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File 2011 Tax Return Late

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File 2011 Tax Return Late

File 2011 tax return late Publication 936 - Main Content Table of Contents Part I. File 2011 tax return late Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. File 2011 tax return late Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. File 2011 tax return late Home Mortgage Interest This part explains what you can deduct as home mortgage interest. File 2011 tax return late It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. File 2011 tax return late Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). File 2011 tax return late The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. File 2011 tax return late You can deduct home mortgage interest if all the following conditions are met. File 2011 tax return late You file Form 1040 and itemize deductions on Schedule A (Form 1040). File 2011 tax return late The mortgage is a secured debt on a qualified home in which you have an ownership interest. File 2011 tax return late Secured Debt and Qualified Home are explained later. File 2011 tax return late  Both you and the lender must intend that the loan be repaid. File 2011 tax return late Fully deductible interest. File 2011 tax return late   In most cases, you can deduct all of your home mortgage interest. File 2011 tax return late How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. File 2011 tax return late   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. File 2011 tax return late (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. File 2011 tax return late ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. File 2011 tax return late   The three categories are as follows. File 2011 tax return late Mortgages you took out on or before October 13, 1987 (called grandfathered debt). File 2011 tax return late Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). File 2011 tax return late Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). File 2011 tax return late The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. File 2011 tax return late   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. File 2011 tax return late    You can use Figure A to check whether your home mortgage interest is fully deductible. File 2011 tax return late This image is too large to be displayed in the current screen. File 2011 tax return late Please click the link to view the image. File 2011 tax return late Figure A. File 2011 tax return late Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. File 2011 tax return late A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. File 2011 tax return late In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. File 2011 tax return late If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. File 2011 tax return late In this publication, mortgage will refer to secured debt. File 2011 tax return late Debt not secured by home. File 2011 tax return late   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). File 2011 tax return late   A debt is not secured by your home if it once was, but is no longer secured by your home. File 2011 tax return late Wraparound mortgage. File 2011 tax return late   This is not a secured debt unless it is recorded or otherwise perfected under state law. File 2011 tax return late Example. File 2011 tax return late Beth owns a home subject to a mortgage of $40,000. File 2011 tax return late She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. File 2011 tax return late Beth continues to make the payments on the $40,000 note. File 2011 tax return late John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. File 2011 tax return late Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. File 2011 tax return late Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. File 2011 tax return late Choice to treat the debt as not secured by your home. File 2011 tax return late   You can choose to treat any debt secured by your qualified home as not secured by the home. File 2011 tax return late This treatment begins with the tax year for which you make the choice and continues for all later tax years. File 2011 tax return late You can revoke your choice only with the consent of the Internal Revenue Service (IRS). File 2011 tax return late   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. File 2011 tax return late This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. File 2011 tax return late Cooperative apartment owner. File 2011 tax return late   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. File 2011 tax return late Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. File 2011 tax return late This means your main home or your second home. File 2011 tax return late A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. File 2011 tax return late The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. File 2011 tax return late Otherwise, it is considered personal interest and is not deductible. File 2011 tax return late Main home. File 2011 tax return late   You can have only one main home at any one time. File 2011 tax return late This is the home where you ordinarily live most of the time. File 2011 tax return late Second home. File 2011 tax return late   A second home is a home that you choose to treat as your second home. File 2011 tax return late Second home not rented out. File 2011 tax return late   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. File 2011 tax return late You do not have to use the home during the year. File 2011 tax return late Second home rented out. File 2011 tax return late   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. File 2011 tax return late You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. File 2011 tax return late If you do not use the home long enough, it is considered rental property and not a second home. File 2011 tax return late For information on residential rental property, see Publication 527. File 2011 tax return late More than one second home. File 2011 tax return late   If you have more than one second home, you can treat only one as the qualified second home during any year. File 2011 tax return late However, you can change the home you treat as a second home during the year in the following situations. File 2011 tax return late If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. File 2011 tax return late If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. File 2011 tax return late If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. File 2011 tax return late Divided use of your home. File 2011 tax return late   The only part of your home that is considered a qualified home is the part you use for residential living. File 2011 tax return late If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. File 2011 tax return late You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. File 2011 tax return late Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. File 2011 tax return late (See Home Acquisition Debt in Part II. File 2011 tax return late ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . File 2011 tax return late Renting out part of home. File 2011 tax return late   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. File 2011 tax return late The rented part of your home is used by the tenant primarily for residential living. File 2011 tax return late The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. File 2011 tax return late You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. File 2011 tax return late If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. File 2011 tax return late Office in home. File 2011 tax return late   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. File 2011 tax return late It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. File 2011 tax return late Home under construction. File 2011 tax return late   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. File 2011 tax return late   The 24-month period can start any time on or after the day construction begins. File 2011 tax return late Home destroyed. File 2011 tax return late   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. File 2011 tax return late This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. File 2011 tax return late   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. File 2011 tax return late   This rule applies to your main home and to a second home that you treat as a qualified home. File 2011 tax return late Time-sharing arrangements. File 2011 tax return late   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. File 2011 tax return late A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. File 2011 tax return late Rental of time-share. File 2011 tax return late   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. File 2011 tax return late See Second home rented out , earlier, for the use requirement. File 2011 tax return late To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. File 2011 tax return late Married taxpayers. File 2011 tax return late   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. File 2011 tax return late Separate returns. File 2011 tax return late   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. File 2011 tax return late However, if you both consent in writing, then one spouse can take both the main home and a second home into account. File 2011 tax return late Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. File 2011 tax return late It also describes certain special situations that may affect your deduction. File 2011 tax return late Late payment charge on mortgage payment. File 2011 tax return late   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. File 2011 tax return late Mortgage prepayment penalty. File 2011 tax return late   If you pay off your home mortgage early, you may have to pay a penalty. File 2011 tax return late You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. File 2011 tax return late Sale of home. File 2011 tax return late   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale. File 2011 tax return late Example. File 2011 tax return late John and Peggy Harris sold their home on May 7. File 2011 tax return late Through April 30, they made home mortgage interest payments of $1,220. File 2011 tax return late The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. File 2011 tax return late Their mortgage interest deduction is $1,270 ($1,220 + $50). File 2011 tax return late Prepaid interest. File 2011 tax return late   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. File 2011 tax return late You can deduct in each year only the interest that qualifies as home mortgage interest for that year. File 2011 tax return late However, there is an exception that applies to points, discussed later. File 2011 tax return late Mortgage interest credit. File 2011 tax return late    You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. File 2011 tax return late Figure the credit on Form 8396, Mortgage Interest Credit. File 2011 tax return late If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. File 2011 tax return late   See Form 8396 and Publication 530 for more information on the mortgage interest credit. File 2011 tax return late Ministers' and military housing allowance. File 2011 tax return late   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. File 2011 tax return late Hardest Hit Fund and Emergency Homeowners' Loan Programs. File 2011 tax return late   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. File 2011 tax return late You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. File 2011 tax return late You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. File 2011 tax return late If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098–MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums), and box 5 (other information including real property taxes paid). File 2011 tax return late However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. File 2011 tax return late Mortgage assistance payments under section 235 of the National Housing Act. File 2011 tax return late   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. File 2011 tax return late You cannot deduct the interest that is paid for you. File 2011 tax return late No other effect on taxes. File 2011 tax return late   Do not include these mortgage assistance payments in your income. File 2011 tax return late Also, do not use these payments to reduce other deductions, such as real estate taxes. File 2011 tax return late Divorced or separated individuals. File 2011 tax return late   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. File 2011 tax return late See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. File 2011 tax return late Redeemable ground rents. File 2011 tax return late   In some states (such as Maryland), you can buy your home subject to a ground rent. File 2011 tax return late A ground rent is an obligation you assume to pay a fixed amount per year on the property. File 2011 tax return late Under this arrangement, you are leasing (rather than buying) the land on which your home is located. File 2011 tax return late   