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Amended Return Instructions

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Amended Return Instructions

Amended return instructions 2. Amended return instructions   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. Amended return instructions You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Amended return instructions Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Amended return instructions You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Amended return instructions You can deduct depreciation only on the part of your property used for rental purposes. Amended return instructions Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Amended return instructions You may have to use Form 4562 to figure and report your depreciation. Amended return instructions See Which Forms To Use in chapter 3. Amended return instructions Also see Publication 946. Amended return instructions Section 179 deduction. Amended return instructions   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. Amended return instructions This deduction is not allowed for property used in connection with residential rental property. Amended return instructions See chapter 2 of Publication 946. Amended return instructions Alternative minimum tax (AMT). Amended return instructions   If you use accelerated depreciation, you may be subject to the AMT. Amended return instructions Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Amended return instructions   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Amended return instructions However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Amended return instructions   To find out if you are subject to the AMT, see the Instructions for Form 6251. Amended return instructions The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. Amended return instructions What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Amended return instructions You own the property. Amended return instructions You use the property in your business or income-producing activity (such as rental property). Amended return instructions The property has a determinable useful life. Amended return instructions The property is expected to last more than one year. Amended return instructions Property you own. Amended return instructions   To claim depreciation, you usually must be the owner of the property. Amended return instructions You are considered as owning property even if it is subject to a debt. Amended return instructions Rented property. Amended return instructions   Generally, if you pay rent for property, you cannot depreciate that property. Amended return instructions Usually, only the owner can depreciate it. Amended return instructions However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Amended return instructions See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Amended return instructions Cooperative apartments. Amended return instructions   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. Amended return instructions See chapter 4, Special Situations. Amended return instructions Property having a determinable useful life. Amended return instructions   To be depreciable, your property must have a determinable useful life. Amended return instructions This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Amended return instructions What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Amended return instructions This includes land and certain excepted property. Amended return instructions Land. Amended return instructions   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Amended return instructions But if it does, the loss is accounted for upon disposition. Amended return instructions The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Amended return instructions   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Amended return instructions These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Amended return instructions Example. Amended return instructions You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Amended return instructions Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Amended return instructions If you replace the house, you would have to destroy the bushes and trees right next to it. Amended return instructions These bushes and trees are closely associated with the house, so they have a determinable useful life. Amended return instructions Therefore, you can depreciate them. Amended return instructions Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Amended return instructions Excepted property. Amended return instructions   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Amended return instructions Property placed in service and disposed of (or taken out of business use) in the same year. Amended return instructions Equipment used to build capital improvements. Amended return instructions You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Amended return instructions For more information, see chapter 1 of Publication 946. Amended return instructions When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Amended return instructions You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. Amended return instructions Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. Amended return instructions Even if you are not using the property, it is in service when it is ready and available for its specific use. Amended return instructions Example 1. Amended return instructions On November 22 of last year, you purchased a dishwasher for your rental property. Amended return instructions The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Amended return instructions Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Amended return instructions If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. Amended return instructions Example 2. Amended return instructions On April 6, you purchased a house to use as residential rental property. Amended return instructions You made extensive repairs to the house and had it ready for rent on July 5. Amended return instructions You began to advertise the house for rent in July and actually rented it beginning September 1. Amended return instructions The house is considered placed in service in July when it was ready and available for rent. Amended return instructions You can begin to depreciate the house in July. Amended return instructions Example 3. Amended return instructions You moved from your home in July. Amended return instructions During August and September you made several repairs to the house. Amended return instructions On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Amended return instructions The property is considered placed in service on October 1, the date when it was available for rent. Amended return instructions Conversion to business use. Amended return instructions   If you place property in service in a personal activity, you cannot claim depreciation. Amended return instructions However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. Amended return instructions You place the property in service for business or income-producing use on the date of the change. Amended return instructions Example. Amended return instructions You bought a house and used it as your personal home several years before you converted it to rental property. Amended return instructions Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Amended return instructions You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. Amended