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File taxes online free federal and state 4. File taxes online free federal and state   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. File taxes online free federal and state Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. File taxes online free federal and state Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. File taxes online free federal and state If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. File taxes online free federal and state You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. File taxes online free federal and state Special rules apply if you rent your condominium to others. File taxes online free federal and state You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. File taxes online free federal and state In addition, you can deduct any dues or assessments paid for maintenance of the common elements. File taxes online free federal and state You cannot deduct special assessments you pay to a condominium management corporation for improvements. File taxes online free federal and state However, you may be able to recover your share of the cost of any improvement by taking depreciation. File taxes online free federal and state Cooperatives If you live in a cooperative, you do not own your apartment. File taxes online free federal and state Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. File taxes online free federal and state If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. File taxes online free federal and state In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. File taxes online free federal and state Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. File taxes online free federal and state Figure your depreciation deduction as follows. File taxes online free federal and state Figure the depreciation for all the depreciable real property owned by the corporation. File taxes online free federal and state (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. File taxes online free federal and state ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. File taxes online free federal and state Multiply your cost per share by the total number of outstanding shares. File taxes online free federal and state Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. File taxes online free federal and state Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. File taxes online free federal and state Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. File taxes online free federal and state Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. File taxes online free federal and state Multiply the result of (2) by the percentage you figured in (3). File taxes online free federal and state This is your depreciation on the stock. File taxes online free federal and state Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. File taxes online free federal and state Payments added to capital account. File taxes online free federal and state   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. File taxes online free federal and state For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. File taxes online free federal and state   Treat as a capital cost the amount you were assessed for capital items. File taxes online free federal and state This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. File taxes online free federal and state   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. File taxes online free federal and state Otherwise, figure your share in the following manner. File taxes online free federal and state Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. File taxes online free federal and state Multiply the corporation's deductible interest by the number you figured in (1). File taxes online free federal and state This is your share of the interest. File taxes online free federal and state Multiply the corporation's deductible taxes by the number you figured in (1). File taxes online free federal and state This is your share of the taxes. File taxes online free federal and state Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. File taxes online free federal and state You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. File taxes online free federal and state You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. File taxes online free federal and state However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). File taxes online free federal and state Example. File taxes online free federal and state Your tax year is the calendar year. File taxes online free federal and state You moved from your home in May and started renting it out on June 1. File taxes online free federal and state You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. File taxes online free federal and state Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. File taxes online free federal and state When figuring depreciation, treat the property as placed in service on June 1. File taxes online free federal and state Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. File taxes online free federal and state Fair market value. File taxes online free federal and state   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. File taxes online free federal and state Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. File taxes online free federal and state Figuring the basis. File taxes online free federal and state   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. File taxes online free federal and state For other increases and decreases to basis, see Adjusted Basis in chapter 2. File taxes online free federal and state Example. File taxes online free federal and state Several years ago you built your home for $140,000 on a lot that cost you $14,000. File taxes online free federal and state Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. File taxes online free federal and state Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. File taxes online free federal and state Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. File taxes online free federal and state The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). File taxes online free federal and state On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. File taxes online free federal and state The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). File taxes online free federal and state Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. File taxes online free federal and state (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. File taxes online free federal and state ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. File taxes online free federal and state The fair market value of the property on the date you change your apartment to rental use. File taxes online free federal and state This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. File taxes online free federal and state The corporation's adjusted basis in the property on that date. File taxes online free federal and state Do not subtract depreciation when figuring the corporation's adjusted basis. File taxes online free federal and state If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). File taxes online free federal and state The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. File taxes online free federal and state Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. File taxes online free