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. File 2011 tax return late   A ground rent is a redeemable ground rent if all of the following are true. File 2011 tax return late Your lease, including renewal periods, is for more than 15 years. File 2011 tax return late You can freely assign the lease. File 2011 tax return late You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specific amount. File 2011 tax return late The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. File 2011 tax return late   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. File 2011 tax return late Nonredeemable ground rents. File 2011 tax return late   Payments on a nonredeemable ground rent are not mortgage interest. File 2011 tax return late You can deduct them as rent if they are a business expense or if they are for rental property. File 2011 tax return late Reverse mortgages. File 2011 tax return late   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. File 2011 tax return late With a reverse mortgage, you retain title to your home. File 2011 tax return late Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. File 2011 tax return late Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. File 2011 tax return late Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. File 2011 tax return late Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. File 2011 tax return late Rental payments. File 2011 tax return late   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. File 2011 tax return late This is true even if the settlement papers call them interest. File 2011 tax return late You cannot deduct these payments as home mortgage interest. File 2011 tax return late Mortgage proceeds invested in tax-exempt securities. File 2011 tax return late   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. File 2011 tax return late “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. File 2011 tax return late Refunds of interest. File 2011 tax return late   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. File 2011 tax return late If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. File 2011 tax return late However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. File 2011 tax return late This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. File 2011 tax return late If you need to include the refund in income, report it on Form 1040, line 21. File 2011 tax return late   If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. File 2011 tax return late For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. File 2011 tax return late   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. File 2011 tax return late Cooperative apartment owner. File 2011 tax return late   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. File 2011 tax return late The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. File 2011 tax return late   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. File 2011 tax return late Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. File 2011 tax return late Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. File 2011 tax return late This image is too large to be displayed in the current screen. File 2011 tax return late Please click the link to view the image. File 2011 tax return late Figure B. File 2011 tax return late Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. File 2011 tax return late See Points paid by the seller , later. File 2011 tax return late General Rule You generally cannot deduct the full amount of points in the year paid. File 2011 tax return late Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. File 2011 tax return late See Deduction Allowed Ratably , next. File 2011 tax return late For exceptions to the general rule, see Deduction Allowed in Year Paid , later. File 2011 tax return late Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. File 2011 tax return late You use the cash method of accounting. File 2011 tax return late This means you report income in the year you receive it and deduct expenses in the year you pay them. File 2011 tax return late Most individuals use this method. File 2011 tax return late Your loan is secured by a home. File 2011 tax return late (The home does not need to be your main home. File 2011 tax return late ) Your loan period is not more than 30 years. File 2011 tax return late If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. File 2011 tax return late Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. File 2011 tax return late Example. File 2011 tax return late You use the cash method of accounting. File 2011 tax return late In 2013, you took out a $100,000 loan payable over 20 years. File 2011 tax return late The terms of the loan are the same as for other 20-year loans offered in your area. File 2011 tax return late You paid $4,800 in points. File 2011 tax return late You made 3 monthly payments on the loan in 2013. File 2011 tax return late You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. File 2011 tax return late In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). File 2011 tax return late Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. File 2011 tax return late (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. File 2011 tax return late ) Your loan is secured by your main home. File 2011 tax return late (Your main home is the one you ordinarily live in most of the time. File 2011 tax return late ) Paying points is an established business practice in the area where the loan was made. File 2011 tax return late The points paid were not more than the points generally charged in that area. File 2011 tax return late You use the cash method of accounting. File 2011 tax return late This means you report income in the year you receive it and deduct expenses in the year you pay them. File 2011 tax return late Most individuals use this method. File 2011 tax return late The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. File 2011 tax return late The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. File 2011 tax return late The funds you provided are not required to have been applied to the points. File 2011 tax return late They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. File 2011 tax return late You cannot have borrowed these funds from your lender or mortgage broker. File 2011 tax return late You use your loan to buy or build your main home. File 2011 tax return late The points were computed as a percentage of the principal amount of the mortgage. File 2011 tax return late The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. File 2011 tax return late The points may be shown as paid from either your funds or the seller's. File 2011 tax return late Note. File 2011 tax return late If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. File 2011 tax return late Home improvement loan. File 2011 tax return late   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. File 2011 tax return late Second home. File 2011 tax return late You cannot fully deduct in the year paid points you pay on loans secured by your second home. File 2011 tax return late You can deduct these points only over the life of the loan. File 2011 tax return late Refinancing. File 2011 tax return late   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. File 2011 tax return late This is true even if the new mortgage is secured by your main home. File 2011 tax return late   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. File 2011 tax return late You can deduct the rest of the points over the life of the loan. File 2011 tax return late Example 1. File 2011 tax return late In 1998, Bill Fields got a mortgage to buy a home. File 2011 tax return late In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. File 2011 tax return late The mortgage is secured by his home. File 2011 tax return late To get the new loan, he had to pay three points ($3,000). File 2011 tax return late Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. File 2011 tax return late Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. File 2011 tax return late The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. File 2011 tax return late Bill's first payment on the new loan was due July 1. File 2011 tax return late He made six payments on the loan in 2013 and is a cash basis taxpayer. File 2011 tax return late Bill used the funds from the new mortgage to repay his existing mortgage. File 2011 tax return late Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. File 2011 tax return late He cannot deduct all of the points in 2013. File 2011 tax return late He can deduct two points ($2,000) ratably over the life of the loan. File 2011 tax return late He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. File 2011 tax return late The other point ($1,000) was a fee for services and is not deductible. File 2011 tax return late Example 2. File 2011 tax return late The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. File 2011 tax return late Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. File 2011 tax return late His deduction is $500 ($2,000 × 25%). File 2011 tax return late Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. File 2011 tax return late This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. File 2011 tax return late The total amount Bill deducts in 2013 is $550 ($500 + $50). File 2011 tax return late Special Situations This section describes certain special situations that may affect your deduction of points. File 2011 tax return late Original issue discount. File 2011 tax return late   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. File 2011 tax return late This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. File 2011 tax return late Amounts charged for services. File 2011 tax return late    Amounts charged by the lender for specific services connected to the loan are not interest. File 2011 tax return late Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. File 2011 tax return late  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. File 2011 tax return late Points paid by the seller. File 2011 tax return late   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. File 2011 tax return late Treatment by seller. File 2011 tax return late   The seller cannot deduct these fees as interest. File 2011 tax return late But they are a selling expense that reduces the amount realized by the seller. File 2011 tax return late See Publication 523 for information on selling your home. File 2011 tax return late Treatment by buyer. File 2011 tax return late   The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. File 2011 tax return late If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. File 2011 tax return late If any of those tests are not met, the buyer deducts the points over the life of the loan. File 2011 tax return late   If you need information about the basis of your home, see Publication 523 or Publication 530. File 2011 tax return late Funds provided are less than points. File 2011 tax return late   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. File 2011 tax return late In addition, you can deduct any points paid by the seller. File 2011 tax return late Example 1. File 2011 tax return late When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). File 2011 tax return late You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. File 2011 tax return late Of the $1,000 charged for points, you can deduct $750 in the year paid. File 2011 tax return late You spread the remaining $250 over the life of the mortgage. File 2011 tax return late Example 2. File 2011 tax return late The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. File 2011 tax return late In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). File 2011 tax return late You spread the remaining $250 over the life of the mortgage. File 2011 tax return late You must reduce the basis of your home by the $1,000 paid by the seller. File 2011 tax return late Excess points. File 2011 tax return late   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. File 2011 tax return late You must spread any additional points over the life of the mortgage. File 2011 tax return late Mortgage ending early. File 2011 tax return late   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. File 2011 tax return late However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. File 2011 tax return late Instead, deduct the remaining balance over the term of the new loan. File 2011 tax return late   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. File 2011 tax return late Example. File 2011 tax return late Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. File 2011 tax return late He deducts $200 points per year. File 2011 tax return late Through 2012, Dan has deducted $2,200 of the points. File 2011 tax return late Dan prepaid his mortgage in full in 2013. File 2011 tax return late He can deduct the remaining $800 of points in 2013. File 2011 tax return late Limits on deduction. File 2011 tax return late   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . File 2011 tax return late See the Table 1 Instructions for line 10. File 2011 tax return late Form 1098. File 2011 tax return late    