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File 1040 Ez Online

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File 1040 Ez Online

File 1040 ez online 22. File 1040 ez online   Taxes Table of Contents IntroductionIndian tribal government. File 1040 ez online Useful Items - You may want to see: Tests To Deduct Any Tax Income TaxesState and Local Income Taxes Foreign Income Taxes General Sales TaxesMotor vehicles. File 1040 ez online Real Estate TaxesReal estate taxes for prior years. File 1040 ez online Examples. File 1040 ez online Form 1099-S. File 1040 ez online Real Estate-Related Items You Cannot Deduct Personal Property Taxes Taxes and Fees You Cannot Deduct Where To Deduct Introduction This chapter discusses which taxes you can deduct if you itemize deductions on Schedule A (Form 1040). File 1040 ez online It also explains which taxes you can deduct on other schedules or forms and which taxes you cannot deduct. File 1040 ez online This chapter covers the following topics. File 1040 ez online Income taxes (federal, state, local, and foreign). File 1040 ez online General sales taxes (state and local). File 1040 ez online Real estate taxes (state, local, and foreign). File 1040 ez online Personal property taxes (state and local). File 1040 ez online Taxes and fees you cannot deduct. File 1040 ez online Use Table 22-1 as a guide to determine which taxes you can deduct. File 1040 ez online The end of the chapter contains a section that explains which forms you use to deduct different types of taxes. File 1040 ez online Business taxes. File 1040 ez online   You can deduct certain taxes only if they are ordinary and necessary expenses of your trade or business or of producing income. File 1040 ez online For information on these taxes, see Publication 535, Business Expenses. File 1040 ez online State or local taxes. File 1040 ez online   These are taxes imposed by the 50 states, U. File 1040 ez online S. File 1040 ez online possessions, or any of their political subdivisions (such as a county or city), or by the District of Columbia. File 1040 ez online Indian tribal government. File 1040 ez online   An Indian tribal government recognized by the Secretary of the Treasury as performing substantial government functions will be treated as a state for purposes of claiming a deduction for taxes. File 1040 ez online Income taxes, real estate taxes, and personal property taxes imposed by that Indian tribal government (or by any of its subdivisions that are treated as political subdivisions of a state) are deductible. File 1040 ez online General sales taxes. File 1040 ez online   These are taxes imposed at one rate on retail sales of a broad range of classes of items. File 1040 ez online Foreign taxes. File 1040 ez online   These are taxes imposed by a foreign country or any of its political subdivisions. File 1040 ez online Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 530 Tax Information for Homeowners Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule E (Form 1040) Supplemental Income and Loss 1116 Foreign Tax Credit Tests To Deduct Any Tax The following two tests must be met for you to deduct any tax. File 1040 ez online The tax must be imposed on you. File 1040 ez online You must pay the tax during your tax year. File 1040 ez online The tax must be imposed on you. File 1040 ez online   In general, you can deduct only taxes imposed on you. File 1040 ez online   Generally, you can deduct property taxes only if you are an owner of the property. File 1040 ez online If your spouse owns the property and pays the real estate taxes, the taxes are deductible on your spouse's separate return or on your joint return. File 1040 ez online You must pay the tax during your tax year. File 1040 ez online   If you are a cash basis taxpayer, you can deduct only those taxes you actually paid during your tax year. File 1040 ez online If you pay your taxes by check, the day you mail or deliver the check is the date of payment, provided the check is honored by the financial institution. File 1040 ez online If you use a pay-by-phone account (such as a credit card or electronic funds withdrawal), the date reported on the statement of the financial institution showing when payment was made is the date of payment. File 1040 ez online If you contest a tax liability and are a cash basis taxpayer, you can deduct the tax only in the year you actually pay it (or transfer money or other property to provide for satisfaction of the contested liability). File 1040 ez online See Publication 538, Accounting Periods and Methods, for details. File 1040 ez online    If you use an accrual method of accounting, see Publication 538 for more information. File 1040 ez online Income Taxes This section discusses the deductibility of state and local income taxes (including employee contributions to state benefit funds) and foreign income taxes. File 1040 ez online State and Local Income Taxes You can deduct state and local income taxes. File 1040 ez online However, you can elect to deduct state and local general sales taxes instead of state and local income taxes. File 1040 ez online See General Sales Taxes , later. File 1040 ez online Exception. File 1040 ez online    You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax, unless the exempt income is interest income. File 1040 ez online For example, you cannot deduct the part of a state's income tax that is on a cost-of-living allowance exempt from federal income tax. File 1040 ez online What To Deduct Your deduction may be for withheld taxes, estimated tax payments, or other tax payments as follows. File 1040 ez online Withheld taxes. File 1040 ez online   You can deduct state and local income taxes withheld from your salary in the year they are withheld. File 1040 ez online Your Form(s) W-2 will show these amounts. File 1040 ez online Forms W-2G, 1099-G, 1099-R, and 1099-MISC may also show state and local income taxes withheld. File 1040 ez online Estimated tax payments. File 1040 ez online   You can deduct estimated tax payments you made during the year to a state or local government. File 1040 ez online However, you must have a reasonable basis for making the estimated tax payments. File 1040 ez online Any estimated state or local tax payments that are not made in good faith at the time of payment are not deductible. File 1040 ez online For example, you made an estimated state income tax payment. File 1040 ez online However, the estimate of your state tax liability shows that you will get a refund of the full amount of your estimated payment. File 1040 ez online You had no reasonable basis to believe you had any additional liability for state income taxes and you cannot deduct the estimated tax payment. File 1040 ez online Refund applied to taxes. File 1040 ez online   You can deduct any part of a refund of prior-year state or local income taxes that you chose to have credited to your 2013 estimated state or local income taxes. File 1040 ez online    Do not reduce your deduction by either of the following items. File 1040 ez online Any state or local income tax refund (or credit) you expect to receive for 2013. File 1040 ez online Any refund of (or credit for) prior-year state and local income taxes you actually received in 2013. File 1040 ez online   However, part or all of this refund (or credit) may be taxable. File 1040 ez online See Refund (or credit) of state or local income taxes , later. File 1040 ez online Separate federal returns. File 1040 ez online   If you and your spouse file separate state, local, and federal income tax returns, you each can deduct on your federal return only the amount of your own state and local income tax that you paid during the tax year. File 1040 ez online Joint state and local returns. File 1040 ez online   If you and your spouse file joint state and local returns and separate federal returns, each of you can deduct on your separate federal return a part of the total state and local income taxes paid during the tax year. File 1040 ez online You can deduct only the amount of the total taxes that is proportionate to your gross income compared to the combined gross income of you and your spouse. File 1040 ez online However, you cannot deduct more than the amount you actually paid during the year. File 1040 ez online You can avoid this calculation if you and your spouse are jointly and individually liable for the full amount of the state and local income taxes. File 1040 ez online If so, you and your spouse can deduct on your separate federal returns the amount you each actually paid. File 1040 ez online Joint federal return. File 1040 ez online   If you file a joint federal return, you can deduct the total of the state and local income taxes both of you paid. File 1040 ez online Contributions to state benefit funds. File 1040 ez online    As an employee, you can deduct mandatory contributions to state benefit funds withheld from your wages that provide protection against loss of wages. File 1040 ez online For example, certain states require employees to make contributions to state funds providing disability or unemployment insurance benefits. File 1040 ez online Mandatory payments made to the following state benefit funds are deductible as state income taxes on Schedule A (Form 1040), line 5. File 1040 ez online Alaska Unemployment Compensation Fund. File 1040 ez online California Nonoccupational Disability Benefit Fund. File 1040 ez online New Jersey Nonoccupational Disability Benefit Fund. File 1040 ez online New Jersey Unemployment Compensation Fund. File 1040 ez online New York Nonoccupational Disability Benefit Fund. File 1040 ez online Pennsylvania Unemployment Compensation Fund. File 1040 ez online Rhode Island Temporary Disability Benefit Fund. File 1040 ez online Washington State Supplemental Workmen's Compensation Fund. File 1040 ez online    Employee contributions to private or voluntary disability plans are not deductible. File 1040 ez online Refund (or credit) of state or local income taxes. File 1040 ez online   If you receive a refund of (or credit for) state or local income taxes in a year after the year in which you paid them, you may have to include the refund in income on Form 1040, line 10, in the year you receive it. File 1040 ez online This includes refunds resulting from taxes that were overwithheld, applied from a prior year return, not figured correctly, or figured again because of an amended return. File 1040 ez online If you did not itemize your deductions in the previous year, do not include the refund in income. File 1040 ez online If you deducted the taxes in the previous year, include all or part of the refund on Form 1040, line 10, in the year you receive the refund. File 1040 ez online For a discussion of how much to include, see Recoveries in chapter 12. File 1040 ez online Foreign Income Taxes Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. File 1040 ez online S. File 1040 ez online