling price of your corn is $5. Amend return 75 a bushel. Amend return   Report the results of your futures transactions and your sale of corn separately on Schedule F. Amend return See the instructions for the 2013 Schedule F (Form 1040). Amend return   The loss on your futures transactions is $13,900, figured as follows. Amend return July 2 - Sold December corn futures (50,000 bu. Amend return @$5. Amend return 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Amend 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 return   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Amend return × $6). Amend return Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Amend return   Assume you were right and the price went down 25 cents a bushel. Amend return In effect, you would still net $5. Amend return 75 a bushel, figured as follows. Amend return Sold cash corn, per bushel $5. Amend return 50 Gain on hedge, per bushel . Amend return 25 Net price, per bushel $5. Amend return 75       The gain on your futures transactions would have been $11,100, figured as follows. Amend return July 2 - Sold December corn futures (50,000 bu. Amend return @$5. Amend return 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Amend return @$5. Amend 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 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 return Livestock This part discusses the sale or exchange of livestock used in your farm business. Amend return Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Amend return However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Amend return See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Amend return The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Amend return The sale of this livestock is reported on Schedule F. Amend return See chapter 3. Amend return Also, special rules apply to sales or exchanges caused by weather-related conditions. Amend return See chapter 3. Amend return Holding period. Amend 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 return Livestock. Amend return   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Amend 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 return Livestock used in farm business. Amend return   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Amend return The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Amend 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 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 return Example 1. Amend return You discover an animal that you intend to use for breeding purposes is sterile. Amend return You dispose of it within a reasonable time. Amend return This animal was held for breeding purposes. Amend return Example 2. Amend 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 return These young animals were held for breeding or dairy purposes. Amend 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 return See Sales Caused by Weather-Related Conditions in chapter 3. Amend return Example 3. Amend return You are in the business of raising hogs for slaughter. Amend return Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Amend return You sell the brood sows after obtaining the litter. Amend 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 return Example 4. Amend return You are in the business of raising registered cattle for sale to others for use as breeding cattle. Amend return The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Amend return Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Amend return Such use does not demonstrate that you are holding the cattle for breeding purposes. Amend 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 return The same applies to hog and sheep breeders. Amend return Example 5. Amend return You breed, raise, and train horses for racing purposes. Amend return Every year you cull horses from your racing stable. Amend 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 return These horses are all considered held for sporting purposes. Amend return Figuring gain or loss on the cash method. Amend 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 return Raised livestock. Amend return   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Amend return Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Amend 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 return However, see Uniform Capitalization Rules in chapter 6. Amend return Purchased livestock. Amend return   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Amend return Example. Amend return A farmer sold a breeding cow on January 8, 2013, for $1,250. Amend return Expenses of the sale were $125. Amend return The cow was bought July 2, 2009, for $1,300. Amend return Depreciation (not less than the amount allowable) was $867. Amend 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 return Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Amend return Any loss on the disposition of such property is treated as a long-term capital loss. Amend return Converted wetland. Amend return   This is generally land that was drained or filled to make the production of agricultural commodities possible. Amend 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 return   A wetland (before conversion) is land that meets all the following conditions. Amend 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 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 return It supports, under normal circumstances, mostly plants that grow in saturated soil. Amend return Highly erodible cropland. Amend return   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Amend 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 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 return Successor. Amend 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 return Timber Standing timber you held as investment property is a capital asset. Amend return Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Amend return If you held the timber primarily for sale to customers, it is not a capital asset. Amend return Gain or loss on its sale is ordinary business income or loss. Amend return It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Amend return See the Instructions for Schedule F (Form 1040). Amend 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 return Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Amend return , are ordinary farm income and expenses reported on Schedule F. Amend 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 return Timber considered cut. Amend 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 return This is true whether the timber is cut under contract or whether you cut it yourself. Amend return Christmas trees. Amend 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 return They qualify for both rules discussed below. Amend return Election to treat cutting as a sale or exchange. Amend return   Under the general rule, the cutting of timber results in no gain or loss. Amend return It is not until a sale or exchange occurs that gain or loss is realized. Amend 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 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 return Any later sale results in ordinary business income or loss. Amend return See the example below. Amend 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 return Making the election. Amend 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 return You do not have to make the election in the first year