The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. File 2011 tax return late See Form 1098, Mortgage Interest Statement , later. File 2011 tax return late Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. File 2011 tax return late The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. File 2011 tax return late Qualified mortgage insurance. File 2011 tax return late   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). File 2011 tax return late   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. File 2011 tax return late If provided by the Rural Housing Service, it is commonly known as a guarantee fee. File 2011 tax return late The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. File 2011 tax return late These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. File 2011 tax return late Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. File 2011 tax return late Special rules for prepaid mortgage insurance. File 2011 tax return late   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. File 2011 tax return late You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. File 2011 tax return late No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. File 2011 tax return late This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. File 2011 tax return late Example. File 2011 tax return late Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. File 2011 tax return late Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. File 2011 tax return late Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. File 2011 tax return late Ryan's adjusted gross income (AGI) for 2012 is $76,000. File 2011 tax return late Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. File 2011 tax return late For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. File 2011 tax return late In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). File 2011 tax return late Limit on deduction. File 2011 tax return late   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. File 2011 tax return late See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. File 2011 tax return late If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. File 2011 tax return late Form 1098. File 2011 tax return late   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. File 2011 tax return late See Form 1098, Mortgage Interest Statement, next. File 2011 tax return late Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. File 2011 tax return late You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. File 2011 tax return late A governmental unit is a person for purposes of furnishing the statement. File 2011 tax return late The statement for each year should be sent to you by January 31 of the following year. File 2011 tax return late A copy of this form will also be sent to the IRS. File 2011 tax return late The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. File 2011 tax return late However, it should not show any interest that was paid for you by a government agency. File 2011 tax return late As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. File 2011 tax return late However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. File 2011 tax return late See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. File 2011 tax return late Prepaid interest on Form 1098. File 2011 tax return late   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. File 2011 tax return late However, you cannot deduct the prepaid amount for January 2014 in 2013. File 2011 tax return late (See Prepaid interest , earlier. File 2011 tax return late ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. File 2011 tax return late You will include the interest for January 2014 with other interest you pay for 2014. File 2011 tax return late Refunded interest. File 2011 tax return late   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. File 2011 tax return late See Refunds of interest , earlier. File 2011 tax return late Mortgage insurance premiums. File 2011 tax return late   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. File 2011 tax return late See Mortgage Insurance Premiums , earlier. File 2011 tax return late How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. File 2011 tax return late If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. File 2011 tax return late Attach a statement explaining the difference and print “See attached” next to line 10. File 2011 tax return late Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. File 2011 tax return late If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. File 2011 tax return late The seller must give you this number and you must give the seller your TIN. File 2011 tax return late A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. File 2011 tax return late Failure to meet any of these requirements may result in a $50 penalty for each failure. File 2011 tax return late The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. File 2011 tax return late If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. File 2011 tax return late Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. File 2011 tax return late More than one borrower. File 2011 tax return late   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. File 2011 tax return late Show how much of the interest each of you paid, and give the name and address of the person who received the form. File 2011 tax return late Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. File 2011 tax return late Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. File 2011 tax return late   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. File 2011 tax return late Let each of the other borrowers know what his or her share is. File 2011 tax return late Mortgage proceeds used for business or investment. File 2011 tax return late   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. File 2011 tax return late It shows where to deduct the part of your excess interest that is for those activities. File 2011 tax return late The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. File 2011 tax return late Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. File 2011 tax return late This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. File 2011 tax return late Cooperative housing corporation. File 2011 tax return late   This is a corporation that meets all of the following conditions. File 2011 tax return late Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. File 2011 tax return late Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. File 2011 tax return late For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. File 2011 tax return late At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. File 2011 tax return late At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. File 2011 tax return late Stock used to secure debt. File 2011 tax return late   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). File 2011 tax return late However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. File 2011 tax return late See chapter 4 of Publication 535 for details on these rules. File 2011 tax return late Figuring deductible home mortgage interest. File 2011 tax return late   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. File 2011 tax return late The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. File 2011 tax return late   Figure your share of this interest by multiplying the total by the following fraction. File 2011 tax return late      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. File 2011 tax return late   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. File 2011 tax return late The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. File 2011 tax return late (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. File 2011 tax return late ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. File 2011 tax return late Form 1098. File 2011 tax return late    The cooperative should give you a Form 1098 showing your share of the interest. File 2011 tax return late Use the rules in this publication to determine your deductible mortgage interest. File 2011 tax return late Part II. File 2011 tax return late Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. File 2011 tax return late These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . File 2011 tax return late Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. File 2011 tax return late This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. File 2011 tax return late Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. File 2011 tax return late Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). File 2011 tax return late It also must be secured by that home. File 2011 tax return late If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. File 2011 tax return late The additional debt may qualify as home equity debt (discussed later). File 2011 tax return late Home acquisition debt limit. File 2011 tax return late   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). File 2011 tax return late This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). File 2011 tax return late Debt over this limit may qualify as home equity debt (also discussed later). File 2011 tax return late Refinanced home acquisition debt. File 2011 tax return late   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. File 2011 tax return late However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. File 2011 tax return late Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). File 2011 tax return late Mortgage that qualifies later. File 2011 tax return late   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. File 2011 tax return late For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. File 2011 tax return late However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. File 2011 tax return late Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. File 2011 tax return late However, if the property later becomes a qualified home, the debt may qualify after that time. File 2011 tax return late Mortgage treated as used to buy, build, or improve home. File 2011 tax return late   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. File 2011 tax return late This applies in the following situations. File 2011 tax return late You buy your home within 90 days before or after the date you take out the mortgage. File 2011 tax return late The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). File 2011 tax return late (See Example 1 later. File 2011 tax return late ) You build or improve your home and take out the mortgage before the work is completed. File 2011 tax return late The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. File 2011 tax return late You build or improve your home and take out the mortgage within 90 days after the work is completed. File 2011 tax return late The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. File 2011 tax return late (See Example 2 later. File 2011 tax return late ) Example 1. File 2011 tax return late You bought your main home on June 3 for $175,000. File 2011 tax return late You paid for the home with cash you got from the sale of your old home. File 2011 tax return late On July 15, you took out a mortgage of $150,000 secured by your main home. File 2011 tax return late You used the $150,000 to invest in stocks. File 2011 tax return late You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. File 2011 tax return late The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. File 2011 tax return late Example 2. File 2011 tax return late On January 31, John began building a home on the lot that he owned. File 2011 tax return late He used $45,000 of his personal funds to build the home. File 2011 tax return late The home was completed on October 31. File 2011 tax return late On November 21, John took out a $36,000 mortgage that was secured by the home. File 2011 tax return late The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. File 2011 tax return late The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. File 2011 tax return late This is illustrated by Figure C. File 2011 tax return late   Please click here for the text description of the image. File 2011 tax return late Figure C. File 2011 tax return late John's example Date of the mortgage. File 2011 tax return late   The date you take out your mortgage is the day the loan proceeds are disbursed. File 2011 tax return late This is generally the closing date. File 2011 tax return late You can treat the day you apply in writing for your mortgage as the date you take it out. File 2011 tax return late However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. File 2011 tax return late If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. File 2011 tax return late Cost of home or improvements. File 2011 tax return late   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. File 2011 tax return late   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. File 2011 tax return late Substantial improvement. File 2011 tax return late   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. File 2011 tax return late    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. File 2011 