return instructions Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). Amended return instructions For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. Amended return instructions Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. Amended return instructions For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Amended return instructions See Basis of Depreciable Property , later. Amended return instructions Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Amended return instructions You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Amended return instructions You sell or exchange the property. Amended return instructions You convert the property to personal use. Amended return instructions You abandon the property. Amended return instructions The property is destroyed. Amended return instructions Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Amended return instructions If you placed rental property in service before 1987, you are using one of the following methods. Amended return instructions ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Amended return instructions Straight line or declining balance method over the useful life of property placed in service before 1981. Amended return instructions See MACRS Depreciation , later, for more information. Amended return instructions Rental property placed in service before 2013. Amended return instructions   Continue to use the same method of figuring depreciation that you used in the past. Amended return instructions Use of real property changed. Amended return instructions   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Amended return instructions This includes your residence that you changed to rental use. Amended return instructions See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Amended return instructions Improvements made after 1986. Amended return instructions   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Amended return instructions As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Amended return instructions For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Amended return instructions This publication discusses MACRS depreciation only. Amended return instructions If you need information about depreciating property placed in service before 1987, see Publication 534. Amended return instructions Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. Amended return instructions This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. Amended return instructions If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. Amended return instructions Basis and adjusted basis are explained in the following discussions. Amended return instructions If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. Amended return instructions See Basis of Property Changed to Rental Use in chapter 4. Amended return instructions Cost Basis The basis of property you buy is usually its cost. Amended return instructions The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Amended return instructions Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. Amended return instructions Exception. Amended return instructions   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. Amended return instructions Such taxes were deductible before 1987 and after 2003. Amended return instructions Loans with low or no interest. Amended return instructions   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. Amended return instructions See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Amended return instructions Real property. Amended return instructions   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. Amended return instructions Real estate taxes. Amended return instructions   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. Amended return instructions You cannot deduct them as taxes paid. Amended return instructions   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Amended return instructions Do not include that amount in your basis in the property. Amended return instructions Settlement fees and other costs. Amended return instructions   The following settlement fees and closing costs for buying the property are part of your basis in the property. Amended return instructions Abstract fees. Amended return instructions Charges for installing utility services. Amended return instructions Legal fees. Amended return instructions Recording fees. Amended return instructions Surveys. Amended return instructions Transfer taxes. Amended return instructions Title insurance. Amended return instructions Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Amended return instructions   The following are settlement fees and closing costs you cannot include in your basis in the property. Amended return instructions Fire insurance premiums. Amended return instructions Rent or other charges relating to occupancy of the property before closing. Amended return instructions Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. Amended return instructions   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Amended return instructions Assumption of a mortgage. Amended return instructions   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. Amended return instructions Example. Amended return instructions You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Amended return instructions Your basis is $300,000. Amended return instructions Separating cost of land and buildings. Amended return instructions   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. Amended return instructions The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. Amended return instructions   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. Amended return instructions Example. Amended return instructions You buy a house and land for $200,000. Amended return instructions The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Amended return instructions The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. Amended return instructions You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. Amended return instructions Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). Amended return instructions Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. Amended return instructions If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Amended return instructions Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. Amended return instructions The result of these adjustments to the basis is the adjusted basis. Amended return instructions Increases to basis. Amended return instructions   You must increase the basis of any property by the cost of all items properly added to a capital account. Amended return instructions These include the following. Amended return instructions The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. Amended return instructions Amounts spent after a casualty to restore the damaged property. Amended return instructions The cost of extending utility service lines to the property. Amended return instructions Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Amended return instructions Additions or improvements. Amended return instructions   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. Amended return instructions This includes all direct costs, such as material and labor, but does not include your own labor. Amended return instructions It also includes all expenses related to the addition or improvement. Amended return instructions   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. Amended