you cut the timber. Amend return You can make it in any year to which the election would apply. Amend return If the timber is partnership property, the election is made on the partnership return. Amend return This election cannot be made on an amended return. Amend return   Once you have made the election, it remains in effect for all later years unless you revoke it. Amend return Election under section 631(a) may be revoked. Amend 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 return The prior election (and revocation) is disregarded for purposes of making a subsequent election. Amend return See Form T (Timber), Forest Activities Schedule, for more information. Amend return Gain or loss. Amend 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 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 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 return 611-3. Amend return   Depletion of timber is discussed in chapter 7. Amend return Example. Amend return   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Amend return It had an adjusted basis for depletion of $40 per MBF. Amend return You are a calendar year taxpayer. Amend return On January 1, 2013, the timber had a FMV of $350 per MBF. Amend return It was cut in April for sale. Amend return On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Amend return You report the difference between the FMV and your adjusted basis for depletion as a gain. Amend 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 return You figure your gain as follows. Amend 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 return Outright sales of timber. Amend 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 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 return Cutting contract. Amend 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 return You are the owner of the timber. Amend return You held the timber longer than 1 year before its disposal. Amend return You kept an economic interest in the timber. Amend 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 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 return Include this amount on Form 4797 along with your other section 1231 gains or losses. Amend return Date of disposal. Amend return   The date of disposal is the date the timber is cut. Amend 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 return   This election applies only to figure the holding period of the timber. Amend return It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Amend 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 return The statement must identify the advance payments subject to the election and the contract under which they were made. Amend 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 return Attach the statement to the amended return and write “Filed pursuant to section 301. Amend return 9100-2” at the top of the statement. Amend return File the amended return at the same address the original return was filed. Amend return Owner. Amend 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 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 return Tree stumps. Amend 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 return Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Amend 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 return Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Amend return   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Amend 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 return If you have a gain from the sale, you may be allowed to exclude the gain on your home. Amend return For more information, see Publication 523, Selling Your Home. Amend return The gain on the sale of your business property is taxable. Amend return A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Amend 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 return See chapter 9. Amend return Losses from personal-use property, other than casualty or theft losses, are not deductible. Amend 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 return See chapter 10 for information about installment sales. Amend return When you sell your farm, the gain or loss on each asset is figured separately. Amend return The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Amend return Each of the assets sold must be classified as one of the following. Amend return Capital asset held 1 year or less. Amend return Capital asset held longer than 1 year. Amend 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 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 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 return Allocation of consideration paid for a farm. Amend return   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Amend return The residual method is required only if the group of assets sold constitutes a trade or business. Amend return This method determines gain or loss from the transfer of each asset. Amend return It also determines the buyer's basis in the business assets. Amend return For more information, see Sale of a Business in chapter 2 of Publication 544. Amend return Property used in farm operation. Amend 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 return Recognized gains and losses on business property must be reported on your return for the year of the sale. Amend return If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Amend return Example. Amend return You sell your farm, including your main home, which you have owned since December 2001. Amend return You realize gain on the sale as follows. Amend 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 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 return Treat the balance as section 1231 gain. Amend 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 return Partial sale. Amend 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 return You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Amend return For a detailed discussion on installment sales, see Publication 544. Amend return Adjusted basis of the part sold. Amend 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 return , on the part sold. Amend 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 return Example. Amend return You bought a 600-acre farm for $700,000. Amend return The farm included land and buildings. Amend return The purchase contract designated $600,000 of the purchase price to the land. Amend return You later sold 60 acres of land on which you had installed a fence. Amend 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 return Use this amount to determine your gain or loss on the sale of the 60 acres. Amend return Assessed values for local property taxes. Amend 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 return Example. Amend return Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Amend 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 return The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Amend return Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Amend return The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Amend return Sale of your home. Amend return   Your home is a capital asset and not property used in the trade or business of farming. Amend 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 return Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Amend 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 return For more information on basis, see chapter 6. Amend return More information. Amend return   