possession. File 1040 ez online However, you cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. File 1040 ez online S. File 1040 ez online tax under the foreign earned income exclusion or the foreign housing exclusion. File 1040 ez online For information on these exclusions, see Publication 54, Tax Guide for U. File 1040 ez online S. File 1040 ez online Citizens and Resident Aliens Abroad. File 1040 ez online For information on the foreign tax credit, see Publication 514. File 1040 ez online General Sales Taxes You can elect to deduct state and local general sales taxes, instead of state and local income taxes, as an itemized deduction on Schedule A (Form 1040), line 5b. File 1040 ez online You can use either your actual expenses or the state and local sales tax tables to figure your sales tax deduction. File 1040 ez online Actual expenses. File 1040 ez online   Generally, you can deduct the actual state and local general sales taxes (including compensating use taxes) if the tax rate was the same as the general sales tax rate. File 1040 ez online However, sales taxes on food, clothing, medical supplies, and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. File 1040 ez online If you paid sales tax on a motor vehicle at a rate higher than the general sales tax rate, you can deduct only the amount of tax that you would have paid at the general sales tax rate on that vehicle. File 1040 ez online If you use the actual expenses method, you must have receipts to show the general sales taxes paid. File 1040 ez online Do not include sales taxes paid on items used in your trade or business. File 1040 ez online Motor vehicles. File 1040 ez online   For purposes of this section, motor vehicles include cars, motorcycles, motor homes, recreational vehicles, sport utility vehicles, trucks, vans, and off-road vehicles. File 1040 ez online This also includes sales taxes on a leased motor vehicle, but not on vehicles used in your trade or business. File 1040 ez online Optional sales tax tables. File 1040 ez online   Instead of using your actual expenses, you can figure your state and local general sales tax deduction using the state and local sales tax tables in the Instructions for Schedule A (Form 1040). File 1040 ez online You may also be able to add the state and local general sales taxes paid on certain specified items. File 1040 ez online   Your applicable table amount is based on the state where you live, your income, and the number of exemptions claimed on your tax return. File 1040 ez online Your income is your adjusted gross income plus any nontaxable items such as the following. File 1040 ez online Tax-exempt interest. File 1040 ez online Veterans' benefits. File 1040 ez online Nontaxable combat pay. File 1040 ez online Workers' compensation. File 1040 ez online Nontaxable part of social security and railroad retirement benefits. File 1040 ez online Nontaxable part of IRA, pension, or annuity distributions, excluding rollovers. File 1040 ez online Public assistance payments. File 1040 ez online If you lived in different states during the same tax year, you must prorate your applicable table amount for each state based on the days you lived in each state. File 1040 ez online See the Instructions for Schedule A (Form 1040), line 5, for details. File 1040 ez online Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. File 1040 ez online You can deduct these taxes only if they are based on the assessed value of the real property and charged uniformly against all property under the jurisdiction of the taxing authority. File 1040 ez online Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. File 1040 ez online They also do not include itemized charges for services (such as trash collection) assessed against specific property or certain people, even if the charge is paid to the taxing authority. File 1040 ez online For more information about taxes and charges that are not deductible, see Real Estate-Related Items You Cannot Deduct , later. File 1040 ez online Tenant-shareholders in a cooperative housing corporation. File 1040 ez online   Generally, if you are a tenant-stockholder in a cooperative housing corporation, you can deduct the amount paid to the corporation that represents your share of the real estate taxes the corporation paid or incurred for your dwelling unit. File 1040 ez online The corporation should provide you with a statement showing your share of the taxes. File 1040 ez online For more information, see Special Rules for Cooperatives in Publication 530. File 1040 ez online Division of real estate taxes between buyers and sellers. File 1040 ez online   If you bought or sold real estate during the year, the real estate taxes must be divided between the buyer and the seller. File 1040 ez online   The buyer and the seller must divide the real estate taxes according to the number of days in the real property tax year (the period to which the tax is imposed relates) that each owned the property. File 1040 ez online The seller is treated as paying the taxes up to, but not including, the date of sale. File 1040 ez online The buyer is treated as paying the taxes beginning with the date of sale. File 1040 ez online This applies regardless of the lien dates under local law. File 1040 ez online Generally, this information is included on the settlement statement provided at the closing. File 1040 ez online    If you (the seller) cannot deduct taxes until they are paid because you use the cash method of accounting, and the buyer of your property is personally liable for the tax, you are considered to have paid your part of the tax at the time of the sale. File 1040 ez online This lets you deduct the part of the tax to the date of sale even though you did not actually pay it. File 1040 ez online However, you must also include the amount of that tax in the selling price of the property. File 1040 ez online The buyer must include the same amount in his or her cost of the property. File 1040 ez online   You figure your deduction for taxes on each property bought or sold during the real property tax year as follows. File 1040 ez online Worksheet 22-1. File 1040 ez online Figuring Your Real Estate Tax Deduction 1. File 1040 ez online Enter the total real estate taxes for the real property tax year   2. File 1040 ez online Enter the number of days in the real property tax year that you owned the property   3. File 1040 ez online Divide line 2 by 365 (for leap years, divide line 2 by 366) . File 1040 ez online 4. File 1040 ez online Multiply line 1 by line 3. File 1040 ez online This is your deduction. File 1040 ez online Enter it on Schedule A (Form 1040), line 6   Note. File 1040 ez online Repeat steps 1 through 4 for each property you bought or sold during the real property tax year. File 1040 ez online Your total deduction is the sum of the line 4 amounts for all of the properties. File 1040 ez online Real estate taxes for prior years. File 1040 ez online   Do not divide delinquent taxes between the buyer and seller if the taxes are for any real property tax year before the one in which the property is sold. File 1040 ez online Even if the buyer agrees to pay the delinquent taxes, the buyer cannot deduct them. File 1040 ez online The buyer must add them to the cost of the property. File 1040 ez online The seller can deduct these taxes paid by the buyer. File 1040 ez online However, the seller must include them in the selling price. File 1040 ez online Examples. File 1040 ez online   The following examples illustrate how real estate taxes are divided between buyer and seller. File 1040 ez online Example 1. File 1040 ez online Dennis and Beth White's real property tax year for both their old home and their new home is the calendar year, with payment due August 1. File 1040 ez online The tax on their old home, sold on May 7, was $620. File 1040 ez online The tax on their new home, bought on May 3, was $732. File 1040 ez online Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the old home even though they did not actually pay them to the taxing authority. File 1040 ez online On the other hand, they can claim only a proportionate share of the taxes they paid on their new property even though they paid the entire amount. File 1040 ez online Dennis and Beth owned their old home during the real property tax year for 126 days (January 1 to May 6, the day before the sale). File 1040 ez online They figure their deduction for taxes on their old home as follows. File 1040 ez online Worksheet 22-1. File 1040 ez online Figuring Your Real Estate Tax Deduction — Taxes on Old Home 1. File 1040 ez online Enter the total real estate taxes for the real property tax year $620 2. File 1040 ez online Enter the number of days in the real property tax year that you owned the property 126 3. File 1040 ez online Divide line 2 by 365 (for leap years, divide line 2 by 366) . File 1040 ez online 3452 4. File 1040 ez online Multiply line 1 by line 3. File 1040 ez online This is your deduction. File 1040 ez online Enter it on Schedule A (Form 1040), line 6 $214 Since the buyers of their old home paid all of the taxes, Dennis and Beth also include the $214 in the selling price of the old home. File 1040 ez online (The buyers add the $214 to their cost of the home. File 1040 ez online ) Dennis and Beth owned their new home during the real property tax year for 243 days (May 3 to December 31, including their date of purchase). File 1040 ez online They figure their deduction for taxes on their new home as follows. File 1040 ez online Worksheet 22-1. File 1040 ez online Figuring Your Real Estate Tax Deduction — Taxes on New Home 1. File 1040 ez online Enter the total real estate taxes for the real property tax year $732 2. File 1040 ez online Enter the number of days in the real property tax year that you owned the property 243 3. File 1040 ez online Divide line 2 by 365 (for leap years, divide line 2 by 366) . File 1040 ez online 6658 4. File 1040 ez online Multiply line 1 by line 3. File 1040 ez online This is your deduction. File 1040 ez online Enter it on Schedule A (Form 1040), line 6 $487 Since Dennis and Beth paid all of the taxes on the new home, they add $245 ($732 paid less $487 deduction) to their cost of the new home. File 1040 ez online (The sellers add this $245 to their selling price and deduct the $245 as a real estate tax. File 1040 ez online ) Dennis and Beth's real estate tax deduction for their old and new homes is the sum of $214 and $487, or $701. File 1040 ez online They will enter this amount on Schedule A (Form 1040), line 6. File 1040 ez online Example 2. File 1040 ez online George and Helen Brown bought a new home on May 3, 2013. File 1040 ez online Their real property tax year for the new home is the calendar year. File 1040 ez online Real estate taxes for 2012 were assessed in their state on January 1, 2013. File 1040 ez online The taxes became due on May 31, 2013, and October 31, 2013. File 