return instructions Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Amended return instructions   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Amended return instructions For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Amended return instructions    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Amended return instructions However, see What Rental Property Cannot Be Depreciated, earlier. Amended return instructions Assessments for local improvements. Amended return instructions   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. Amended return instructions For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. Amended return instructions Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Amended return instructions You cannot deduct these items as taxes or depreciate them. Amended return instructions    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Amended return instructions Do not add them to your basis in the property. Amended return instructions Deducting vs. Amended return instructions capitalizing costs. Amended return instructions   Do not add to your basis costs you can deduct as current expenses. Amended return instructions However, there are certain costs you can choose either to deduct or to capitalize. Amended return instructions If you capitalize these costs, include them in your basis. Amended return instructions If you deduct them, do not include them in your basis. Amended return instructions   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Amended return instructions   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Amended return instructions Decreases to basis. Amended return instructions   You must decrease the basis of your property by any items that represent a return of your cost. Amended return instructions These include the following. Amended return instructions Insurance or other payment you receive as the result of a casualty or theft loss. Amended return instructions Casualty loss not covered by insurance for which you took a deduction. Amended return instructions Amount(s) you receive for granting an easement. Amended return instructions Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. Amended return instructions Exclusion from income of subsidies for energy conservation measures. Amended return instructions Special depreciation allowance claimed on qualified property. Amended return instructions Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Amended return instructions If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Amended return instructions   If your rental property was previously used as your main home, you must also decrease the basis by the following. Amended return instructions Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Amended return instructions District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Amended return instructions Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Amended return instructions Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Amended return instructions This allowance is figured before you figure your regular depreciation deduction. Amended return instructions See Publication 946, chapter 3, for details. Amended return instructions Also see the Instructions for Form 4562, Line 14. Amended return instructions If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Amended return instructions The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Amended return instructions MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Amended return instructions This section explains how to determine which MACRS depreciation system applies to your property. Amended return instructions It also discusses other information you need to know before you can figure depreciation under MACRS. Amended return instructions This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Amended return instructions Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Amended return instructions You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Amended return instructions Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. Amended return instructions In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. Amended return instructions However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. Amended return instructions For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Amended return instructions Electing ADS If you choose, you can use the ADS method for most property. Amended return instructions Under ADS, you use the straight line method of depreciation. Amended return instructions The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. Amended return instructions However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Amended return instructions If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. Amended return instructions Once you make this election, you can never revoke it. Amended return instructions For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. Amended return instructions Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. Amended return instructions The property class generally determines the depreciation method, recovery period, and convention. Amended return instructions The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. Amended return instructions Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Amended return instructions 5-year property. Amended return instructions This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Amended return instructions ), automobiles, and light trucks. Amended return instructions This class also includes appliances, carpeting, furniture, etc. Amended return instructions , used in a residential rental real estate activity. Amended return instructions Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. Amended return instructions See chapter 5 of Publication 946. Amended return instructions 7-year property. Amended return instructions This class includes office furniture and equipment (desks, file cabinets, etc. Amended return instructions ). Amended return instructions This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. Amended return instructions 15-year property. Amended return instructions This class includes roads, fences, and shrubbery (if depreciable). Amended return instructions Residential rental property. Amended return instructions This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. Amended return instructions It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. Amended return instructions If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. Amended return instructions The other property classes do not generally apply to property used in rental activities. Amended return instructions These classes are not discussed in this publication. Amended return instructions See Publication 946 for more information. Amended return instructions Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Amended return instructions The recovery periods are generally longer under ADS than GDS. Amended return instructions The recovery period of property depends on its property class. Amended return instructions Under GDS, the recovery period of an asset is generally the same as its property class. Amended return instructions Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Amended return instructions See Table 2-1 for recovery periods of property commonly used in residential rental activities. Amended return instructions Qualified Indian reservation property. Amended return instructions   