For more information on selling your home, see Publication 523. Amend return Gain from condemnation. Amend 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 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 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 return The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Amend return This is true even if you voluntarily return the property to the lender. Amend return You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Amend return Buyer's (borrower's) gain or loss. Amend 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 return The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Amend return See Determining Gain or Loss , earlier. Amend return Worksheet 8-1. Amend return Worksheet for Foreclosures andRepossessions Part 1. Amend return Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Amend return Complete this part only if you were personally liable for the debt. Amend return Otherwise, go to Part 2. Amend return   1. Amend 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 return Enter the Fair Market Value of the transferred property   3. Amend return Ordinary income from cancellation of debt upon foreclosure or repossession. Amend return * Subtract line 2 from line 1. Amend return If zero or less, enter -0-   Part 2. Amend return Figure your gain or loss from foreclosure or repossession. Amend return   4. Amend return If you completed Part 1, enter the smaller of line 1 or line 2. Amend return If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Amend return Enter any proceeds you received from the foreclosure sale   6. Amend return Add lines 4 and 5   7. Amend return Enter the adjusted basis of the transferred property   8. Amend return Gain or loss from foreclosure or repossession. Amend return Subtract line 7  from line 6   * The income may not be taxable. Amend return See Cancellation of debt . Amend return    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Amend return Amount realized on a nonrecourse debt. Amend 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 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 return Example 1. Amend return Ann paid $200,000 for land used in her farming business. Amend return She paid $15,000 down and borrowed the remaining $185,000 from a bank. Amend return Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Amend return The bank foreclosed on the loan 2 years after Ann stopped making payments. Amend return When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Amend return The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Amend 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 return She has a $20,000 deductible loss. Amend return Example 2. Amend return Assume the same facts as in Example 1 except the FMV of the land was $210,000. Amend return The result is the same. Amend return The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Amend 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 return Amount realized on a recourse debt. Amend 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 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 return The amount realized does not include the canceled debt that is your income from cancellation of debt. Amend return See Cancellation of debt , later. Amend return Example 3. Amend return Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Amend return In this case, the amount she realizes is $170,000. Amend return This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Amend return Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Amend return She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Amend return She is also treated as receiving ordinary income from cancellation of debt. Amend return That income is $10,000 ($180,000 − $170,000). Amend return This is the part of the canceled debt not included in the amount realized. Amend return She reports this as other income on Schedule F, line 8. Amend return Seller's (lender's) gain or loss on repossession. Amend 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 return For more information, see Repossession in Publication 537, Installment Sales. Amend return Cancellation of debt. Amend 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 return This income is separate from any gain or loss realized from the foreclosure or repossession. Amend return Report the income from cancellation of a business debt on Schedule F, line 8. Amend return Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Amend return    You can use Worksheet 8-1 to figure your income from cancellation of debt. Amend return   However, income from cancellation of debt is not taxed if any of the following apply. Amend return The cancellation is intended as a gift. Amend return The debt is qualified farm debt (see chapter 3). Amend return The debt is qualified real property business debt (see chapter 5 of Publication 334). Amend return You are insolvent or bankrupt (see  chapter 3). Amend return The debt is qualified principal residence indebtedness (see chapter 3). Amend return   Use Form 982 to report the income exclusion. Amend return Abandonment The abandonment of property is a disposition of property. Amend 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 return Business or investment property. Amend return   Loss from abandonment of business or investment property is deductible as a loss. Amend return Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Amend return If your adjusted basis is more than the amount you realize (if any), then you have a loss. Amend return If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Amend return This rule also applies to leasehold improvements the lessor made for the lessee. Amend 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 return   If the abandoned property is secured by debt, special rules apply. Amend 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 return For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Amend return The abandonment loss is deducted in the tax year in which the loss is sustained. Amend return Report the loss on Form 4797, Part II, line 10. Amend return Personal-use property. Amend return   You cannot deduct any loss from abandonment of your home or other property held for personal use. Amend return Canceled debt. Amend 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 return This income is separate from any loss realized from abandonment of the property. Amend return Report income from cancellation of a debt related to a business or rental activity as business or rental income. Amend return Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Amend return   However, income from cancellation of debt is not taxed in certain circumstances. Amend return See Cancellation of debt earlier under Foreclosure or Repossession . Amend return Forms 1099-A and 1099-C. Amend 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 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 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 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 return Prev  Up  Next   Home   More Online Publications
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National Institute of Food and Agriculture

The National Institute of Food and Agriculture is a research and grant-making organization focused on agricultural issues. To find your local Cooperative Extension office, consult the county government listings in your local telephone directory.