1040 ez online The Browns agreed to pay all taxes due after the date of purchase. File 1040 ez online Real estate taxes for 2012 were $680. File 1040 ez online They paid $340 on May 31, 2013, and $340 on October 31, 2013. File 1040 ez online These taxes were for the 2012 real property tax year. File 1040 ez online The Browns cannot deduct them since they did not own the property until 2013. File 1040 ez online Instead, they must add $680 to the cost of their new home. File 1040 ez online In January 2014, the Browns receive their 2013 property tax statement for $752, which they will pay in 2014. File 1040 ez online The Browns owned their new home during the 2013 real property tax year for 243 days (May 3 to December 31). File 1040 ez online They will figure their 2014 deduction for taxes as follows. File 1040 ez online Worksheet 22-1. File 1040 ez online Figuring Your Real Estate Tax Deduction — Taxes on New Home 1. File 1040 ez online Enter the total real estate taxes for the real property tax year $752 2. File 1040 ez online Enter the number of days in the real property tax year that you owned the property 243 3. File 1040 ez online Divide line 2 by 365 (for leap years, divide line 2 by 366) . File 1040 ez online 6658 4. File 1040 ez online Multiply line 1 by line 3. File 1040 ez online This is your deduction. File 1040 ez online Claim it on Schedule A (Form 1040), line 6 $501 The remaining $251 ($752 paid less $501 deduction) of taxes paid in 2014, along with the $680 paid in 2013, is added to the cost of their new home. File 1040 ez online Because the taxes up to the date of sale are considered paid by the seller on the date of sale, the seller is entitled to a 2013 tax deduction of $931. File 1040 ez online This is the sum of the $680 for 2012 and the $251 for the 122 days the seller owned the home in 2013. File 1040 ez online The seller must also include the $931 in the selling price when he or she figures the gain or loss on the sale. File 1040 ez online The seller should contact the Browns in January 2014 to find out how much real estate tax is due for 2013. File 1040 ez online Form 1099-S. File 1040 ez online   For certain sales or exchanges of real estate, the person responsible for closing the sale (generally the settlement agent) prepares Form 1099-S, Proceeds From Real Estate Transactions, to report certain information to the IRS and to the seller of the property. File 1040 ez online Box 2 of Form 1099-S is for the gross proceeds from the sale and should include the portion of the seller's real estate tax liability that the buyer will pay after the date of sale. File 1040 ez online The buyer includes these taxes in the cost basis of the property, and the seller both deducts this amount as a tax paid and includes it in the sales price of the property. File 1040 ez online   For a real estate transaction that involves a home, any real estate tax the seller paid in advance but that is the liability of the buyer appears on Form 1099-S, box 5. File 1040 ez online The buyer deducts this amount as a real estate tax, and the seller reduces his or her real estate tax deduction (or includes it in income) by the same amount. File 1040 ez online See Refund (or rebate) , later. File 1040 ez online Taxes placed in escrow. File 1040 ez online   If your monthly mortgage payment includes an amount placed in escrow (put in the care of a third party) for real estate taxes, you may not be able to deduct the total amount placed in escrow. File 1040 ez online You can deduct only the real estate tax that the third party actually paid to the taxing authority. File 1040 ez online If the third party does not notify you of the amount of real estate tax that was paid for you, contact the third party or the taxing authority to find the proper amount to show on your return. File 1040 ez online Tenants by the entirety. File 1040 ez online   If you and your spouse held property as tenants by the entirety and you file separate federal returns, each of you can deduct only the taxes each of you paid on the property. File 1040 ez online Divorced individuals. File 1040 ez online   If your divorce or separation agreement states that you must pay the real estate taxes for a home owned by you and your spouse, part of your payments may be deductible as alimony and part as real estate taxes. File 1040 ez online See Taxes and insurance in chapter 18 for more information. File 1040 ez online Ministers' and military housing allowances. File 1040 ez online   If you are a minister or a member of the uniformed services and receive a housing allowance that you can exclude from income, you still can deduct all of the real estate taxes you pay on your home. File 1040 ez online Refund (or rebate). File 1040 ez online   If you received a refund or rebate in 2013 of real estate taxes you paid in 2013, you must reduce your deduction by the amount refunded to you. File 1040 ez online If you received a refund or rebate in 2013 of real estate taxes you deducted in an earlier year (either as an itemized deduction or an increase to your standard deduction), you generally must include the refund or rebate in income in the year you receive it. File 1040 ez online However, the amount you include in income is limited to the amount of the deduction that reduced your tax in the earlier year. File 1040 ez online For more information, see Recoveries in chapter 12. File 1040 ez online Table 22-1. File 1040 ez online Which Taxes Can You Deduct? Type of Tax You Can Deduct You Cannot Deduct Fees and Charges Fees and charges that are expenses of your trade or business or of producing income. File 1040 ez online Fees and charges that are not expenses of your trade or business or of producing income, such as fees for driver's licenses, car inspections, parking, or charges for water bills (see Taxes and Fees You Cannot Deduct ). File 1040 ez online     Fines and penalties. File 1040 ez online Income Taxes State and local income taxes. File 1040 ez online Federal income taxes. File 1040 ez online   Foreign income taxes. File 1040 ez online     Employee contributions to state funds listed under Contributions to state benefit funds . File 1040 ez online Employee contributions to private or voluntary disability plans. File 1040 ez online     State and local general sales taxes if you choose to deduct state and local income taxes. File 1040 ez online General Sales Taxes State and local general sales taxes, including compensating use taxes. File 1040 ez online State and local income taxes if you choose to deduct state and local general sales taxes. File 1040 ez online Other Taxes Taxes that are expenses of your trade or business. File 1040 ez online Federal excise taxes, such as tax on gasoline, that are not expenses of your trade or business or of producing income. File 1040 ez online   Taxes on property producing rent or royalty income. File 1040 ez online Per capita taxes. File 1040 ez online   Occupational taxes. File 1040 ez online See chapter 28. File 1040 ez online     One-half of self-employment tax paid. File 1040 ez online   Personal Property Taxes State and local personal property taxes. File 1040 ez online Customs duties that are not expenses of your trade or business or of producing income. File 1040 ez online Real Estate Taxes State and local real estate taxes. File 1040 ez online Real estate taxes that are treated as imposed on someone else (see Division of real estate taxes between buyers and sellers ). File 1040 ez online   Foreign real estate taxes. File 1040 ez online Taxes for local benefits (with exceptions). File 1040 ez online See Real Estate-Related Items You Cannot Deduct . File 1040 ez online   Tenant's share of real estate taxes paid by  cooperative housing corporation. File 1040 ez online Trash and garbage pickup fees (with exceptions). File 1040 ez online See Real Estate-Related Items You Cannot Deduct . File 1040 ez online     Rent increase due to higher real estate taxes. File 1040 ez online     Homeowners' association charges. File 1040 ez online Real Estate-Related Items You Cannot Deduct Payments for the following items generally are not deductible as real estate taxes. File 1040 ez online Taxes for local benefits. File 1040 ez online Itemized charges for services (such as trash and garbage pickup fees). File 1040 ez online Transfer taxes (or stamp taxes). File 1040 ez online Rent increases due to higher real estate taxes. File 1040 ez online Homeowners' association charges. File 1040 ez online Taxes for local benefits. File 1040 ez online   Deductible real estate taxes generally do not include taxes charged for local benefits and improvements tending to increase the value of your property. File 1040 ez online These include assessments for streets, sidewalks, water mains, sewer lines, public parking facilities, and similar improvements. File 1040 ez online You should increase the basis of your property by the amount of the assessment. File 1040 ez online   Local benefit taxes are deductible only if they are for maintenance, repair, or interest charges related to those benefits. File 1040 ez online If only a part of the taxes is for maintenance, repair, or interest, you must be able to show the amount of that part to claim the deduction. File 1040 ez online If you cannot determine what part of the tax is for maintenance, repair, or interest, none of it is deductible. File 1040 ez online    Taxes for local benefits may be included in your real estate tax bill. File 1040 ez online If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. File 1040 ez online You should use the rules above to determine if the local benefit tax is deductible. File 1040 ez online Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. File 1040 ez online Itemized charges for services. File 1040 ez online    An itemized charge for services assessed against specific property or certain people is not a tax, even if the charge is paid to the taxing authority. File 1040 ez online For example, you cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged to each homeowner for trash collection), or A flat fee charged for a single service provided by your government (such as a $30 charge for mowing your lawn because it was allowed to grow higher than permitted under your local ordinance). File 1040 ez online    You must look at your real estate tax bill to determine if any nondeductible itemized charges, such as those listed above, are included in the bill. File 1040 ez online If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. File 1040 ez online Exception. File 1040 ez online   Service charges used to maintain or improve services (such as trash collection or police and fire protection) are deductible as real estate taxes if: The fees or charges are imposed at a like rate against all property in the taxing jurisdiction, The funds collected are not earmarked; instead, they are commingled with general revenue funds, and Funds used to maintain or improve services