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Amended return instructions For more information, see chapter 4 of Publication 946. Amended return instructions Additions or improvements to property. Amended return instructions   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Amended return instructions   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. Amended return instructions   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. Amended return instructions Example. Amended return instructions You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Amended return instructions You built an addition onto the house and placed it in service in 2013. Amended return instructions You must use MACRS for the addition. Amended return instructions Under GDS, the addition is depreciated as residential rental property over 27. Amended return instructions 5 years. Amended return instructions Table 2-1. Amended return instructions MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. Amended return instructions 27. Amended return instructions 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. Amended return instructions   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Amended return instructions The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Amended return instructions Mid-month convention. Amended return instructions    A mid-month convention is used for all residential rental property and nonresidential real property. Amended return instructions Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. Amended return instructions Mid-quarter convention. Amended return instructions   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. Amended return instructions   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. Amended return instructions Example. Amended return instructions During the tax year, Tom Martin purchased the following items to use in his rental property. Amended return instructions He elects not to claim the special depreciation allowance discussed earlier. Amended return instructions A dishwasher for $400 that he placed in service in January. Amended return instructions Used furniture for $100 that he placed in service in September. Amended return instructions A refrigerator for $800 that he placed in service in October. Amended return instructions Tom uses the calendar year as his tax year. Amended return instructions The total basis of all property placed in service that year is $1,300. Amended return instructions The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Amended return instructions Tom must use the mid-quarter convention instead of the half-year convention for all three items. Amended return instructions Half-year convention. Amended return instructions    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Amended return instructions Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year. Amended return instructions   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. Amended return instructions You deduct a full year of depreciation for any other year during the recovery period. Amended return instructions Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Amended return instructions The deduction is substantially the same both ways. Amended return instructions You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. Amended return instructions In this publication we will use the percentage tables. Amended return instructions For instructions on how to compute the deduction, see chapter 4 of Publication 946. Amended return instructions Residential rental property. Amended return instructions   You must use the straight line method and a mid-month convention for residential rental property. Amended return instructions In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). Amended return instructions 5-, 7-, or 15-year property. Amended return instructions   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Amended return instructions However, in limited cases you must use the mid-quarter convention, if it applies. Amended return instructions For property in the 15-year class, use the 150% declining balance method and a half-year convention. Amended return instructions   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Amended return instructions The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Amended return instructions You make this election on Form 4562. Amended return instructions In Part III, column (f), enter “150 DB. Amended return instructions ” Once you make this election, you cannot change to another method. Amended return instructions   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. Amended return instructions   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. Amended return instructions The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Amended return instructions You elect the straight line method on Form 4562. Amended return instructions In Part III, column (f), enter “S/L. Amended return instructions ” Once you make this election, you cannot change to another method. Amended return instructions MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Amended return instructions The tables show the percentages for the first few years or until the change to the straight line method is made. Amended return instructions See Appendix A of Publication 946 for complete tables. Amended return instructions The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. Amended return instructions If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. Amended return instructions How to use the percentage tables. Amended return instructions   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Amended return instructions   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. Amended return instructions   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. Amended return instructions For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . Amended return instructions See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Amended return instructions Unadjusted basis. Amended return instructions   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. Amended return instructions   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. Amended return instructions For more information, see chapter 4 of Publication 946. Amended return instructions Please click here for the text description of the image. Amended return instructions Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Amended return instructions   The percentages in these tables take into account the half-year and mid-quarter conventions. Amended return instructions Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Amended return instructions Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Amended return instructions If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. Amended return instructions Example 1. Amended return instructions You purchased a stove and refrigerator and placed them in service in June. Amended return instructions Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Amended return instructions Both are 5-year property. Amended return instructions Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Amended return instructions For that year your depreciation deduction is $120 ($600 × . Amended return instructions 20) for the stove and $200 ($1,000 × . Amended return instructions 20) for the refrigerator. Amended return instructions For Year 2, the depreciation percentage is 32%. Amended return instructions That year's depreciation