Contact the Agency or Department

Website: National Institute of Food and Agriculture Extension Research and Learning

Address: 1400 Independence Ave., SW
Mail Stop 2215

Washington, DC 20250-2215

Phone Number: (202) 720-7947

The Amend Return

Amend return Publication 225 - Introductory Material Table of Contents IntroductionOrdering forms and publications. Amend return Tax questions. Amend return Future Developments What's New for 2013 What's New for 2014 Reminders Introduction You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. Amend return A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Amend return It also includes plantations, ranches, ranges, and orchards. Amend return This publication explains how the federal tax laws apply to farming. Amend return Use this publication as a guide to figure your taxes and complete your farm tax return. Amend return If you need more information on a subject, get the specific IRS tax publication covering that subject. Amend return We refer to many of these free publications throughout this publication. Amend return See chapter 16 for information on ordering these publications. Amend return The explanations and examples in this publication reflect the Internal Revenue Service's interpretation of tax laws enacted by Congress, Treasury regulations, and court decisions. Amend return However, the information given does not cover every situation and is not intended to replace the law or change its meaning. Amend return This publication covers subjects on which a court may have made a decision more favorable to taxpayers than the interpretation of the Service. Amend return Until these differing interpretations are resolved by higher court decisions, or in some other way, this publication will continue to present the interpretation of the Service. Amend return The IRS Mission. Amend return   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Amend return Comments and suggestions. Amend return   We welcome your comments about this publication and your suggestions for future editions. Amend return   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Amend return NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Amend return Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Amend return   You can email us at taxforms@irs. Amend return gov. Amend return Please put “Publications Comment” on the subject line. Amend return You can also send us comments from www. Amend return irs. Amend return gov/formspubs/, select “Comment on Tax Forms and Publications” under “More Information. Amend return ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Amend return Ordering forms and publications. Amend return   Visit www. Amend return irs. Amend return gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Amend return Internal Revenue Service 1201 N. Amend return Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Amend return   If you have a tax question, check the information available on IRS. Amend return gov or call 1-800-829-1040. Amend return We cannot answer tax questions sent to either of the above addresses. Amend return Comments on IRS enforcement actions. Amend return   The Small Business and Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were established to receive comments from small business about federal agency enforcement actions. Amend return The Ombudsman will annually evaluate the enforcement activities of each agency and rate its responsiveness to small business. Amend return If you wish to comment on the enforcement actions of the IRS, you can: Call 1-888-734-3247, Fax your comments to 202-481-5719, Write to Office of the National Ombudsman U. Amend return S. Amend return Small Business Administration 409 3rd Street, S. Amend return W. Amend return  Washington, DC 20416 Send an email to ombudsman@sba. Amend return gov, or Download the appraisal form at  www. Amend return sba. Amend return gov/ombudsman. Amend return Treasury Inspector General for Tax Administration. Amend return   If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (1-800-877-8339 for TTY/TDD users). Amend return You can remain anonymous. Amend return Farm tax classes. Amend return   Many state Cooperative Extension Services conduct farm tax workshops in conjunction with the IRS. Amend return Contact your county extension office for more information. Amend return Rural tax education website. Amend return   The Rural Tax Education website is a source for information concerning agriculturally related income and deductions and self-employment tax. Amend return The website is available for farmers and ranchers, other agricultural producers, Extension educators, and any one interested in learning about the tax side of the agricultural community. Amend return Members of the National Farm Income Tax Extension Committee are contributors for the website and the website is hosted by Utah State University Cooperative Extension. Amend return You can visit the website at www. Amend return ruraltax. Amend return org. Amend return Future Developments The IRS has created a page on IRS. Amend return gov for information about Publication 225, at  www. Amend return irs. Amend return gov/pub225. Amend return Information