are not limited to or determined by the amount of these fees or charges collected. File 1040 ez online Transfer taxes (or stamp taxes). File 1040 ez online   Transfer taxes and similar taxes and charges on the sale of a personal home are not deductible. File 1040 ez online If they are paid by the seller, they are expenses of the sale and reduce the amount realized on the sale. File 1040 ez online If paid by the buyer, they are included in the cost basis of the property. File 1040 ez online Rent increase due to higher real estate taxes. File 1040 ez online   If your landlord increases your rent in the form of a tax surcharge because of increased real estate taxes, you cannot deduct the increase as taxes. File 1040 ez online Homeowners' association charges. File 1040 ez online   These charges are not deductible because they are imposed by the homeowners' association, rather than the state or local government. File 1040 ez online Personal Property Taxes Personal property tax is deductible if it is a state or local tax that is: Charged on personal property, Based only on the value of the personal property, and Charged on a yearly basis, even if it is collected more or less than once a year. File 1040 ez online A tax that meets the above requirements can be considered charged on personal property even if it is for the exercise of a privilege. File 1040 ez online For example, a yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways. File 1040 ez online If the tax is partly based on value and partly based on other criteria, it may qualify in part. File 1040 ez online Example. File 1040 ez online Your state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. File 1040 ez online You paid $32 based on the value ($1,500) and weight (3,400 lbs. File 1040 ez online ) of your car. File 1040 ez online You can deduct $15 (1% × $1,500) as a personal property tax because it is based on the value. File 1040 ez online The remaining $17 ($. File 1040 ez online 50 × 34), based on the weight, is not deductible. File 1040 ez online Taxes and Fees You Cannot Deduct Many federal, state, and local government taxes are not deductible because they do not fall within the categories discussed earlier. File 1040 ez online Other taxes and fees, such as federal income taxes, are not deductible because the tax law specifically prohibits a deduction for them. File 1040 ez online See Table 22-1. File 1040 ez online Taxes and fees that are generally not deductible include the following items. File 1040 ez online Employment taxes. File 1040 ez online This includes social security, Medicare, and railroad retirement taxes withheld from your pay. File 1040 ez online However, one-half of self-employment tax you pay is deductible. File 1040 ez online In addition, the social security and other employment taxes you pay on the wages of a household worker may be included in medical expenses that you can deduct or child care expenses that allow you to claim the child and dependent care credit. File 1040 ez online For more information, see chapters 21 and 32. File 1040 ez online Estate, inheritance, legacy, or succession taxes. File 1040 ez online However, you can deduct the estate tax attributable to income in respect of a decedent if you, as a beneficiary, must include that income in your gross income. File 1040 ez online In that case, deduct the estate tax as a miscellaneous deduction that is not subject to the 2%-of-adjusted-gross-income limit. File 1040 ez online For more information, see Publication 559, Survivors, Executors, and Administrators. File 1040 ez online Federal income taxes. File 1040 ez online This includes income taxes withheld from your pay. File 1040 ez online Fines and penalties. File 1040 ez online You cannot deduct fines and penalties paid to a government for violation of any law, including related amounts forfeited as collateral deposits. File 1040 ez online Gift taxes. File 1040 ez online License fees. File 1040 ez online You cannot deduct license fees for personal purposes (such as marriage, driver's, and dog license fees). File 1040 ez online Per capita taxes. File 1040 ez online You cannot deduct state or local per capita taxes. File 1040 ez online Many taxes and fees other than those listed above are also nondeductible, unless they are ordinary and necessary expenses of a business or income producing activity. File 1040 ez online For other nondeductible items, see Real Estate-Related Items You Cannot Deduct , earlier. File 1040 ez online Where To Deduct You deduct taxes on the following schedules. File 1040 ez online State and local income taxes. File 1040 ez online    These taxes are deducted on Schedule A (Form 1040), line 5, even if your only source of income is from business, rents, or royalties. File 1040 ez online Check box a on line 5. File 1040 ez online General sales taxes. File 1040 ez online   Sales taxes are deducted on Schedule A (Form 1040), line 5. File 1040 ez online You must check box b on line 5. File 1040 ez online If you elect to deduct sales taxes, you cannot deduct state and local income taxes on Schedule A (Form 1040), line 5, box a. File 1040 ez online Foreign income taxes. File 1040 ez online   Generally, income taxes you pay to a foreign country or U. File 1040 ez online S. File 1040 ez online possession can be claimed as an itemized deduction on Schedule A (Form 1040), line 8, or as a credit against your U. File 1040 ez online S. File 1040 ez online income tax on Form 1040, line 47. File 1040 ez online To claim the credit, you may have to complete and attach Form 1116. File 1040 ez online For more information, see chapter 37, the Form 1040 instructions, or Publication 514. File 1040 ez online Real estate taxes and personal property taxes. File 1040 ez online    Real estate and personal property taxes are deducted on Schedule A (Form 1040), lines 6 and 7, respectively, unless they are paid on property used in your business, in which case they are deducted on Schedule C, Schedule C-EZ, or Schedule F (Form 1040). File 1040 ez online Taxes on property that produces rent or royalty income are deducted on Schedule E (Form 1040). File 1040 ez online Self-employment tax. File 1040 ez online    Deduct one-half of your self-employment tax on Form 1040, line 27. File 1040 ez online Other taxes. File 1040 ez online    All other deductible taxes are deducted on Schedule A (Form 1040), line 8. File 1040 ez online Prev  Up  Next   Home   More Online Publications
 
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Page Last Reviewed or Updated: 24-Mar-2014

The File 1040 Ez Online

File 1040 ez online 8. File 1040 ez online   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. File 1040 ez online Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. File 1040 ez online This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. File 1040 ez online A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. File 1040 ez online An exchange is a transfer of property for other property or services. File 1040 ez online Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. File 1040 ez online If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. File 1040 ez online If the adjusted basis of the property is more than the amount you realize, you will have a loss. File 1040 ez online Basis and adjusted basis. File 1040 ez online   The basis of property you buy is usually its cost. File 1040 ez online The adjusted basis of property is basis plus certain additions and minus certain deductions. File 1040 ez online See chapter 6 for more information about basis and adjusted basis. File 1040 ez online Amount realized. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. File 1040 ez online Amount recognized. File 1040 ez online   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. File 1040 ez online A recognized gain is a gain you must include in gross income and report on your income tax return. File 1040 ez online A recognized loss is a loss you deduct from gross income. File 1040 ez online However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. File 1040 ez online See Like-Kind Exchanges next. File 1040 ez online Also, a loss from the disposition of property held for personal use is not deductible. File 1040 ez online Like-Kind Exchanges Certain exchanges of property are not taxable. File 1040 ez online This means any gain from the exchange is not recognized, and any loss cannot be deducted. File 1040 ez online Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. File 1040 ez online The exchange of property for the same kind of property is the most common type of nontaxable exchange. File 1040 ez online To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. File 1040 ez online Qualifying property. File 1040 ez online Like-kind property. File 1040 ez online These two requirements are discussed later. File 1040 ez online Multiple-party transactions. File 1040 ez online   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. File 1040 ez online Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. File 1040 ez online Receipt of title from third party. File 1040 ez online   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. File 1040 ez online Basis of property received. File 1040 ez online   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. File 1040 ez online See chapter 6 for more information. File 1040 ez online Money paid. File 1040 ez online   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. File 1040 ez online The basis of the property received is the basis of the property given up, increased by the money paid. File 1040 ez online Example. File 1040 ez online You traded an old tractor with an adjusted basis of $15,000 for a new one. File 1040 ez online The new tractor costs $300,000. File 1040 ez online You were allowed $80,000 for the old tractor and paid $220,000 cash. File 1040 ez online 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). File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Reporting the exchange. File 1040 ez online   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. File 1040 ez online The Instructions for Form 8824 explain how to report the details of the exchange. File 1040 ez online   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. File 1040 ez online You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. File 1040 ez online See chapter 9 for more information. File 1040 ez online Qualifying property. File 1040 ez online   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. File 1040 ez online Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. File 1040 ez online Nonqualifying property. File 1040 ez online   The rules for like-kind exchanges do not apply to exchanges of the following property. File 1040 ez online Property you use for personal purposes, such as your home and family car. File 1040 ez online Stock in trade or other property held primarily for sale, such as crops and produce. File 1040 ez online