deduction will be $192 ($600 × . Amended return instructions 32) for the stove and $320 ($1,000 × . Amended return instructions 32) for the refrigerator. Amended return instructions Example 2. Amended return instructions Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Amended return instructions Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . Amended return instructions 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Amended return instructions Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. Amended return instructions Your depreciation deduction for the refrigerator is $50 ($1,000 x . Amended return instructions 05). Amended return instructions Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. Amended return instructions For that year, your depreciation deduction for the stove is $150 ($600 x . Amended return instructions 25). Amended return instructions Table 2-2d. Amended return instructions    Use this table when you are using the GDS 27. Amended return instructions 5 year option for residential rental property. Amended return instructions Find the row for the month that you placed the property in service. Amended return instructions Use the percentages listed for that month to figure your depreciation deduction. Amended return instructions The mid-month convention is taken into account in the percentages shown in the table. Amended return instructions Continue to use the same row (month) under the column for the appropriate year. Amended return instructions Example. Amended return instructions You purchased a single family rental house for $185,000 and placed it in service on February 8. Amended return instructions The sales contract showed that the building cost $160,000 and the land cost $25,000. Amended return instructions Your basis for depreciation is its original cost, $160,000. Amended return instructions This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. Amended return instructions 5 years. Amended return instructions Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Amended return instructions 182%. Amended return instructions That year's depreciation deduction is $5,091 ($160,000 x . Amended return instructions 03182). Amended return instructions Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Amended return instructions See Appendix B in Publication 946 for other property. Amended return instructions If your property is not listed in Appendix B, it is considered to have no class life. Amended return instructions Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Amended return instructions Use the mid-month convention for residential rental property and nonresidential real property. Amended return instructions For all other property, use the half-year or mid-quarter convention, as appropriate. Amended return instructions See Publication 946 for ADS depreciation tables. Amended return instructions Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Amended return instructions If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Amended return instructions For more information, see Depreciation under Decreases to Basis in Publication 551. Amended return instructions If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Amended return instructions S. Amended return instructions Individual Income Tax Return. Amended return instructions If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Amended return instructions Filing an amended return. Amended return instructions   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Amended return instructions You claimed the incorrect amount because of a mathematical error made in any year. Amended return instructions You claimed the incorrect amount because of a posting error made in any year. Amended return instructions You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Amended return instructions You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Amended return instructions   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. Amended return instructions This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. Amended return instructions   If an amended return is allowed, you must file it by the later of the following dates. Amended return instructions 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Amended return instructions A return filed before an unextended due date is considered filed on that due date. Amended return instructions 2 years from the time you paid your tax for that year. Amended return instructions Changing your accounting method. Amended return instructions   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Amended return instructions In some instances, that consent is automatic. Amended return instructions For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Amended return instructions Prev  Up  Next   Home   More Online Publications
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The Amended Return Instructions

Amended return instructions 4. Amended return instructions   Reporting Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Information Returns Schedule D and Form 8949Long and Short Term Net Gain or Loss Treatment of Capital Losses Capital Gains Tax Rates Form 4797Mark-to-market election. Amended return instructions Introduction This chapter explains how to report capital gains and losses and ordinary gains and losses from sales, exchanges, and other dispositions of property. Amended return instructions Although this discussion refers to Schedule D (Form 1040) and Form 8949, many of the rules discussed here also apply to taxpayers other than individuals. Amended return instructions However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Amended return instructions Topics - This chapter discusses: Information returns Schedule D (Form 1040) Form 4797 Form 8949 Useful Items - You may want to see: Publication 550 Investment Income and Expenses 537 Installment Sales Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1099-B Proceeds From Broker and Barter Exchange Transactions 1099-S Proceeds From Real Estate Transactions 4684 Casualties and Thefts 4797 Sales of Business Property 6252 Installment Sale Income 6781 Gains and Losses from Section 1256 Contracts and Straddles 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Amended return instructions Information Returns If you sell or exchange certain assets, you should receive an information return showing the proceeds of the sale. Amended return instructions This information is also provided to the IRS. Amended return instructions Form 1099-B. Amended return instructions   If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a substitute statement from the broker. Amended return instructions Use the Form 1099-B or a substitute statement to complete Form 8949 and/or Schedule D. Amended return instructions Whether or not you receive 1099-B, you must report all taxable sales of stock, bonds, commodities, etc. Amended return instructions on Form 8949 and/or Schedule D, as applicable. Amended return instructions For more information on figuring gains and losses from these transactions, see chapter 4 in Publication 550. Amended return instructions For information on reporting the gains and losses, see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Amended return instructions Form 1099-S. Amended return instructions   An information return must be provided on certain real estate transactions. Amended return instructions Generally, the person responsible for closing the transaction (the “real estate reporting