tax return late However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. File 2011 tax return late Acquiring an interest in a home because of a divorce. File 2011 tax return late   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. File 2011 tax return late Part of home not a qualified home. File 2011 tax return late    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. File 2011 tax return late See Divided use of your home under Qualified Home in Part I. File 2011 tax return late Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. File 2011 tax return late In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. File 2011 tax return late Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. File 2011 tax return late Example. File 2011 tax return late You bought your home for cash 10 years ago. File 2011 tax return late You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. File 2011 tax return late This loan is home equity debt. File 2011 tax return late Home equity debt limit. File 2011 tax return late   There is a limit on the amount of debt that can be treated as home equity debt. File 2011 tax return late The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. File 2011 tax return late Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. File 2011 tax return late Example. File 2011 tax return late You own one home that you bought in 2000. File 2011 tax return late Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. File 2011 tax return late Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. File 2011 tax return late To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. File 2011 tax return late Your home equity debt is limited to $15,000. File 2011 tax return late This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. File 2011 tax return late Debt higher than limit. File 2011 tax return late   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. File 2011 tax return late But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. File 2011 tax return late If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. File 2011 tax return late Part of home not a qualified home. File 2011 tax return late   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. File 2011 tax return late See Divided use of your home under Qualified Home in Part I. File 2011 tax return late Fair market value (FMV). File 2011 tax return late    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. File 2011 tax return late Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. File 2011 tax return late Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. File 2011 tax return late To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. File 2011 tax return late How you used the proceeds does not matter. File 2011 tax return late Grandfathered debt is not limited. File 2011 tax return late All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. File 2011 tax return late However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. File 2011 tax return late Refinanced grandfathered debt. File 2011 tax return late   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. File 2011 tax return late To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). File 2011 tax return late The debt must be secured by the qualified home. File 2011 tax return late   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. File 2011 tax return late After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. File 2011 tax return late Exception. File 2011 tax return late   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. File 2011 tax return late This term cannot be more than 30 years. File 2011 tax return late Example. File 2011 tax return late Chester took out a $200,000 first mortgage on his home in 1986. File 2011 tax return late The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. File 2011 tax return late Chester refinanced the debt in 1991 with a new 20-year mortgage. File 2011 tax return late The refinanced debt is treated as grandfathered debt for its entire term (20 years). File 2011 tax return late Line-of-credit mortgage. File 2011 tax return late    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. File 2011 tax return late The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. File 2011 tax return late The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. File 2011 tax return late See Average Mortgage Balance in the Table 1 Instructions that follow. File 2011 tax return late Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. File 2011 tax return late All the mortgages are grandfathered debt. File 2011 tax return late The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . File 2011 tax return late In either of those cases, you do not need Table 1. File 2011 tax return late Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. File 2011 tax return late Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. File 2011 tax return late Table 1. File 2011 tax return late Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. File 2011 tax return late Part I Qualified Loan Limit 1. File 2011 tax return late Enter the average balance of all your grandfathered debt. File 2011 tax return late See line 1 instructions 1. File 2011 tax return late   2. File 2011 tax return late Enter the average balance of all your home acquisition debt. File 2011 tax return late See line 2 instructions 2. File 2011 tax return late   3. File 2011 tax return late Enter $1,000,000 ($500,000 if married filing separately) 3. File 2011 tax return late   4. File 2011 tax return late Enter the larger of the amount on line 1 or the amount on line 3 4. File 2011 tax return late   5. File 2011 tax return late Add the amounts on lines 1 and 2. File 2011 tax return late Enter the total here 5. File 2011 tax return late   6. File 2011 tax return late Enter the smaller of the amount on line 4 or the amount on line 5 6. File 2011 tax return late   7. File 2011 tax return late If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. File 2011 tax return late See the line 7 instructions for the limit which may apply to you. File 2011 tax return late 7. File 2011 tax return late   8. File 2011 tax return late Add the amounts on lines 6 and 7. File 2011 tax return late Enter the total. File 2011 tax return late This is your qualified loan limit. File 2011 tax return late 8. File 2011 tax return late   Part II Deductible Home Mortgage Interest 9. File 2011 tax return late Enter the total of the average balances of all mortgages on all qualified homes. File 2011 tax return late  See line 9 instructions 9. File 2011 tax return late     If line 8 is less than line 9, go on to line 10. File 2011 tax return late If line 8 is equal to or more than line 9, stop here. File 2011 tax return late All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). File 2011 tax return late     10. File 2011 tax return late Enter the total amount of interest that you paid. File 2011 tax return late See line 10 instructions 10. File 2011 tax return late   11. File 2011 tax return late Divide the amount on line 8 by the amount on line 9. File 2011 tax return late Enter the result as a decimal amount (rounded to three places) 11. File 2011 tax return late × . File 2011 tax return late 12. File 2011 tax return late Multiply the amount on line 10 by the decimal amount on line 11. File 2011 tax return late Enter the result. File 2011 tax return late This is your deductible home mortgage interest. File 2011 tax return late Enter this amount on Schedule A (Form 1040) 12. File 2011 tax return late   13. File 2011 tax return late Subtract the amount on line 12 from the amount on line 10. File 2011 tax return late Enter the result. File 2011 tax return late This is not home mortgage interest. File 2011 tax return late See line 13 instructions 13. File 2011 tax return late   Home equity debt only. File 2011 tax return late   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. File 2011 tax return late Enter zero on line 6 and complete the rest of Table 1. File 2011 tax return late Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. File 2011 tax return late You need these amounts to complete lines 1, 2, and 9 of Table 1. File 2011 tax return late You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. File 2011 tax return late The following are methods you can use to figure your average mortgage balances. File 2011 tax return late However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. File 2011 tax return late Average of first and last balance method. File 2011 tax return late   You can use this method if all the following apply. File 2011 tax return late You did not borrow any new amounts on the mortgage during the year. File 2011 tax return late (This does not include borrowing the original mortgage amount. File 2011 tax return late ) You did not prepay more than one month's principal during the year. File 2011 tax return late (This includes prepayment by refinancing your home or by applying proceeds from its sale. File 2011 tax return late ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. File 2011 tax return late You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. File 2011 tax return late    To figure your average balance, complete the following worksheet. File 2011 tax return late    1. File 2011 tax return late Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. File 2011 tax return late Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. File 2011 tax return late Add amounts on lines 1 and 2   4. File 2011 tax return late Divide the amount on line 3 by 2. File 2011 tax return late Enter the result   Interest paid divided by interest rate method. File 2011 tax return late   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. File 2011 tax return late    Complete the following worksheet to figure your average balance. File 2011 tax return late    1. File 2011 tax return late Enter the interest paid in 2013. File 2011 tax return late Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. File 2011 tax return late However, do include interest that is for 2013 but was paid in an earlier year   2. File 2011 tax return late Enter the annual interest rate on the mortgage. File 2011 tax return late If the interest rate varied in 2013, use the lowest rate for the year   3. File 2011 tax return late Divide the amount on line 1 by the amount on line 2. File 2011 tax return late Enter the result   Example. File 2011 tax return late Mr. File 2011 tax return late Blue had a line of credit secured by his main home all year. File 2011 tax return late He paid interest of $2,500 on this loan. File 2011 tax return late The interest rate on the loan was 9% (. File 2011 tax return late 09) all year. File 2011 tax return late His average balance using this method is $27,778, figured as follows. File 2011 tax return late 1. File 2011 tax return late Enter the interest paid in 2013. File 2011 tax return late Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. File 2011 tax return late However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. File 2011 tax return late Enter the annual interest rate on the mortgage. File 2011 tax return late If the interest rate varied in 2013, use the lowest rate for the year . File 2011 tax return late 09 3. File 2011 tax return late Divide the amount on line 1 by the amount on line 2. File 2011 tax return late Enter the result $27,778 Statements provided by your lender. File 2011 tax return late   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. File 2011 tax return late You can treat the balance as zero for any month the mortgage was not secured by your qualified home. File 2011 tax return late   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. File 2011 tax return late   If your lender can give you your average balance for the year, you can use that amount. File 2011 tax return late Example. File 2011 tax return late Ms. File 2011 tax return late Brown had a home equity loan secured by her main home all year. File 2011 tax return late She received monthly statements showing her average balance for each month. File 2011 tax return late She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. File 2011 tax return late Mixed-use mortgages. File 2011 tax return late   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). File 2011 tax return late For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). File 2011 tax return late   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. File 2011 tax return late Do not use the methods described earlier in this section to figure the average balance of either category. File 2011 tax return late Instead, for each category, use the following method. File 2011 tax return late Figure the balance of that category of debt for each month. File 2011 tax return late This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. File 2011 tax return late Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. File 2011 tax return late Add together the monthly balances figured in (1). File 2011 tax return late Divide the result in (2) by 12. File 2011 tax return late   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. File 2011 tax return late Example 1. File 2011 tax return late In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). File 2011 tax return late On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. File 2011 tax return late She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). File 2011 tax return late Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. File 2011 tax return late During 2013, her principal payments on the second mortgage totaled $10,000. File 2011 tax return late To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. File 2011 tax return late The January and February balances were zero. File 2011 tax return late The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. File 2011 tax return late (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. File 2011 tax return late ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). File 2011 tax return late Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). File 2011 tax return late Example 2. File 2011 tax return late The facts are the same as in Example 1. File 2011 tax return late In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. File 2011 tax return late The balance of the home acquisition debt remains $180,000 for each of those months. File 2011 tax return late Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). File 2011 tax return late The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. File 2011 tax return late Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). File 2011 tax return late L