Stocks, bonds, or notes. File 1040 ez online However, see Qualifying property above. File 1040 ez online Other securities or evidences of indebtedness, such as accounts receivable. File 1040 ez online Partnership interests. File 1040 ez online However, you may have a nontaxable exchange under other rules. File 1040 ez online See Other Nontaxable Exchanges in chapter 1 of Publication 544. File 1040 ez online Like-kind property. File 1040 ez online   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. File 1040 ez online Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. File 1040 ez online Generally, real property exchanged for real property qualifies as an exchange of like-kind property. File 1040 ez online For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. File 1040 ez online   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. File 1040 ez online An exchange of a tractor for acreage, however, is not an exchange of like-kind property. File 1040 ez online The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. File 1040 ez online For example, the exchange of a bull for a cow is not a like-kind exchange. File 1040 ez online 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. File 1040 ez online    Note. File 1040 ez online Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. File 1040 ez online Personal property. File 1040 ez online   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. File 1040 ez online Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. File 1040 ez online Property classified in any General Asset Class may not be classified within a Product Class. File 1040 ez online Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. File 1040 ez online General Asset Classes. File 1040 ez online   General Asset Classes describe the types of property frequently used in many businesses. File 1040 ez online They include, but are not limited to, the following property. File 1040 ez online Office furniture, fixtures, and equipment (asset class 00. File 1040 ez online 11). File 1040 ez online Information systems, such as computers and peripheral equipment (asset class 00. File 1040 ez online 12). File 1040 ez online Data handling equipment except computers (asset class 00. File 1040 ez online 13). File 1040 ez online Automobiles and taxis (asset class 00. File 1040 ez online 22). File 1040 ez online Light general purpose trucks (asset class 00. File 1040 ez online 241). File 1040 ez online Heavy general purpose trucks (asset class 00. File 1040 ez online 242). File 1040 ez online Tractor units for use over-the-road (asset class 00. File 1040 ez online 26). File 1040 ez online Trailers and trailer-mounted containers (asset class 00. File 1040 ez online 27). File 1040 ez online Industrial steam and electric generation and/or distribution systems (asset class 00. File 1040 ez online 4). File 1040 ez online Product Classes. File 1040 ez online   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). File 1040 ez online The latest version of the manual can be accessed at www. File 1040 ez online census. File 1040 ez online gov/eos/www/naics/. File 1040 ez online Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. File 1040 ez online ntis. File 1040 ez online gov/products/naics. File 1040 ez online aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. File 1040 ez online A CD-ROM version with search and retrieval software is also available from NTIS. File 1040 ez online    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. File 1040 ez online Partially nontaxable exchange. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online A loss is not deductible. File 1040 ez online Example 1. File 1040 ez online 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. File 1040 ez online 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). File 1040 ez online However, only $10,000, the cash received, is recognized (included in income). File 1040 ez online Example 2. File 1040 ez online Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. File 1040 ez online Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). File 1040 ez online Example 3. File 1040 ez online Assume in Example 1 that the FMV of the land you received was only $15,000. File 1040 ez online Your $5,000 loss is not recognized. File 1040 ez online Unlike property given up. File 1040 ez online   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. File 1040 ez online The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. File 1040 ez online Like-kind exchanges between related persons. File 1040 ez online   Special rules apply to like-kind exchanges between related persons. File 1040 ez online These rules affect both direct and indirect exchanges. File 1040 ez online Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. File 1040 ez online The gain or loss on the original exchange must be recognized as of the date of the later disposition. File 1040 ez online The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. File 1040 ez online Related persons. File 1040 ez online   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. File 1040 ez online ), 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. File 1040 ez online   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. File 1040 ez online Example. File 1040 ez online You used a grey pickup truck in your farming business. File 1040 ez online Your sister used a red pickup truck in her landscaping business. File 1040 ez online In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. File 1040 ez online At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. File 1040 ez online The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. File 1040 ez online 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). File 1040 ez online 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). File 1040 ez online However, because this was a like-kind exchange, you recognized no gain. File 1040 ez online 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). File 1040 ez online She recognized gain only to the extent of the money she received, $200. File 1040 ez online 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). File 1040 ez online In 2013, you sold the red pickup truck to a third party for $7,000. File 1040 ez online Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. File 1040 ez online On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. File 1040 ez online 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). File 1040 ez online In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. File 1040 ez online Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). File 1040 ez online Exceptions to the rules for related persons. File 1040 ez online   The following property dispositions are excluded from these rules. File 1040 ez online Dispositions due to the death of either related person. File 1040 ez online Involuntary conversions. File 1040 ez online 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. File 1040 ez online Multiple property exchanges. File 1040 ez online   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. File 1040 ez online However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. File 1040 ez online Transfer and receive properties in two or more exchange groups. File 1040 ez online Transfer or receive more than one property within a single exchange group. File 1040 ez online   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. File 1040 ez online Deferred exchange. File 1040 ez online   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. File 1040 ez online 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. File 1040 ez online The property you receive is replacement property. File 1040 ez online The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. File 1040 ez online In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. File 1040 ez online   For more information see Deferred Exchanges in chapter 1 of Publication 544. File 1040 ez online 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. File 1040 ez online This rule does not apply if the recipient is a nonresident alien. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. File 1040 ez online 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. File 1040 ez online This rule applies for determining loss as well as gain. File 1040 ez online Any gain recognized on a transfer in trust increases the basis. File 1040 ez online For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. File 1040 ez online 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). File 1040 ez online You may also have a capital gain if your section 1231 transactions result in a net gain. File 1040 ez online See Section 1231 Gains and Losses in  chapter 9. File 1040 ez online 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). File 1040 ez online Your net capital gains may be taxed at a lower tax rate than ordinary income. File 1040 ez online See Capital Gains Tax Rates , later. File 1040 ez online Your deduction for a net capital loss may be limited. File 1040 ez online See Treatment of Capital Losses , later. File 1040 ez online Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. File 1040 ez online The following items are examples of capital assets. File 1040 ez online A home owned and occupied by you and your family. File 1040 ez online Household furnishings. File 1040 ez online A car used for pleasure. File 1040 ez online 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. File 1040 ez online Stocks and bonds. File 1040 ez online However, there are special rules for gains on qualified small business stock. File 1040 ez online 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. File 1040 ez online Personal-use property. File 1040 ez online   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. File 1040 ez online Loss from the sale or exchange of personal-use property is not deductible. File 1040 ez online You can deduct a loss relating to personal-use property only if it results from a casualty or theft. File 1040 ez online For information on casualties and thefts, see chapter 11. File 1040 ez online 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. File 1040 ez online The time you own an asset before disposing of it is the holding period. File 1040 ez online If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. File 1040 ez online Report it in Part I of Schedule D (Form 1040). File 1040 ez online If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. File 1040 ez online Report it in Part II of Schedule D (Form 1040). File 1040 ez online Holding period. File 1040 ez online   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. File 1040 ez online The day you disposed of the property is part of your holding period. File 1040 ez online Example. File 1040 ez online If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. File 1040 ez online 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. File 1040 ez online Inherited property. File 