federal and state Generally, that will be MACRS for any conversion after 1986. File taxes online free federal and state Treat the property as placed in service on the conversion date. File taxes online free federal and state Example. File taxes online free federal and state Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. File taxes online free federal and state Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. File taxes online free federal and state 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . File taxes online free federal and state 01364). File taxes online free federal and state Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. File taxes online free federal and state You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). File taxes online free federal and state You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of the house. File taxes online free federal and state There is no change in the types of expenses deductible for the personal-use part of your property. File taxes online free federal and state Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). File taxes online free federal and state You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. File taxes online free federal and state You do not have to divide the expenses that belong only to the rental part of your property. File taxes online free federal and state For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. File taxes online free federal and state If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. File taxes online free federal and state You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. File taxes online free federal and state How to divide expenses. File taxes online free federal and state   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. File taxes online free federal and state You can use any reasonable method for dividing the expense. File taxes online free federal and state It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. File taxes online free federal and state The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. File taxes online free federal and state Example. File taxes online free federal and state You rent a room in your house. File taxes online free federal and state The room is 12 × 15 feet, or 180 square feet. File taxes online free federal and state Your entire house has 1,800 square feet of floor space. File taxes online free federal and state You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. File taxes online free federal and state If your heating bill for the year for the entire house was $600, $60 ($600 × . File taxes online free federal and state 10) is a rental expense. File taxes online free federal and state The balance, $540, is a personal expense that you cannot deduct. File taxes online free federal and state Duplex. File taxes online free federal and state   A common situation is the duplex where you live in one unit and rent out the other. File taxes online free federal and state Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. File taxes online free federal and state Example. File taxes online free federal and state You own a duplex and live in one half, renting the other half. File taxes online free federal and state Both units are approximately the same size. File taxes online free federal and state Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. File taxes online free federal and state You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). File taxes online free federal and state Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. File taxes online free federal and state You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. File taxes online free federal and state Where to report. File taxes online free federal and state   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. File taxes online free federal and state For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. File taxes online free federal and state   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. File taxes online free federal and state You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. File taxes online free federal and state Presumption of profit. File taxes online free federal and state   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. File taxes online free federal and state Postponing decision. File taxes online free federal and state   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. File taxes online free federal and state You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. File taxes online free federal and state You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. File taxes online free federal and state More information. File taxes online free federal and state   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. File taxes online free federal and state Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. File taxes online free federal and state Instead of selling the house she had been living in, she decided to change it to rental property. File taxes online free federal and state Eileen selected a tenant and started renting the house on February 1. File taxes online free federal and state Eileen charges $750 a month for rent and collects it herself. File taxes online free federal and state Eileen also received a $750 security deposit from her tenant. File taxes online free federal and state Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. File taxes online free federal and state Her rental expenses for the year are as follows. File taxes online free federal and state   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. File taxes online free federal and state She can deduct eleven-twelfths of these expenses as rental expenses. File taxes online free federal and state She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. File taxes online free federal and state She cannot deduct the balance of the fire insurance because it is a personal expense. File taxes online free federal and state Eileen bought this house in 1984 for $35,000. File taxes online free federal and state Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. File taxes online free federal and state Before changing it to rental property, Eileen added several improvements to the house. File taxes online free federal and state She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. File taxes online free federal and state Of this amount, $35,000 was for the land and $117,000 was for the house. File taxes online free federal and state Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. File taxes online free federal and state As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. File taxes online free federal and state She chooses the GDS recovery period of 27. File taxes online free federal and state 5 years. File taxes online free federal and state She uses Table 2-2d to find her depreciation percentage. File taxes online free federal and state Since she placed the property in service in February, the percentage is 3. File taxes online free federal and state 182%. File taxes online free federal and state On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. File taxes online free federal and state The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. File taxes online free federal and state She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. File taxes online free federal and state On May 1, Eileen paid $4,000 to have a furnace installed in the house. File taxes online free federal and state The furnace is residential rental property. File taxes online free federal and state Because she placed the property in service in May, the percentage from Table 2-2d is 2. File taxes online free federal and state 273%. File taxes online free federal and state Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . File taxes online free federal and state 03182) $1,241   Dishwasher ($425 × . File taxes online free federal and state 20) 85   Furnace ($4,000 × . File taxes online free federal and state 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. File taxes online free federal and state She enters her income, expenses, and depreciation for the house in the column for Property A. File taxes online free federal and state Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. File taxes online free federal and state See the Instructions for Form 4562 for more information on preparing the form. File taxes online free federal and state Prev  Up  Next   Home   More Online Publications