person”) must report on Form 1099-S sales or exchanges of the following types of property. Amended return instructions Land (improved or unimproved), including air space. Amended return instructions An inherently permanent structure, including any residential, commercial, or industrial building. Amended return instructions A condominium unit and its related fixtures and common elements (including land). Amended return instructions Stock in a cooperative housing corporation. Amended return instructions If you sold or exchanged any of the above types of property, the “real estate reporting person” must give you a copy of Form 1099-S or a statement containing the same information as the Form 1099-S. Amended return instructions The “real estate reporting person” could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property. Amended return instructions   For more information see chapter 4 in Publication 550. Amended return instructions Also, see the Instructions for Form 8949. Amended return instructions Schedule D and Form 8949 Form 8949. Amended return instructions   Individuals, corporations, and partnerships, use Form 8949 to report the following. Amended return instructions    Sales or exchanges of capital assets, including stocks, bonds, etc. Amended return instructions , and real estate (if not reported on another form or schedule such as Form 4684, 4797, 6252, 6781, or 8824). Amended return instructions Include these transactions even if you did not receive a Form 1099-B or 1099-S. Amended return instructions Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit. Amended return instructions Nonbusiness bad debts. Amended return instructions   Individuals, If you are filing a joint return, complete as many copies of Form 8949 as you need to report all of your and your spouse's transactions. Amended return instructions You and your spouse may list your transactions on separate forms or you may combine them. Amended return instructions However, you must include on your Schedule D the totals from all Forms 8949 for both you and your spouse. Amended return instructions    Corporations and electing large partnerships also use Form 8949 to report their share of gain or loss from a partnership, S Corporation, estate or trust. Amended return instructions   Business entities meeting certain criteria, may have an exception to some of the normal requirements for completing Form 8949. Amended return instructions See the Instructions for Form 8949. Amended return instructions Schedule D. Amended return instructions    Use Schedule D (Form 1040) to figure the overall gain or loss from transactions reported on Form 8949, and to report certain transactions you do not have to report on Form 8949. Amended return instructions Before completing Schedule D, you may have to complete other forms as shown below. Amended return instructions    Complete all applicable lines of Form 8949 before completing lines 1b, 2, 3, 8b, 9, or 10 of your applicable Schedule D. Amended return instructions Enter on Schedule D the combined totals from all your Forms 8949. Amended return instructions For a sale, exchange, or involuntary conversion of business property, complete Form 4797 (discussed later). Amended return instructions For a like-kind exchange, complete Form 8824. Amended return instructions See Reporting the exchange under Like-Kind Exchanges in chapter 1. Amended return instructions For an installment sale, complete Form 6252. Amended return instructions See Publication 537. Amended return instructions For an involuntary conversion due to casualty or theft, complete Form 4684. Amended return instructions See Publication 547, Casualties, Disasters, and Thefts. Amended return instructions For a disposition of an interest in, or property used in, an activity to which the at-risk rules apply, complete Form 6198, At-Risk Limitations. Amended return instructions See Publication 925, Passive Activity and At-Risk Rules. Amended return instructions For a disposition of an interest in, or property used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations. Amended return instructions See Publication 925. Amended return instructions For gains and losses from section 1256 contracts and straddles, complete Form 6781. Amended return instructions See Publication 550. Amended return instructions Personal-use property. Amended return instructions   Report gain on the sale or exchange of property held for personal use (such as your home) on Form 8949 and Schedule D (Form 1040), as applicable. Amended return instructions Loss from the sale or exchange of property held for personal use is not deductible. Amended return instructions But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, report the transaction on Form 8949 and Schedule D, even though the loss is not deductible. Amended return instructions See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for information on how to report the transaction. Amended return instructions 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. Amended return instructions The time you own an asset before disposing of it is the holding period. Amended return instructions If you received a Form 1099-B, (or substitute statement) box 1c may help you determine whether the gain or loss is short-term or long-term. Amended return instructions If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. Amended return instructions Report it in Part I of Form 8949 and/or Schedule D, as applicable. Amended return instructions If you hold a capital asset longer than 1 year, the gain or loss from its disposition is long term. Amended return instructions Report it in Part II of Form 8949 and/or Schedule D, as applicable. Amended return instructions   Table 4-1. Amended return instructions Do I Have a Short-Term or Long-Term Gain or Loss? IF you hold the property. Amended return instructions . Amended return instructions . Amended return instructions  THEN you have a. Amended return instructions . Amended return instructions . Amended return instructions 1 year or less, Short-term capital gain or  loss. Amended return instructions More than 1 year, Long-term capital gain or  loss. Amended return instructions These distinctions are essential to correctly arrive at your net capital gain or loss. Amended return instructions Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income. Amended return instructions See Capital Gains Tax Rates, later. Amended return instructions Holding period. Amended return instructions   To figure if you held property longer than 1 year, start counting on the day following the day you acquired the property. Amended return instructions The day you disposed of the property is part of your holding period. Amended return instructions Example. Amended return instructions If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Amended return instructions 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. Amended return instructions Patent property. Amended return instructions   If you dispose of patent property, you generally are considered to have held the property longer than 1 year, no matter how long you actually held it. Amended return instructions For more information, see Patents in chapter 2. Amended return instructions Inherited property. Amended return instructions   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Amended return instructions Installment sale. Amended return instructions   The gain from an installment sale of an asset qualifying for long-term capital gain treatment in the