1040 ez online   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. File 1040 ez online This rule does not apply to livestock used in a farm business. File 1040 ez online See Holding period under Livestock , later. File 1040 ez online Nonbusiness bad debt. File 1040 ez online   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. File 1040 ez online See chapter 4 of Publication 550. File 1040 ez online Nontaxable exchange. File 1040 ez online   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. File 1040 ez online That is, it begins on the same day as your holding period for the old property. File 1040 ez online Gift. File 1040 ez online   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. File 1040 ez online Real property. File 1040 ez online   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. File 1040 ez online   However, taking possession of real property under an option agreement is not enough to start the holding period. File 1040 ez online The holding period cannot start until there is an actual contract of sale. File 1040 ez online The holding period of the seller cannot end before that time. File 1040 ez online 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. File 1040 ez online Net short-term capital gain or loss. File 1040 ez online   Combine your short-term capital gains and losses. File 1040 ez online Do this by adding all of your short-term capital gains. File 1040 ez online Then add all of your short-term capital losses. File 1040 ez online Subtract the lesser total from the greater. File 1040 ez online The difference is your net short-term capital gain or loss. File 1040 ez online Net long-term capital gain or loss. File 1040 ez online   Follow the same steps to combine your long-term capital gains and losses. File 1040 ez online The result is your net long-term capital gain or loss. File 1040 ez online Net gain. File 1040 ez online   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. File 1040 ez online 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. File 1040 ez online See Capital Gains Tax Rates , later. File 1040 ez online Net loss. File 1040 ez online   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. File 1040 ez online But there are limits on how much loss you can deduct and when you can deduct it. File 1040 ez online See Treatment of Capital Losses next. File 1040 ez online 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. File 1040 ez online 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). File 1040 ez online If your other income is low, you may not be able to use the full $3,000. File 1040 ez online The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). File 1040 ez online Capital loss carryover. File 1040 ez online   Generally, you have a capital loss carryover if either of the following situations applies to you. File 1040 ez online Your net loss on Schedule D (Form 1040), is more than the yearly limit. File 1040 ez online Your taxable income without your deduction for exemptions is less than zero. File 1040 ez online 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. File 1040 ez online    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). File 1040 ez online 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. File 1040 ez online These lower rates are called the maximum capital gains rates. File 1040 ez online 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. File 1040 ez online See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). File 1040 ez online Also see Publication 550. File 1040 ez online Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. File 1040 ez online A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). File 1040 ez online Property held for sale in the ordinary course of your farm business. File 1040 ez online   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. File 1040 ez online 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). File 1040 ez online The treatment of this property is discussed in chapter 3. File 1040 ez online Land and depreciable properties. File 1040 ez online   Land and depreciable property you use in farming are not capital assets. File 1040 ez online Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. File 1040 ez online 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. File 1040 ez online The sales of these business assets are reported on Form 4797. File 1040 ez online See chapter 9 for more information. File 1040 ez online 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. File 1040 ez online Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. File 1040 ez online Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. File 1040 ez online Hedging transactions. File 1040 ez online Transactions that are not hedging transactions. File 1040 ez online 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. File 1040 ez online There is a limit on the amount of capital losses you can deduct each year. File 1040 ez online Hedging transactions are not subject to the mark-to-market rules. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online The gain or loss on the termination of these hedges is generally ordinary gain or loss. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Examples include fuel and feed. File 1040 ez online If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. File 1040 ez online Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. File 1040 ez online It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. File 1040 ez online Retain the identification of each hedging transaction with your books and records. File 1040 ez online Also, identify the item(s) or aggregate risk that is being hedged in your records. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Accounting methods for hedging transactions. File 1040 ez online   The accounting method you use for a hedging transaction must clearly reflect income. File 1040 ez online 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. File 1040 ez online There are requirements and limits on the method you can use for certain hedging transactions. File 1040 ez online See Regulations section 1. File 1040 ez online 446-4(e) for those requirements and limits. File 1040 ez online   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. File 1040 ez online Cash method. File 1040 ez online Farm-price method. File 1040 ez online Unit-livestock-price method. File 1040 ez online   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. File 1040 ez online   Your books and records must describe the accounting method used for each type of hedging transaction. File 1040 ez online They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. File 1040 ez online You must make the additional identification no more than 35 days after entering into the hedging transaction. File 1040 ez online Example of a hedging transaction. File 1040 ez online   You file your income tax returns on the cash method. File 1040 ez online On July 2 you anticipate a yield of 50,000 bushels of corn this year. File 1040 ez online The December futures price is $5. File 1040 ez online 75 a bushel, but there are indications that by harvest time the price will drop. File 1040 ez online To protect yourself against a drop in the price, you enter into the following hedging transaction. File 1040 ez online You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. File 1040 ez online 75 a bushel. File 1040 ez online   The price did not drop as anticipated but rose to $6 a bushel. File 1040 ez online In November, you sell your crop at a local elevator for $6 a bushel. File 1040 ez online You also close out your futures position by buying ten December contracts for $6 a bushel. File 1040 ez online You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. File 1040 ez online   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. File 1040 ez online Your loss on the hedge is 25 cents a bushel. File 1040 ez online In effect, the net selling price of your corn is $5. File 1040 ez online 75 a bushel. File 1040 ez online   Report the results of your futures transactions and your sale of corn separately on Schedule F. File 1040 ez online See the instructions for the 2013 Schedule F (Form 1040). File 1040 ez online   The loss on your futures transactions is $13,900, figured as follows. File 1040 ez online July 2 - Sold December corn futures (50,000 bu. File 1040 ez online @$5. File 1040 ez online 75) $287,500 November 6 - Bought December corn futures (50,000 bu. File 1040 ez online @$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. File 1040 ez online   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. File 1040 ez online × $6). File 1040 ez online Report it on Schedule F, Part I, line 2, as income from sales of products you raised. File 1040 ez online   Assume you were right and the price went down 25 cents a bushel. File 1040 ez online In effect, you would still net $5. File 1040 ez online 75 a bushel, figured as follows. File 1040 ez online Sold cash corn, per bushel $5. File 1040 ez online 50 Gain on hedge, per bushel . File 1040 ez online 25 Net price, per bushel $5. File 1040 ez online 75       The gain on your futures transactions would have been $11,100, figured as follows. File 1040 ez online July 2 - Sold December corn futures (50,000 bu. File 1040 ez online @$5. File 1040 ez online 75) $287,500 November 6 - Bought December corn futures (50,000 bu. File 1040 ez online @$5. File 1040 ez online 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. File 1040 ez online   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. File 1040 ez online Livestock This part discusses the sale or exchange of livestock used in your farm business. File 1040 ez online Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. File 1040 ez online However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. File 1040 ez online See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. File 1040 ez online The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. File 1040 ez online The sale of this livestock is reported on Schedule F. File 1040 ez online See chapter 3. File 1040 ez online Also, special rules apply to sales or exchanges caused by weather-related conditions. File 1040 ez online See chapter 3. File 1040 ez online Holding period. File 1040 ez online   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). File 1040 ez online Livestock. File 1040 ez online   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. File 1040 ez online Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. File 1040 ez online Livestock used in farm business. File 1040 ez online   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. File 1040 ez online The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Example 1. File 1040 ez online You discover an animal that you intend to use for breeding purposes is sterile. File 1040 ez online You dispose of it within a reasonable time. File 1040 ez online This animal was