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The File 2011 Tax Return Late

File 2011 tax return late 3. File 2011 tax return late   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. File 2011 tax return late Form 4797. File 2011 tax return late Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. File 2011 tax return late Granting the right to remove deposits. File 2011 tax return late Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. File 2011 tax return late You must report the income from all the different sources on your tax return, unless it is excluded by law. File 2011 tax return late Where you report the income on your tax return depends on its source. File 2011 tax return late This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. File 2011 tax return late For information on where to report other income, see the Instructions for Form 1040, U. File 2011 tax return late S. File 2011 tax return late Individual Income Tax Return. File 2011 tax return late Accounting method. File 2011 tax return late   The rules discussed in this chapter assume you use the cash method of accounting. File 2011 tax return late Under the cash method, you generally include an item of income in gross income in the year you receive it. File 2011 tax return late See Cash Method in chapter 2. File 2011 tax return late   If you use an accrual method of accounting, different rules may apply to your situation. File 2011 tax return late See Accrual Method in chapter 2. File 2011 tax return late Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. File 2011 tax return late Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. File 2011 tax return late Use this schedule to figure the net profit or loss from regular farming operations. File 2011 tax return late Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. File 2011 tax return late This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. File 2011 tax return late It also includes income from the sale of crop shares if you materially participate in producing the crop. File 2011 tax return late See Rents (Including Crop Shares) , later. File 2011 tax return late Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. File 2011 tax return late Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. File 2011 tax return late Land. File 2011 tax return late Depreciable farm equipment. File 2011 tax return late Buildings and structures. File 2011 tax return late Livestock held for draft, breeding, sport, or dairy purposes. File 2011 tax return late Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. File 2011 tax return late Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. File 2011 tax return late Sales of Farm Products Where to report. File 2011 tax return late    Table 3-1 shows where to report the sale of farm products on your tax return. File 2011 tax return late Schedule F. File 2011 tax return late   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. File 2011 tax return late This includes money and the fair market value of any property or services you receive. File 2011 tax return late When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). File 2011 tax return late See chapter 6 for information on the basis of assets. File 2011 tax return late You generally report these amounts on Schedule F for the year you receive payment. File 2011 tax return late Example. File 2011 tax return late In 2012, you bought 20 feeder calves for $11,000 for resale. File 2011 tax return late You sold them in 2013 for $21,000. File 2011 tax return late You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. File 2011 tax return late Form 4797. File 2011 tax return late   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. File 2011 tax return late In either case, you should always report these sales on Form 4797 instead of Schedule F. File 2011 tax return late See Livestock under Ordinary or Capital Gain or Loss in chapter 8. File 2011 tax return late Animals you do not hold primarily for sale are considered business assets of your farm. File 2011 tax return late Table 3-1. File 2011 tax return late Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. File 2011 tax return late   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. File 2011 tax return late This applies even if your agent pays you in a later year. File 2011 tax return late For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. File 2011 tax return late Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. File 2011 tax return late You must meet all the following conditions to qualify. File 2011 tax return late Your principal trade or business is farming. File 2011 tax return late You use the cash method of accounting. File 2011 tax return late You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. File 2011 tax return late The weather-related condition caused an area to be designated as eligible for assistance by the federal government. File 2011 tax return late Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. File 2011 tax return late The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. File 2011 tax return late A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. File 2011 tax return late See Other Involuntary Conversions in chapter 11. File 2011 tax return late Usual business practice. File 2011 tax return late   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. File 2011 tax return late Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. File 2011 tax return late If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. File 2011 tax return late Connection with affected area. File 2011 tax return late   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. File 2011 tax return late However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. File 2011 tax return late This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. File 2011 tax return late Classes of livestock. File 2011 tax return late   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. File 2011 tax return late Do not separate animals into classes based on age, sex, or breed. File 2011 tax return late Amount to be postponed. File 2011 tax return late   Follow these steps to figure the amount of gain to be postponed for each class of animals. File 2011 tax return late Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. File 2011 tax return late For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. File 2011 tax return late Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. File 2011 tax return late Example. File 2011 tax return late You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. File 2011 tax return late As a result of drought, you sold 135 head during 2012. File 2011 tax return late You realized $70,200 from the sale. File 2011 tax return late On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. File 2011 tax return late The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. File 2011 tax return late How to postpone gain. File 2011 tax return late   To postpone gain, attach a statement to your tax return for the year of the sale. File 2011 tax return late The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. File 2011 tax return late A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). File 2011 tax return late Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. File 2011 tax return late A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. File 2011 tax return late The number of animals sold in each of the 3 preceding years. File 2011 tax return late The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. File 2011 tax return late The total number of animals sold and the number sold because of weather-related conditions during the tax year. File 2011 tax return late A computation, as described above, of the income to be postponed for each class of livestock. File 2011 tax return late   Generally, you must file the statement and the return by the due date of the return, including extensions. File 2011 tax return late However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. File 2011 tax return late For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). File 2011 tax return late Attach the statement to the amended return and write “Filed pursuant to section 301. File 2011 tax return late 9100-2” at the top of the amended return. File 2011 tax return late File the amended return at the same address you filed the original return. File 2011 tax return late Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. File 2011 tax return late Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. File 2011 tax return late However, if you materially participate in farming operations on the land, the rent is farm income. File 2011 tax return late See Landlord Participation in Farming in chapter 12. File 2011 tax return late Pasture income and rental. File 2011 tax return late   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. File 2011 tax return late You must enter it as Other income on Schedule F. File 2011 tax return late If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. File 2011 tax return late Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. File 2011 tax return late It does not matter whether you use the cash method of accounting or an accrual method of accounting. File 2011 tax return late If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. File 2011 tax return late See Landlord Participation in Farming in chapter 12. File 2011 tax return late Report the rental income on Schedule F. File 2011 tax return late If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). File 2011 tax return late The income is not included in self-employment income. File 2011 tax return late Crop shares you use to feed livestock. File 2011 tax return late   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. File 2011 tax return late You must include the fair market value of the crop shares in income at that time. File 2011 tax return late You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. File 2011 tax return late Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. File 2011 tax return late See  chapter 12. File 2011 tax return late Crop shares you give to others (gift). File 2011 tax return late   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. File 2011 tax return late You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. File 2011 tax return late Example. File 2011 tax return late A tenant farmed part of your land under a crop-share arrangement. File 2011 tax return late The tenant harvested and delivered the crop in your name to an elevator company. File 2011 tax return late Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. File 2011 tax return late They sell their crop shares in the following year and the elevator company makes payments directly to your children. File 2011 tax return late In this situation, you are considered to have received rental income and then made a gift of that income. File 2011 tax return late You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. File 2011 tax return late Crop share loss. File 2011 tax return late   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. File 2011 tax return late See Publication 925 for information on these rules. File 2011 tax return late Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. File 2011 tax return late However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. File 2011 tax return late See Cost-Sharing Exclusion (Improvements) , later. File 2011 tax return late Report the agricultural program payment on the appropriate line of Schedule F, Part I. File 2011 tax return late Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. File 2011 tax return late However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. File 2011 tax return late Claim the deduction on