year of sale continues to be long term in later tax years. Amended return instructions If it is short term in the year of sale, it continues to be short term when payments are received in later tax years. Amended return instructions    The date the installment payment is received determines the capital gains rate that should be applied not the date the asset was sold under an installment contract. Amended return instructions Nontaxable exchange. Amended return instructions   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. Amended return instructions That is, it begins on the same day as your holding period for the old property. Amended return instructions Example. Amended return instructions You bought machinery on December 4, 2012. Amended return instructions On June 4, 2013, you traded this machinery for other machinery in a nontaxable exchange. Amended return instructions On December 5, 2013, you sold the machinery you got in the exchange. Amended return instructions Your holding period for this machinery began on December 5, 2012. Amended return instructions Therefore, you held it longer than 1 year. Amended return instructions Corporate liquidation. Amended return instructions   The holding period for property you receive in a liquidation generally starts on the day after you receive it if gain or loss is recognized. Amended return instructions Profit-sharing plan. Amended return instructions   The holding period of common stock withdrawn from a qualified contributory profit-sharing plan begins on the day following the day the plan trustee delivered the stock to the transfer agent with instructions to reissue the stock in your name. Amended return instructions Gift. Amended return instructions   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. Amended return instructions For more information on basis, see Publication 551, Basis of Assets. Amended return instructions Real property. Amended return instructions   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, the day after you took possession of it and assumed the burdens and privileges of ownership. Amended return instructions   However, taking possession of real property under an option agreement is not enough to start the holding period. Amended return instructions The holding period cannot start until there is an actual contract of sale. Amended return instructions The holding period of the seller cannot end before that time. Amended return instructions Repossession. Amended return instructions   If you sell real property but keep a security interest in it and then later repossess it, your holding period for a later sale includes the period you held the property before the original sale, as well as the period after the repossession. Amended return instructions Your holding period does not include the time between the original sale and the repossession. Amended return instructions That is, it does not include the period during which the first buyer held the property. Amended return instructions Nonbusiness bad debts. Amended return instructions   Nonbusiness bad debts are short-term capital losses. Amended return instructions For information on nonbusiness bad debts, see chapter 4 of Publication 550. Amended return instructions    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. Amended return instructions Net short-term capital gain or loss. Amended return instructions   Combine your short-term capital gains and losses, including your share of short-term capital gains or losses from partnerships, S corporations, and fiduciaries and any short-term capital loss carryover. Amended return instructions Do this by adding all your short-term capital gains. Amended return instructions Then add all your short-term capital losses. Amended return instructions Subtract the lesser total from the other. Amended return instructions The result is your net short-term capital gain or loss. Amended return instructions Net long-term capital gain or loss. Amended return instructions   Follow the same steps to combine your long-term capital gains and losses. Amended return instructions Include the following items. Amended return instructions Net section 1231 gain from Part I, Form 4797, after any adjustment for nonrecaptured section 1231 losses from prior tax years. Amended return instructions Capital gain distributions from regulated investment companies (mutual funds) and real estate investment trusts. Amended return instructions Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries. Amended return instructions Any long-term capital loss carryover. Amended return instructions The result from combining these items with other long-term capital gains and losses is your net long-term capital gain or loss. Amended return instructions Net gain. Amended return instructions   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Amended return instructions Different tax rates may apply to the part that is a net capital gain. Amended return instructions See Capital Gains Tax Rates, later. Amended return instructions Net loss. Amended return instructions   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Amended return instructions But there are limits on how much loss you can deduct and when you can deduct it. Amended return instructions See Treatment of Capital Losses, next. Amended return instructions    Treatment of Capital Losses If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. Amended return instructions The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Amended return instructions Table 4-2. Amended return instructions Holding Period for Different Types of Acquisitions Type of acquisition: When your holding period starts: Stocks and bonds bought on a securities market Day after trading date you bought security. Amended return instructions Ends on trading date you sold security. Amended return instructions U. Amended return instructions S. Amended return instructions Treasury notes and bonds If bought at auction, day after notification of bid acceptance. Amended return instructions If bought through subscription, day after subscription was submitted. Amended return instructions Nontaxable exchanges Day after date you acquired old property. Amended return instructions Gift If your basis is giver's adjusted basis, same day as giver's holding period began. Amended return instructions If your basis is FMV, day after date of gift. Amended return instructions Real property bought Generally, day after date you received title to the property. Amended return instructions Real property repossessed Day after date you originally received title to the property, but does not include time between the original sale and date of repossession. Amended return instructions Capital loss carryover. Amended return instructions   Generally, you have a capital loss carryover if either of the following situations applies to you. Amended return instructions Your net loss is more than the yearly limit. Amended return instructions Your taxable income without your deduction for exemptions is less than zero. Amended return instructions 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 carryover to 2014. Amended return instructions Example. Amended return instructions Bob and Gloria Sampson sold property in 2013. Amended return instructions The sale resulted in a capital loss of $7,000. Amended return instructions The Sampsons had no other capital transactions. Amended return instructions On their joint 2013 return, the Sampsons deduct $3,000, the yearly limit. Amended return