held for breeding purposes. File 1040 ez online Example 2. File 1040 ez online 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. File 1040 ez online These young animals were held for breeding or dairy purposes. File 1040 ez online 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. File 1040 ez online See Sales Caused by Weather-Related Conditions in chapter 3. File 1040 ez online Example 3. File 1040 ez online You are in the business of raising hogs for slaughter. File 1040 ez online Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. File 1040 ez online You sell the brood sows after obtaining the litter. File 1040 ez online 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. File 1040 ez online Example 4. File 1040 ez online You are in the business of raising registered cattle for sale to others for use as breeding cattle. File 1040 ez online The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. File 1040 ez online Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. File 1040 ez online Such use does not demonstrate that you are holding the cattle for breeding purposes. File 1040 ez online 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. File 1040 ez online The same applies to hog and sheep breeders. File 1040 ez online Example 5. File 1040 ez online You breed, raise, and train horses for racing purposes. File 1040 ez online Every year you cull horses from your racing stable. File 1040 ez online 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. File 1040 ez online These horses are all considered held for sporting purposes. File 1040 ez online Figuring gain or loss on the cash method. File 1040 ez online   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. File 1040 ez online Raised livestock. File 1040 ez online   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. File 1040 ez online Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. File 1040 ez online The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. File 1040 ez online However, see Uniform Capitalization Rules in chapter 6. File 1040 ez online Purchased livestock. File 1040 ez online   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. File 1040 ez online Example. File 1040 ez online A farmer sold a breeding cow on January 8, 2013, for $1,250. File 1040 ez online Expenses of the sale were $125. File 1040 ez online The cow was bought July 2, 2009, for $1,300. File 1040 ez online Depreciation (not less than the amount allowable) was $867. File 1040 ez online 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. File 1040 ez online Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. File 1040 ez online Any loss on the disposition of such property is treated as a long-term capital loss. File 1040 ez online Converted wetland. File 1040 ez online   This is generally land that was drained or filled to make the production of agricultural commodities possible. File 1040 ez online 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. File 1040 ez online   A wetland (before conversion) is land that meets all the following conditions. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online It supports, under normal circumstances, mostly plants that grow in saturated soil. File 1040 ez online Highly erodible cropland. File 1040 ez online   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. File 1040 ez online Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. File 1040 ez online 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. File 1040 ez online Successor. File 1040 ez online   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. File 1040 ez online Timber Standing timber you held as investment property is a capital asset. File 1040 ez online Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. File 1040 ez online If you held the timber primarily for sale to customers, it is not a capital asset. File 1040 ez online Gain or loss on its sale is ordinary business income or loss. File 1040 ez online It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). File 1040 ez online See the Instructions for Schedule F (Form 1040). File 1040 ez online 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. File 1040 ez online Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. File 1040 ez online , are ordinary farm income and expenses reported on Schedule F. File 1040 ez online 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. File 1040 ez online Timber considered cut. File 1040 ez online   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. File 1040 ez online This is true whether the timber is cut under contract or whether you cut it yourself. File 1040 ez online Christmas trees. File 1040 ez online   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. File 1040 ez online They qualify for both rules discussed below. File 1040 ez online Election to treat cutting as a sale or exchange. File 1040 ez online   Under the general rule, the cutting of timber results in no gain or loss. File 1040 ez online It is not until a sale or exchange occurs that gain or loss is realized. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online Any later sale results in ordinary business income or loss. File 1040 ez online See the example below. File 1040 ez online   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. File 1040 ez online Making the election. File 1040 ez online   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. File 1040 ez online You do not have to make the election in the first year you cut the timber. File 1040 ez online You can make it in any year to which the election would apply. File 1040 ez online If the timber is partnership property, the election is made on the partnership return. File 1040 ez online This election cannot be made on an amended return. File 1040 ez online   Once you have made the election, it remains in effect for all later years unless you revoke it. File 1040 ez online Election under section 631(a) may be revoked. File 1040 ez online   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. File 1040 ez online The prior election (and revocation) is disregarded for purposes of making a subsequent election. File 1040 ez online See Form T (Timber), Forest Activities Schedule, for more information. File 1040 ez online Gain or loss. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online 611-3. File 1040 ez online   Depletion of timber is discussed in chapter 7. File 1040 ez online Example. File 1040 ez online   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. File 1040 ez online It had an adjusted basis for depletion of $40 per MBF. File 1040 ez online You are a calendar year taxpayer. File 1040 ez online On January 1, 2013, the timber had a FMV of $350 per MBF. File 1040 ez online It was cut in April for sale. File 1040 ez online On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. File 1040 ez online You report the difference between the FMV and your adjusted basis for depletion as a gain. File 1040 ez online 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. File 1040 ez online You figure your gain as follows. File 1040 ez online 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. File 1040 ez online Outright sales of timber. File 1040 ez online   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). File 1040 ez online 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). File 1040 ez online Cutting contract. File 1040 ez online   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. File 1040 ez online You are the owner of the timber. File 1040 ez online You held the timber longer than 1 year before its disposal. File 1040 ez online You kept an economic interest in the timber. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online Include this amount on Form 4797 along with your other section 1231 gains or losses. File 1040 ez online Date of disposal. File 1040 ez online   The date of disposal is the date the timber is cut. File 1040 ez online 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. File 1040 ez online   This election applies only to figure the holding period of the timber. File 1040 ez online It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). File 1040 ez online   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. File 1040 ez online The statement must identify the advance payments subject to the election and the contract under which they were made. File 1040 ez online   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). File 1040 ez online Attach the statement to the amended return and write “Filed pursuant to section 301. File 1040 ez online 9100-2” at the top of the statement. File 1040 ez online File the amended return at the same address the original return was filed. File 1040 ez online Owner. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online Tree stumps. File 1040 ez online   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. File 1040 ez online Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. File 1040 ez online However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. File 1040 ez online Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. File 1040 ez online   See Form T (Timber) and its separate instructions for more information about dispositions of timber. File 1040 ez online 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). File 1040 ez online If you have a gain from the sale, you may be allowed to exclude the gain on your home. File 1040 ez online For more information, see Publication 523, Selling Your Home. File 1040 ez online The gain on the sale of your business property is taxable. File 1040 ez online A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. File 1040 ez online Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. File 1040 ez online See chapter 9. File 1040 ez online Losses from personal-use property, other than casualty or theft losses, are not deductible. File 1040 ez online 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. File 1040 ez online See chapter 10 for information about installment sales. File 1040 ez online When you sell your farm, the gain or loss on each asset is figured separately. File 1040 ez online The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. File 1040 ez online Each of the assets sold must be classified as one of the following. File 1040 ez online Capital asset held 1 year or less. File 1040 ez online Capital asset held longer than 1 year. File 1040 ez online 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 ). File 1040 ez online 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). File 1040 ez online 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. File 1040 ez online Allocation of consideration paid for a farm. File 1040 ez online   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. File 1040 ez online The residual method is required only if the group of assets sold constitutes a trade or business. File 1040 ez online This method determines gain or loss from the transfer of each asset. File 1040 ez online It also determines the buyer's basis in the business assets. File 1040 ez online For more information, see Sale of a Business in chapter 2 of Publication 544. File 1040 ez online Property used in farm operation. File 1040 ez online   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. File 1040 ez online Recognized gains and losses on business property must be reported on your return for the year of the sale. File 1040 ez online If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). File 1040 ez online Example. File 1040 ez online You sell your farm, including your main home, which you have owned since December 2001. File 1040 ez online You realize gain on the sale as follows. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online Treat the balance as section 1231 gain. File 1040 ez online 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 . File 1040 ez online Partial sale. File 1040 ez online   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. File 1040 ez online You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. File 1040 ez online For a detailed discussion on installment sales, see Publication 544. File 1040 ez online Adjusted basis of the part sold. File 1040 ez online   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. File 1040 ez online , on the part sold. File 1040 ez online 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 . File 1040 ez online Example. File 1040 ez online You bought a 600-acre farm for $700,000. File 1040 ez online The farm included land and buildings. File 1040 ez online The purchase contract designated $600,000 of the purchase price to the land. File 1040 ez online You later sold 60 acres of land on which you had installed a fence. File 1040 ez online 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. File 1040 ez online Use this amount to determine your gain or loss on the sale of the 60 acres. File 1040 ez online Assessed values for local property taxes. File 1040 ez online   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. File 1040 ez online Example. File 1040 ez online Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. File 1040 ez online 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. File 1040 ez online The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. File 1040 ez online Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. File 1040 ez online The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). File 1040 ez online Sale of your home. File 1040 ez online   Your home is a capital asset and not property used in the trade or business of farming. File 1040 ez online 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. File 1040 ez online Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. File 1040 ez online   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. File 1040 ez online For more information on basis, see chapter 6. File 1040 ez online More information. File 1040 ez online   For more information on selling your home, see Publication 523. File 1040 ez online Gain from condemnation. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. File 1040 ez online This is true even if you voluntarily return the property to the lender. File 1040 ez online You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. File 1040 ez online Buyer's (borrower's) gain or loss. File 1040 ez online   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. File 1040 ez online The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. File 1040 ez online See Determining Gain or Loss , earlier. File 1040 ez online Worksheet 8-1. File 1040 ez online Worksheet for Foreclosures andRepossessions Part 1. File 1040 ez online Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. File 1040 ez online Complete this part only if you were personally liable for the debt. File 1040 ez online Otherwise, go to Part 2. File 1040 ez online   1. File 1040 ez online 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. File 1040 ez online Enter the Fair Market Value of the transferred property   3. File 1040 ez online Ordinary income from cancellation of debt upon foreclosure or repossession. File 1040 ez online * Subtract line 2 from line 1. File 1040 ez online If zero or less, enter -0-   Part 2. File 1040 ez online Figure your gain or loss from foreclosure or repossession. File 1040 ez online   4. File 1040 ez online If you completed Part 1, enter the smaller of line 1 or line 2. File 1040 ez online If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. File 1040 ez online Enter any proceeds you received from the foreclosure sale   6. File 1040 ez online Add lines 4 and 5   7. File 1040 ez online Enter the adjusted basis of the transferred property   8. File 1040 ez online Gain or loss from foreclosure or repossession. File 1040 ez online Subtract line 7  from line 6   * The income may not be taxable. File 1040 ez online See Cancellation of debt . File 1040 ez online    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. File 1040 ez online Amount realized on a nonrecourse debt. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online Example 1. File 1040 ez online Ann paid $200,000 for land used in her farming business. File 1040 ez online She paid $15,000 down and borrowed the remaining $185,000 from a bank. File 1040 ez online Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. File 1040 ez online The bank foreclosed on the loan 2 years after Ann stopped making payments. File 1040 ez online When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. File 1040 ez online The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. File 1040 ez online She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). File 1040 ez online She has a $20,000 deductible loss. File 1040 ez online Example 2. File 1040 ez online Assume the same facts as in Example 1 except the FMV of the land was $210,000. File 1040 ez online The result is the same. File 1040 ez online The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. File 1040 ez online Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. File 1040 ez online Amount realized on a recourse debt. File 1040 ez online   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. File 1040 ez online   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. File 1040 ez online The amount realized does not include the canceled debt that is your income from cancellation of debt. File 1040 ez online See Cancellation of debt , later. File 1040 ez online Example 3. File 1040 ez online Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). File 1040 ez online In this case, the amount she realizes is $170,000. File 1040 ez online This is the canceled debt ($180,000) up to the FMV of the land ($170,000). File 1040 ez online Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). File 1040 ez online She has a $30,000 deductible loss, which she figures on Form 4797, Part I. File 1040 ez online She is also treated as receiving ordinary income from cancellation of debt. File 1040 ez online That income is $10,000 ($180,000 − $170,000). File 1040 ez online This is the part of the canceled debt not included in the amount realized. File 1040 ez online She reports this as other income on Schedule F, line 8. File 1040 ez online Seller's (lender's) gain or loss on repossession. File 1040 ez online   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. File 1040 ez online For more information, see Repossession in Publication 537, Installment Sales. File 1040 ez online Cancellation of debt. File 1040 ez online   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. File 1040 ez online This income is separate from any gain or loss realized from the foreclosure or repossession. File 1040 ez online Report the income from cancellation of a business debt on Schedule F, line 8. File 1040 ez online Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. File 1040 ez online    You can use Worksheet 8-1 to figure your income from cancellation of debt. File 1040 ez online   However, income from cancellation of debt is not taxed if any of the following apply. File 1040 ez online The cancellation is intended as a gift. File 1040 ez online The debt is qualified farm debt (see chapter 3). File 1040 ez online The debt is qualified real property business debt (see chapter 5 of Publication 334). File 1040 ez online You are insolvent or bankrupt (see  chapter 3). File 1040 ez online The debt is qualified principal residence indebtedness (see chapter 3). File 1040 ez online   Use Form 982 to report the income exclusion. File 1040 ez online Abandonment The abandonment of property is a disposition of property. File 1040 ez online 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. File 1040 ez online Business or investment property. File 1040 ez online   Loss from abandonment of business or investment property is deductible as a loss. File 1040 ez online Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. File 1040 ez online If your adjusted basis is more than the amount you realize (if any), then you have a loss. File 1040 ez online If the amount you realize (if any) is more than your adjusted basis, then you have a gain. File 1040 ez online This rule also applies to leasehold improvements the lessor made for the lessee. File 1040 ez online 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 . File 1040 ez online   If the abandoned property is secured by debt, special rules apply. File 1040 ez online 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). File 1040 ez online For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). File 1040 ez online The abandonment loss is deducted in the tax year in which the loss is sustained. File 1040 ez online Report the loss on Form 4797, Part II, line 10. File 1040 ez online Personal-use property. File 1040 ez online   You cannot deduct any loss from abandonment of your home or other property held for personal use. File 1040 ez online Canceled debt. File 1040 ez online   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. File 1040 ez online This income is separate from any loss realized from abandonment of the property. File 1040 ez online Report income from cancellation of a debt related to a business or rental activity as business or rental income. File 1040 ez online Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. File 1040 ez online   However, income from cancellation of debt is not taxed in certain circumstances. File 1040 ez online See Cancellation of debt earlier under Foreclosure or Repossession . File 1040 ez online Forms 1099-A and 1099-C. File 1040 ez online   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. File 1040 ez online 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. File 1040 ez online 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. File 1040 ez online For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. File 1040 ez online Prev  Up  Next   Home   More Online Publications