Schedule F for the year of repayment or reduction. File 2011 tax return late Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. File 2011 tax return late However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. File 2011 tax return late You do not need approval from the IRS to adopt this method of reporting CCC loans. File 2011 tax return late Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. File 2011 tax return late However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. File 2011 tax return late For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. File 2011 tax return late Revenue Procedure 2008-52, 2008-36 I. File 2011 tax return late R. File 2011 tax return late B. File 2011 tax return late 587, is available at  www. File 2011 tax return late irs. File 2011 tax return late gov/irb/2008-36_IRB/ar09. File 2011 tax return late html. File 2011 tax return late You can request income tax withholding from CCC loan payments you receive. File 2011 tax return late Use Form W-4V, Voluntary Withholding Request. File 2011 tax return late See chapter 16 for information about ordering the form. File 2011 tax return late To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. File 2011 tax return late Attach a statement to your return showing the details of the loan. File 2011 tax return late You must file the statement and the return by the due date of the return, including extensions. File 2011 tax return late If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File 2011 tax return late Attach the statement to the amended return and write “Filed pursuant to section 301. File 2011 tax return late 9100-2” at the top of the return. File 2011 tax return late File the amended return at the same address you filed the original return. File 2011 tax return late When you make this election, the amount you report as income becomes your basis in the commodity. File 2011 tax return late See chapter 6 for information on the basis of assets. File 2011 tax return late If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. File 2011 tax return late If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. File 2011 tax return late If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. File 2011 tax return late If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. File 2011 tax return late Form 1099-A. File 2011 tax return late   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. File 2011 tax return late “CCC” should be shown in box 6. File 2011 tax return late The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. File 2011 tax return late Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. File 2011 tax return late If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. File 2011 tax return late Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. File 2011 tax return late Market gain should be reported as follows. File 2011 tax return late If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. File 2011 tax return late However, adjust the basis of the commodity for the amount of the market gain. File 2011 tax return late If you did not include the CCC loan in income in the year received, include the market gain in your income. File 2011 tax return late The following examples show how to report market gain. File 2011 tax return late Example 1. File 2011 tax return late Mike Green is a cotton farmer. File 2011 tax return late He uses the cash method of accounting and files his tax return on a calendar year basis. File 2011 tax return late He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. File 2011 tax return late In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. File 2011 tax return late 00 per pound). File 2011 tax return late In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. File 2011 tax return late 50 per pound (lower than the loan amount). File 2011 tax return late Later in 2013, he sold the cotton for $2,500. File 2011 tax return late The market gain on the redemption was $. File 2011 tax return late 50 ($2. File 2011 tax return late 00 – $1. File 2011 tax return late 50) per pound. File 2011 tax return late Mike realized total market gain of $500 ($. File 2011 tax return late 50 x 1,000 pounds). File 2011 tax return late How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. File 2011 tax return late Included CCC loan. File 2011 tax return late   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. File 2011 tax return late The $500 market gain is not recognized on the redemption. File 2011 tax return late He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. File 2011 tax return late   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. File 2011 tax return late His gain from the sale is $1,000 ($2,500 – $1,500). File 2011 tax return late He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. File 2011 tax return late Excluded CCC loan. File 2011 tax return late   Mike has income of $500 from market gain in 2013. File 2011 tax return late He reports it on Schedule F, lines 4a and 4b. File 2011 tax return late His basis in the cotton is zero, so his gain from its sale is $2,500. File 2011 tax return late He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. File 2011 tax return late Example 2. File 2011 tax return late The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. File 2011 tax return late Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. File 2011 tax return late In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. File 2011 tax return late How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. File 2011 tax return late Included CCC loan. File 2011 tax return late   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. File 2011 tax return late The $500 market gain is not recognized on the redemption. File 2011 tax return late Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. File 2011 tax return late   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. File 2011 tax return late Mike has no gain or loss on its sale to the cotton buyer for that amount. File 2011 tax return late Excluded CCC loan. File 2011 tax return late   As in Example 1, Mike has income of $500 from market gain in 2013. File 2011 tax return late He reports it on Schedule F, lines 4a and 4b. File 2011 tax return late His basis in the cotton is zero, so his gain from its sale is $1,500. File 2011 tax return late He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. File 2011 tax return late Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. File 2011 tax return late You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. File 2011 tax return late Cost-share payments you receive may qualify for the cost-sharing exclusion. File 2011 tax return late See Cost-Sharing Exclusion (Improvements) , later. File 2011 tax return late CRP payments are reported to you on Form 1099-G. File 2011 tax return late Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. File 2011 tax return late See the instructions for Schedule SE (Form 1040). File 2011 tax return late Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. File 2011 tax return late You generally include them in the year you receive them. File 2011 tax return late Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. File 2011 tax return late You can request income tax withholding from crop disaster payments you receive from the federal government. File 2011 tax return late Use Form W-4V, Voluntary Withholding Request. File 2011 tax return late See chapter 16 for information about ordering the form. File 2011 tax return late Election to postpone reporting until the following year. File 2011 tax return late   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. File 2011 tax return late You use the cash method of accounting. File 2011 tax return late You receive the crop insurance proceeds in the same tax year the crops are damaged. File 2011 tax return late You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. File 2011 tax return late   Deferral is not permitted for proceeds received from revenue insurance policies. File 2011 tax return late   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. File 2011 tax return late Check the box on line 8c and attach a statement to your tax return. File 2011 tax return late The statement must include your name and address and contain the following information. File 2011 tax return late A statement that you are making an election under IRC section 451(d) and Regulations section 1. File 2011 tax return late 451-6. File 2011 tax return late The specific crop or crops physically destroyed or damaged. File 2011 tax return late A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. File 2011 tax return late The cause of the physical destruction or damage and the date or dates it occurred. File 2011 tax return late The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. File 2011 tax return late The name of each insurance carrier from whom you received payments. File 2011 tax return late   One election covers all crops representing a single trade or business. File 2011 tax return late If you have more than one farming business, make a separate election for each one. File 2011 tax return late For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. File 2011 tax return late   An election is binding for the year unless the IRS approves your request to change it. File 2011 tax return late To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. File 2011 tax return late Ogden Submission Processing Center P. File 2011 tax return late O. File 2011 tax return late Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. File 2011 tax return late These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. File 2011 tax return late They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. File 2011 tax return late Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. File 2011 tax return late You must include these benefits in income in the year you receive them. File 2011 tax return late You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. File 2011 tax return late Report the benefits on Schedule F, Part I, as agricultural program payments. File 2011 tax return late You can usually take a current deduction for the same amount as a feed expense. File 2011 tax return late Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. File 2011 tax return late A payment is any economic benefit you get as a result of an improvement. File 2011 tax return late However, this exclusion applies only to that part of a payment that meets all three of the following tests. File 2011 tax return late It was for a capital expense. File 2011 tax return late You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. File 2011 tax return late You must include the payment for a deductible expense in income, and you can take any offsetting deduction. File 2011 tax return late See chapter 5 for information on deducting soil and water conservation expenses. File 2011 tax return late It does not substantially increase your annual income from the property for which it is made. File 2011 tax return late An increase in annual income is substantial if it is more than the greater of the following amounts. File 2011 tax return late 10% of the average annual income derived from the affected property before receiving the improvement. File 2011 tax return late $2. File 2011 tax return late 50 times the number of affected acres. File 2011 tax return late The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. File 2011 tax return late Qualifying programs. File 2011 tax return late   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. File 2011 tax return late The rural clean water program authorized by the Federal Water Pollution Control Act. File 2011 tax return late The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. File 2011 tax return late The water bank program authorized by the Water Bank Act. File 2011 tax return late The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. File 2011 tax return late The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. File 2011 tax return late The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. File 2011 tax return late The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. File 2011 tax return late Certain small watershed programs, listed later. File 2011 tax return late Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. File 2011 tax return late Several state programs have been approved. File 2011 tax return late For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). File 2011 tax return late Small watershed programs. File 2011 tax return late   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. File 2011 tax return late The programs under the Watershed Protection and Flood Prevention Act. File 2011 tax return late The flood prevention projects under the Flood Control Act of 1944. File 2011 tax return late The Emergency Watershed Protection Program under the Flood Control Act of 1950. File 2011 tax return late Certain programs under the Colorado River Basin Salinity Control Act. File 2011 tax return late The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. File 2011 tax return late The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. File 2011 