instructions They had taxable income of $2,000. Amended return instructions The unused part of the loss, $4,000 ($7,000 − $3,000), is carried over to 2014. Amended return instructions If the Sampsons' capital loss had been $2,000, it would not have been more than the yearly limit. Amended return instructions Their capital loss deduction would have been $2,000. Amended return instructions They would have no carryover to 2014. Amended return instructions Short-term and long-term losses. Amended return instructions   When you carry over a loss, it retains its original character as either long term or short term. Amended return instructions A short-term loss you carry over to the next tax year is added to short-term losses occurring in that year. Amended return instructions A long-term loss you carry over to the next tax year is added to long-term losses occurring in that year. Amended return instructions A long-term capital loss you carry over to the next year reduces that year's long-term gains before its short-term gains. Amended return instructions   If you have both short-term and long-term losses, your short-term losses are used first against your allowable capital loss deduction. Amended return instructions If, after using your short-term losses, you have not reached the limit on the capital loss deduction, use your long-term losses until you reach the limit. Amended return instructions To figure your capital loss carryover from 2013 to 2014 use the Capital Loss Carryover Worksheet in the 2013 Instructions for Schedule D (Form 1040). Amended return instructions Joint and separate returns. Amended return instructions   On a joint return, the capital gains and losses of spouses are figured as the gains and losses of an individual. Amended return instructions If you are married and filing a separate return, your yearly capital loss deduction is limited to $1,500. Amended return instructions Neither you nor your spouse can deduct any part of the other's loss. Amended return instructions   If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. Amended return instructions However, if you and your spouse once filed jointly and are now filing separately, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss. Amended return instructions Death of taxpayer. Amended return instructions   Capital losses cannot be carried over after a taxpayer's death. Amended return instructions They are deductible only on the final income tax return filed on the decedent's behalf. Amended return instructions The yearly limit discussed earlier still applies in this situation. Amended return instructions Even if the loss is greater than the limit, the decedent's estate cannot deduct the difference or carry it over to following years. Amended return instructions Corporations. Amended return instructions   A corporation can deduct capital losses only up to the amount of its capital gains. Amended return instructions In other words, if a corporation has a net capital loss, it cannot be deducted in the current tax year. Amended return instructions It must be carried to other tax years and deducted from capital gains occurring in those years. Amended return instructions For more information, see Publication 542. Amended return instructions 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. Amended return instructions These lower rates are called the maximum capital gains rates. Amended return instructions 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. Amended return instructions For 2013, the maximum tax rates for individuals are 0%, 15%, 20%, 25%, and 28%. Amended return instructions Also, individuals, use the Qualified Dividends and Capital Gain Worksheet in the Instructions for Form 1040, or the Schedule D Tax Computation Worksheet in the Instructions for Schedule D (Form 1040) (whichever applies) to figure your tax if you have qualified dividends or net capital gain. Amended return instructions For more information, see chapter 4 of Publication 550. Amended return instructions Also see the Instructions for Schedule D (Form 1040). Amended return instructions Unrecaptured section 1250 gain. Amended return instructions   Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation. Amended return instructions Unrecaptured section 1250 gain cannot be more than the net section 1231 gain or include any gain otherwise treated as ordinary income. Amended return instructions Use the worksheet in the Schedule D instructions to figure your unrecaptured section 1250 gain. Amended return instructions For more information about section 1250 property and net section 1231 gain, see chapter 3. Amended return instructions Form 4797 Use Form 4797 to report: The sale or exchange of: Property used in your trade or business; Depreciable and amortizable property; Oil, gas, geothermal, or other mineral properties; and Section 126 property. Amended return instructions The involuntary conversion (from other than casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. Amended return instructions The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business). Amended return instructions The disposition of capital assets not reported on Schedule D. Amended return instructions The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations. Amended return instructions The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less. Amended return instructions Gains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f). Amended return instructions You can use Form 4797 with Form 1040, 1065, 1120, or 1120S. Amended return instructions Section 1231 gains and losses. Amended return instructions   Show any section 1231 gains and losses in Part I. Amended return instructions Carry a net gain to Schedule D (Form 1040) as a long-term capital gain. Amended return instructions Carry a net loss to Part II of Form 4797 as an ordinary loss. Amended return instructions   If you had any nonrecaptured net section 1231 losses from the preceding 5 tax years, reduce your net gain by those losses and report the amount of the reduction as an ordinary gain in Part II. Amended return instructions Report any remaining gain on Schedule D (Form 1040). Amended return instructions See Section 1231 Gains and Losses in chapter 3. Amended return instructions Ordinary gains and losses. Amended return instructions   Show any ordinary gains and losses in Part II. Amended return instructions This includes a net loss or a recapture of losses from prior years figured in Part I of Form 4797. Amended return instructions It also includes ordinary gain figured in Part III. Amended return instructions Mark-to-market election. Amended return instructions   If you made a mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D (Form 1040). Amended return instructions See the Instructions for Form 4797. Amended return instructions Also see Special Rules for Traders in Securities, in chapter 4 of Publication 550. Amended return instructions Ordinary income from depreciation. Amended return instructions   Figure the ordinary income from depreciation on personal property and additional depreciation on real property (as discussed in chapter 3) in Part III. Amended return instructions Carry the ordinary income to Part II of Form 4797 as an ordinary gain. Amended return instructions Carry any remaining gain to Part I as section 1231 gain, unless it is from a casualty or theft. Amended return instructions Carry any remaining gain from a casualty or theft to Form 4684. 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