about recent developments affecting Publication 225 will be posted on that page. Amend return What's New for 2013 The following items highlight a number of administrative and tax law changes for 2013. Amend return They are discussed in more detail throughout the publication. Amend return Standard mileage rate. Amend return  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Amend return 5 cents. Amend return See chapter 4. Amend return Simplified method for business use of home deduction. Amend return  The IRS now provides a simplified method to determine your expenses for business use of your home. Amend return For more information, see Schedule C (Form 1040), Part II, and its instructions. Amend return See chapter 4. Amend return Increased section 179 expense deduction dollar limits. Amend return  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Amend return This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Amend return See chapter 7. Amend return Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Amend return  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Amend return See chapter 7. Amend return Expiration of the 3-year recovery period for certain race horses. Amend return . Amend return  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Amend return See chapter 7. Amend return Tax rates. Amend return  For tax years beginning in 2013, the social security part of the self-employment tax increases from 10. Amend return 4% to 12. Amend return 4%. Amend return As a result, the self-employment tax is increased from 13. Amend return 3% to 15. Amend return 3%. Amend return See chapter 12. Amend return Maximum net earnings. Amend return  The maximum net self-employment earnings subject to the social security part (12. Amend return 4%) of the self-employment tax increased to $113,700 for 2013. Amend return There is no maximum limit on earnings subject to the Medicare part (2. Amend return 9%). Amend return See chapter 12. Amend return Net investment income tax. Amend return  For tax years beginning in 2013, individuals, estates, and trusts may be subject to the net investment income tax (NIIT). Amend return If you are a trader in financial instruments and commodities and required to file Schedule C (Form 1040), your investment income (for purposes of the NIIT) may be reduced by your interest and other investment expenses to the extent those expenses are not used to reduce your self-employment income. Amend return For information about NIIT and the special rule for traders in financial instruments and commodities, see the Instructions for Form 8960. Amend return Social Security and Medicare Tax for 2013. Amend return  The employee tax rate for social security is 6. Amend return 2%. Amend return The employer tax rate for social security remains unchanged at 6. Amend return 2%. Amend return The social security wage base limit is $113,700. Amend return The Medicare tax rate is 1. Amend return 45% each for the employee and employer, unchanged from 2012. Amend return There is no wage base limit for Medicare tax. Amend return See chapter 13. Amend return Additional Medicare Tax. Amend return  For tax years beginning in 2013, a 0. Amend return 9% Additional Medicare Tax applies to your Medicare wages, Railroad Tax Act (RRTA) compensation, and self-employment income above a threshold amount. Amend return Use Form 8959, Additional Medicare Tax, to figure this tax. Amend return For more information, see the Instructions for Form 8959 and the Instructions for Schedule SE (Form 1040). Amend return In addition to withholding Medicare tax at 1. Amend return 45%, you must withhold a 0. Amend return 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Amend return You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Amend return Additional Medicare Tax is only imposed on the employee. Amend return There is no employer share of Additional Medicare Tax. Amend return All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Amend return For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E), Employer's Tax Guide. Amend return For more information on Additional Medicare Tax, visit IRS. Amend return gov and enter “Additional Medicare Tax” in the search box. Amend return See chapter 13. Amend return Leave-Based donation programs to aid victims of Hurricane Sandy. Amend return  Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2014, to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy. Amend return The donated leave will not be included in the income or wages of the employee. Amend return The employer may deduct the cash payments as business expenses or charitable contributions. Amend return See chapter 13. Amend return Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans extended. Amend return  The work opportunity tax credit is now available for eligible unemployed veterans who begin work before January 1, 2014. Amend return Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Amend return For more information, visit IRS. Amend return gov and enter “work opportunity credit” in the search box. Amend return See chapter 13. Amend return Estimated tax. Amend return  For tax years beginning in 2013, the Net Investment Income Tax (NIIT) may need to be included when calculating your estimated tax. Amend return Also, when figuring your estimated tax, you may need to include the 0. Amend return 9% Additional Medicare Tax applicable to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above the threshold amount based on your filing status. Amend return For more information, see Publication 505. Amend return What's New for 2014 Maximum net earnings. Amend return  The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2014 will be discussed in the 2013 Publication 334. Amend return See chapter 12. Amend return Social security and Medicare tax for 2014. Amend return  The employee and employer tax rates for social security and the maximum amount of wages subject to social security tax for 2014 will be discussed in Publication 51 (Circular A), Agricultural Employer's Tax Guide (For use in 2014). Amend return The Medicare tax rate for 2014 will also be discussed in Publication 51 (Circular A) (For use in 2014). Amend return There is no limit on the amount of wages subject to Medicare tax. Amend return See chapter 13. Amend return Reminders The following reminders and other items may help you file your tax return. Amend return   IRS e-file (Electronic Filing) You can file your tax returns electronically using an IRS e-file option. Amend return The benefits of IRS e-file include faster refunds, increased accuracy, and acknowledgment of IRS receipt of your return. Amend return You can use one of the following IRS e-file options. Amend return Use an authorized IRS e-file provider. Amend return Use a personal computer. Amend return Visit a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) site. Amend return For details on these fast filing methods, see your income tax package. Amend return Principal agricultural activity codes. Amend return  You must enter on line B of Schedule F (Form 1040) a code that identifies your principal agricultural activity. Amend return It is important to use the correct code because this information will identify market segments of the public for IRS Taxpayer Education programs. Amend return The U. Amend return S. Amend return Census Bureau also uses this information for its economic census. Amend return See the list of Principal Agricultural Activity Codes on page 2 of Schedule F (Form 1040). Amend return Publication on employer identification numbers (EIN). Amend return  Publication 1635, Understanding Your Employer Identification Number, provides general information on employer identification numbers. Amend return Topics include how to apply for an EIN and how to complete Form SS-4. Amend return Change of address. Amend return  If you change your home address, you should use Form 8822, Change of Addres, to notify the IRS. Amend return If you change your business address, you should use Form 8822-B, Change of Address or Responsible Party — Business, to notify the IRS. Amend return Be sure to include your suite, room, or other unit number. Amend return Reportable transactions. Amend return  You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. Amend return You may have to pay a penalty if you are required to file Form 8886 but do not do so. Amend return Reportable transactions include (1) transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, (2) transactions offered to you under conditions of confidentiality and for which you paid an advisor a minimum fee, (3) transactions for which you have or a related party has a right to a full or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained, (4) transactions that result in losses of at least $2 million in any single year or $4 million in any combination of years, and (5) transactions with asset holding periods of 45 days or less and that result in a tax credit of more than $250,000. Amend return For more information, see the Instructions for Form 8886. Amend return Form W-4 for 2014. Amend return  You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2014. Amend return Those employees who owed a large amount of tax or received a large refund for 2013 may need to submit a new Form W-4. Amend return See Publication 919, How Do I Adjust My Tax Withholding. Amend return Form 1099-MISC. Amend return  Generally, file Form 1099-MISC if you pay at least $600 in rents, services, and other miscellaneous payments in your farming business to an individual (for example, an accountant, an attorney, or a veterinarian) who is not your employee. Amend return Limited Liability Company (LLC). Amend return  For purposes of this publication, a limited liability company (LLC) is a business entity organized in the United States under state law. Amend return Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. Amend return An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner by applying the rules in Regulations section 301. Amend return 7701-3. Amend return See Publication 3402 for more details. Amend return Photographs of missing children. Amend return  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Amend return Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Amend return You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Amend return Prev  Up  Next   Home   More Online Publications