tax return late The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. File 2011 tax return late The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. File 2011 tax return late The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. File 2011 tax return late The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. File 2011 tax return late The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. File 2011 tax return late The Conservation Security Program authorized by the Food Security Act of 1985. File 2011 tax return late The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. File 2011 tax return late Income realized. File 2011 tax return late   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). File 2011 tax return late Value of the improvement. File 2011 tax return late   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. File 2011 tax return late The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. File 2011 tax return late Any government payments under a program not listed earlier. File 2011 tax return late Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. File 2011 tax return late Any government payment to you for rent or for your services. File 2011 tax return late The denominator of the fraction is the total cost of the improvement. File 2011 tax return late Excludable portion. File 2011 tax return late   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. File 2011 tax return late 10% of the prior average annual income from the affected acreage. File 2011 tax return late The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. File 2011 tax return late $2. File 2011 tax return late 50 times the number of affected acres. File 2011 tax return late The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. File 2011 tax return late You may need to consult your tax advisor for assistance. File 2011 tax return late Example. File 2011 tax return late One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. File 2011 tax return late The total cost of the improvement was $500,000. File 2011 tax return late The USDA paid $490,000. File 2011 tax return late You paid $10,000. File 2011 tax return late The value of the cost-sharing improvement is $15,000. File 2011 tax return late The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. File 2011 tax return late The excludable portion is the greater amount, $1,550. File 2011 tax return late You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. File 2011 tax return late   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. File 2011 tax return late Any payment excluded from income is not part of your basis. File 2011 tax return late In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. File 2011 tax return late   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. File 2011 tax return late How to report the exclusion. File 2011 tax return late   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. File 2011 tax return late The statement must include the following information. File 2011 tax return late The dollar amount of the cost funded by the government payment. File 2011 tax return late The value of the improvement. File 2011 tax return late The amount you are excluding. File 2011 tax return late   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. File 2011 tax return late Recapture. File 2011 tax return late   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. File 2011 tax return late In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. File 2011 tax return late You must report the recapture on Form 4797. File 2011 tax return late See Section 1255 property under Other Gains in chapter 9. File 2011 tax return late Electing not to exclude payments. File 2011 tax return late   You can elect not to exclude all or part of any payments you receive under these programs. File 2011 tax return late If you make this election for all of these payments, none of the above restrictions and rules apply. File 2011 tax return late You must make this election by the due date, including extensions, for filing your return. File 2011 tax return late In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. File 2011 tax return late If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File 2011 tax return late Write “Filed pursuant to section 301. File 2011 tax return late 9100-2” at the top of the amended return and file it at the same address you filed the original return. File 2011 tax return late Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. File 2011 tax return late You must include these payments on Schedule F, lines 4a and 4b. File 2011 tax return late The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. File 2011 tax return late You must include these payments on Schedule F, lines 6a and 6b. File 2011 tax return late The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. File 2011 tax return late Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. File 2011 tax return late As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. File 2011 tax return late If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. File 2011 tax return late If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. File 2011 tax return late Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. File 2011 tax return late Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. File 2011 tax return late The gain or loss is capital or ordinary depending on how you used the quota. File 2011 tax return late See Capital or ordinary gain or loss , later. File 2011 tax return late Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. File 2011 tax return late Adjusted basis. File 2011 tax return late   The adjusted basis of your quota is determined differently depending on how you obtained the quota. File 2011 tax return late The basis of a quota derived from an original grant by the federal government is zero. File 2011 tax return late The basis of a purchased quota is the purchase price. File 2011 tax return late The basis of a quota received as a gift is generally the same as the donor's basis. File 2011 tax return late However, under certain circumstances, the basis is increased by the amount of gift taxes paid. File 2011 tax return late If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. File 2011 tax return late The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. File 2011 tax return late Reduction of basis. File 2011 tax return late   You are required to reduce the basis of your tobacco quota by the following amounts. File 2011 tax return late Deductions you took for amortization, depletion, or depreciation. File 2011 tax return late Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. File 2011 tax return late The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). File 2011 tax return late Amount treated as interest. File 2011 tax return late   You must reduce your tobacco quota buyout program payment by the amount treated as interest. File 2011 tax return late The interest is reportable as ordinary income. File 2011 tax return late If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. File 2011 tax return late   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. File 2011 tax return late You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. File 2011 tax return late For more information, see Notice 2005-57, 2005-32 I. File 2011 tax return late R. File 2011 tax return late B. File 2011 tax return late 267, available at www. File 2011 tax return late irs. File 2011 tax return late gov/irb/2005-32_IRB/ar13. File 2011 tax return late html. File 2011 tax return late Installment method. File 2011 tax return late   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. File 2011 tax return late Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. File 2011 tax return late See chapter 10 for more information. File 2011 tax return late Capital or ordinary gain or loss. File 2011 tax return late   Whether your gain or loss is ordinary or capital depends on how you used the quota. File 2011 tax return late Quota used in the trade or business of farming. File 2011 tax return late   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. File 2011 tax return late See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. File 2011 tax return late Quota held for investment. File 2011 tax return late   If you held the quota for investment purposes, any gain or loss is capital gain or loss. File 2011 tax return late The same result also applies if you held the quota for the production of income, though not connected with a trade or business. File 2011 tax return late Gain treated as ordinary income. File 2011 tax return late   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. File 2011 tax return late Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. File 2011 tax return late The cost of acquiring a quota. File 2011 tax return late Amounts for amortization, depletion, or depreciation. File 2011 tax return late Amounts to reflect a reduction in the quota pounds. File 2011 tax return late   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. File 2011 tax return late Self-employment income. File 2011 tax return late   The tobacco quota buyout payments are not self-employment income. File 2011 tax return late Income averaging for farmers. File 2011 tax return late   The gain or loss resulting from the quota payments does not qualify for income averaging. File 2011 tax return late A tobacco quota is considered an interest in land. File 2011 tax return late Income averaging is not available for gain or loss arising from the sale or other disposition of land. File 2011 tax return late Involuntary conversion. File 2011 tax return late   The buyout of the tobacco quota is not an involuntary conversion. File 2011 tax return late Form 1099-S. File 2011 tax return late   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. File 2011 tax return late The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. File 2011 tax return late Like-kind exchange of quota. File 2011 tax return late   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. File 2011 tax return late See Notice 2005-57 for more information. File 2011 tax return late Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. File 2011 tax return late Taxation of payments to tobacco growers. File 2011 tax return late   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. File 2011 tax return late Individuals will generally report the payments as an Agricultural program payment on Schedule F. File 2011 tax return late If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. File 2011 tax return late Self-employment income. File 2011 tax return late   Payments to growers generally represent self-employment income. File 2011 tax return late If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. File 2011 tax return late Income averaging for farmers. File 2011 tax return late   Payments to growers who are individuals qualify for farm income averaging. File 2011 tax return late Form 1099-G. File 2011 tax return late   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. File 2011 tax return late Other Payments You must include most other government program payments in income. File 2011 tax return late Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. File 2011 tax return late How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. File 2011 tax return late Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. File 2011 tax return late You must also capitalize the full cost of the improvement. File 2011 tax return late Since you have included the payments in income, they do not reduce your basis. File 2011 tax return late However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. File 2011 tax return late National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. File 2011 tax return late You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. File 2011 tax return late If you produce a tobacco crop, report the payments as income from farming on your Schedule F. File 2011 tax return late If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. File 2011 tax return late Payment to More Than One Person The USDA reports program payments to the IRS. File 2011 tax return late It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). File 2011 tax return late If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. File 2011 tax return late You should file Form 1099-G to report the identity of the actual recipient to the IRS. File 2011 tax return late You should also give this information to the recipient. File 2011 tax return late You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. File 2011 tax return late Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. File 2011 tax return late However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. File 2011 tax return late See chapter 16 for information about ordering Form 1099-G. File 2011 tax return late Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). File 2011 tax return late If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. File 2011 tax return late Form 1099-PATR. File 2011 tax return late   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. File 2011 tax return late Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. File 2011 tax return late For information on the alternative minimum tax, see the Instructions for Form 6251. File 2011 tax return late Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. File 2011 tax return late They include the following items. File 2011 tax return late Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). File 2011 tax return late The stated dollar value of qualified written notices of allocation. File 2011 tax return late The fair market value of other property. File 2011 tax return late Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. File 2011 tax return late You must reduce the cost or other basis of these items by the amount of such patronage dividends received. File 2011 tax return late Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. File 2011 tax return late If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. File 2011 tax return late Qualified written notice of allocation. File 2011 tax return late   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. File 2011 tax return late A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. File 2011 tax return late The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. File 2011 tax return late You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. File 2011 tax return late Signing and giving a written agreement to the cooperative. File 2011 tax return late Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. File 2011 tax return late The cooperative must notify you in writing of this bylaw and give you a copy. File 2011 tax return late Endorsing and cashing a qualified check paid as part of the same patronage dividend. File 2011 tax return late You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. File 2011 tax return late Qualified check. File 2011 tax return late   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. File 2011 tax return late It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. File 2011 tax return late It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. File 2011 tax return late Loss on redemption. File 2011 tax return late   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. File 2011 tax return late The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. File 2011 tax return late Nonqualified notice of allocation. File 2011 tax return late   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. File 2011 tax return late Your basis in the notice is zero. File 2011 tax return late You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. File 2011 tax return late Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. File 2011 tax return late However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. File 2011 tax return late   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. File 2011 tax return late For example, if it represents interest income, report it on your return as interest. File 2011 tax return late Buying or selling capital assets or depreciable property. File 2011 tax return late   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. File 2011 tax return late You must, however, reduce the basis of these assets by the dividends. File 2011 tax return late This reduction is taken into account as of the first day of the tax year in which the dividends are received. File 2011 tax return late If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. File 2011 tax return late   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. File 2011 tax return late Example. File 2011 tax return late On July 1, 2012, Mr. File 2011 tax return late Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. File 2011 tax return late The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). File 2011 tax return late Mr. File 2011 tax return late Brown files his return on a calendar year basis. File 2011 tax return late For 2012, he claimed a depreciation deduction of $311, using the 10. File 2011 tax return late 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). File 2011 tax return late On July 2, 2013, the cooperative association paid Mr. File 2011 tax return late Brown a $300 cash patronage dividend for buying the machine. File 2011 tax return late Mr. File 2011 tax return late Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. File 2011 tax return late Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. File 2011 tax return late 38% × 1. File 2011 tax return late 5 = 23. File 2011 tax return late 07% Depreciation deduction for 2013 ($2,289 × 23. File 2011 tax return late 07%) $528 Exceptions. File 2011 tax return late   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. File 2011 tax return late If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. File 2011 tax return late If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). File 2011 tax return late   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. File 2011 tax return late Personal purchases. File 2011 tax return late   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). File 2011 tax return late This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. File 2011 tax return late Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. File 2011 tax return late A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. File 2011 tax return late These allocations can be paid in money, other property, or qualified certificates. File 2011 tax return late Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. File 2011 tax return late Qualified certificates. File 2011 tax return late   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. File 2011 tax return late The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. File 2011 tax return late If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. File 2011 tax return late Nonqualified certificates. File 2011 tax return late   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. File 2011 tax return late Your basis in the certificate is zero. File 2011 tax return late You must include in income any amount you receive from its sale, redemption, or other disposition. File 2011 tax return late Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. File 2011 tax return late Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. File 2011 tax return late For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. File 2011 tax return late General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. File 2011 tax return late Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. File 2011 tax return late It is excluded from taxable income (see Exclusions , later). File 2011 tax return late Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. File 2011 tax return late If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. File 2011 tax return late Election to defer income from discharge of indebtedness. File 2011 tax return late   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. File 2011 tax return late Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. File 2011 tax return late See IRC section 108(i) and Publication 4681 for details. File 2011 tax return late Form 1099-C. File 2011 tax return late   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. File 2011 tax return late The amount of debt canceled is shown in box 2. File 2011 tax return late Exceptions The following discussion covers some exceptions to the general rule for canceled debt. File 2011 tax return late These exceptions apply before the exclusions discussed below. File 2011 tax return late Price reduced after purchase. File 2011 tax return late   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. File 2011 tax return late Reduce your basis in the property by the amount of the reduction in the debt. File 2011 tax return late The rules that apply to bankruptcy and insolvency are explained below under Exclusions . File 2011 tax return late Deductible debt. File 2011 tax return late   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. File 2011 tax return late This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. File 2011 tax return late Example. File 2011 tax return late You get accounting services for your farm on credit. File 2011 tax return late Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. File 2011 tax return late Your accountant forgives part of the amount you owe for the accounting services. File 2011 tax return late How you treat the canceled debt depends on your method of accounting. File 2011 tax return late Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. File 2011 tax return late Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. File 2011 tax return late Exclusions Do not include canceled debt in income in the following situations. File 2011 tax return late The cancellation takes place in a bankruptcy case under title 11 of the U. File 2011 tax return late S. File 2011 tax return late Code. File 2011 tax return late The cancellation takes place when you are insolvent. File 2011 tax return late The canceled debt is a qualified farm debt. File 2011 tax return late The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). File 2011 tax return late See Publication 334, Tax Guide for Small Business, chapter 5. File 2011 tax return late The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. File 2011 tax return late The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. File 2011 tax return late If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. File 2011 tax return late If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. File 2011 tax return late See Form 982 , later, for information on how to claim an exclusion for a canceled debt. File 2011 tax return late Debt. File 2011 tax return late   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. File 2011 tax return late Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. File 2011 tax return late Bankruptcy. File 2011 tax return late   A bankruptcy case is a case under title 11 of the U. File 2011 tax return late S. File 2011 tax return late Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. File 2011 tax return late   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. File 2011 tax return late Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . File 2011 tax return late Insolvency. File 2011 tax return late   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. File 2011 tax return late   You can exclude canceled debt from gross income up to the amount by which you are insolvent. File 2011 tax return late If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. File 2011 tax return late Otherwise, you include the difference in gross income. File 2011 tax return late Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . File 2011 tax return late You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. File 2011 tax return late Example. File 2011 tax return late You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. File 2011 tax return late Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. File 2011 tax return late Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). File 2011 tax return late You can exclude this amount from income. File 2011 tax return late The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. File 2011 tax return late If not, you must include it in income. File 2011 tax return late Reduction of tax attributes. File 2011 tax return late   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. File 2011 tax return late Order of reduction. File 2011 tax return late   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. File 2011 tax return late Net operating loss (NOL). File 2011 tax return late Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. File 2011 tax return late Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. File 2011 tax return late General business credit carryover. File 2011 tax return late Reduce the credit carryover to or from the tax year of the debt cancellation. File 2011 tax return late Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. File 2011 tax return late Minimum tax credit. File 2011 tax return late Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. File 2011 tax return late Reduce the credit 331/3 cents for each dollar of excluded canceled debt. File 2011 tax return late Capital loss. File 2011 tax return late Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. File 2011 tax return late Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. File 2011 tax return late Basis. File 2011 tax return late Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. File 2011 tax return late Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. File 2011 tax return late Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. File 2011 tax return late Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. File 2011 tax return late Inventory and accounts and notes receivable. File 2011 tax return late Other property. File 2011 tax return late Reduce the basis one dollar for each dollar of excluded canceled debt. File 2011 tax return late However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. File 2011 tax return late For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. File 2011 tax return late 1017-1(b)(2). File 2011 tax return late Also see Electing to reduce the basis of depreciable property