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File taxes online free federal and state 3. File taxes online free federal and state   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. File taxes online free federal and state Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. File taxes online free federal and state Its treatment as ordinary or capital is determined under rules for section 1231 transactions. File taxes online free federal and state When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. File taxes online free federal and state Any remaining gain is a section 1231 gain. File taxes online free federal and state Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. File taxes online free federal and state Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). File taxes online free federal and state Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. File taxes online free federal and state If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). File taxes online free federal and state Do not take that gain into account as section 1231 gain. File taxes online free federal and state Section 1231 transactions. File taxes online free federal and state   The following transactions result in gain or loss subject to section 1231 treatment. File taxes online free federal and state Sales or exchanges of real property or depreciable personal property. File taxes online free federal and state This property must be used in a trade or business and held longer than 1 year. File taxes online free federal and state Generally, property held for the production of rents or royalties is considered to be used in a trade or business. File taxes online free federal and state Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). File taxes online free federal and state Sales or exchanges of leaseholds. File taxes online free federal and state The leasehold must be used in a trade or business and held longer than 1 year. File taxes online free federal and state Sales or exchanges of cattle and horses. File taxes online free federal and state The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. File taxes online free federal and state Sales or exchanges of other livestock. File taxes online free federal and state This livestock does not include poultry. File taxes online free federal and state It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. File taxes online free federal and state Sales or exchanges of unharvested crops. File taxes online free federal and state The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. File taxes online free federal and state You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). File taxes online free federal and state Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. File taxes online free federal and state Cutting of timber or disposal of timber, coal, or iron ore. File taxes online free federal and state The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. File taxes online free federal and state Condemnations. File taxes online free federal and state The condemned property must have been held longer than 1 year. File taxes online free federal and state It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. File taxes online free federal and state It cannot be property held for personal use. File taxes online free federal and state Casualties and thefts. File taxes online free federal and state The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). File taxes online free federal and state You must have held the property longer than 1 year. File taxes online free federal and state However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. File taxes online free federal and state For more information on casualties and thefts, see Publication 547. File taxes online free federal and state Property for sale to customers. File taxes online free federal and state   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. File taxes online free federal and state If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. File taxes online free federal and state Example. File taxes online free federal and state You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. File taxes online free federal and state Customers make deposits on the reels, which you refund if the reels are returned within a year. File taxes online free federal and state If they are not returned, you keep each deposit as the agreed-upon sales price. File taxes online free federal and state Most reels are returned within the 1-year period. File taxes online free federal and state You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. File taxes online free federal and state Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. File taxes online free federal and state Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. File taxes online free federal and state Copyrights. File taxes online free federal and state    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). File taxes online free federal and state The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. File taxes online free federal and state Treatment as ordinary or capital. File taxes online free federal and state   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. File taxes online free federal and state If you have a net section 1231 loss, it is ordinary loss. File taxes online free federal and state If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. File taxes online free federal and state The rest, if any, is long-term capital gain. File taxes online free federal and state Nonrecaptured section 1231 losses. File taxes online free federal and state   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. File taxes online free federal and state Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. File taxes online free federal and state These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. File taxes online free federal and state Example. File taxes online free federal and state In 2013, Ben has a $2,000 net section 1231 gain. File taxes online free federal and state To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. File taxes online free federal and state From 2008 through 2012 he had the following section 1231 gains and losses. File taxes online free federal and state Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. File taxes online free federal and state 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. File taxes online free federal and state To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. File taxes online free federal and state This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. File taxes online free federal and state On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. File taxes online free federal and state Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. File taxes online free federal and state Whether the adjusted basis was figured using depreciation or amortization another person claimed. File taxes online free federal and state Corporate distributions. File taxes online free federal and state   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. File taxes online free federal and state General asset accounts. File taxes online free federal and state   Different rules apply to dispositions of property you depreciated using a general asset account. File taxes online free federal and state For information on these rules, see Publication 946. File taxes online free federal and state Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. File taxes online free federal and state See Gain Treated as Ordinary Income, later. File taxes online free federal and state Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. File taxes online free federal and state See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. File taxes online free federal and state Section 1245 property defined. File taxes online free federal and state   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. File taxes online free federal and state Personal property (either tangible or intangible). File taxes online free federal and state Other tangible property (except buildings and their structural components) used as any of the following. File taxes online free federal and state See Buildings and structural components below. File taxes online free federal and state An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. File taxes online free federal and state A research facility in any of the activities in (a). File taxes online free federal and state A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). File taxes online free federal and state That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. File taxes online free federal and state Amortization of certified pollution control facilities. File taxes online free federal and state The section 179 expense deduction. File taxes online free federal and state Deduction for clean-fuel vehicles and certain refueling property. File taxes online free federal and state Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. File taxes online free federal and state Deduction for certain qualified refinery property. File taxes online free federal and state Deduction for qualified energy efficient commercial building property. File taxes online free federal and state Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. File taxes online free federal and state (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). File taxes online free federal and state ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). File taxes online free federal and state Expenditures to remove architectural and transportation barriers to the handicapped and elderly. File taxes online free federal and state Deduction for qualified tertiary injectant expenses. File taxes online free federal and state Certain reforestation expenditures. File taxes online free federal and state Deduction for election to expense qualified advanced mine safety equipment property. File taxes online free federal and state Single purpose agricultural (livestock) or horticultural structures. File taxes online free federal and state Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. File taxes online free federal and state Any railroad grading or tunnel bore. File taxes online free federal and state Buildings and structural components. File taxes online free federal and state   Section 1245 property does not include buildings and structural components. File taxes online free federal and state The term building includes a house, barn, warehouse, or garage. File taxes online free federal and state The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. File taxes online free federal and state   Do not treat a structure that is essentially machinery or equipment as a building or structural component. File taxes online free federal and state Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. File taxes online free federal and state   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. File taxes online free federal and state Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. File taxes online free federal and state Facility for bulk storage of fungible commodities. File taxes online free federal and state   This term includes oil or gas storage tanks and grain storage bins. File taxes online free federal and state Bulk storage means the storage of a commodity in a large mass before it is used. File taxes online free federal and state For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. File taxes online free federal and state To be fungible, a commodity must be such that one part may be used in place of another. File taxes online free federal and state   Stored materials that vary in composition, size, and weight are not fungible. File taxes online free federal and state Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. File taxes online free federal and state For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. File taxes online free federal and state Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. File taxes online free federal and state The depreciation and amortization allowed or allowable on the property. File taxes online free federal and state The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). File taxes online free federal and state A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. File taxes online free federal and state For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. File taxes online free federal and state See Gifts and Transfers at Death, later. File taxes online free federal and state Use Part III of Form 4797 to figure the ordinary income part of the gain. File taxes online free federal and state Depreciation taken on other property or taken by other taxpayers. File taxes online free federal and state   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. File taxes online free federal and state Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. File taxes online free federal and state Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). File taxes online free federal and state Depreciation and amortization. File taxes online free federal and state   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. File taxes online free federal and state Ordinary depreciation deductions. File taxes online free federal and state Any special depreciation allowance you claimed. File taxes online free federal and state Amortization deductions for all the following costs. File taxes online free federal and state Acquiring a lease. File taxes online free federal and state Lessee improvements. File taxes online free federal and state Certified pollution control facilities. File taxes online free federal and state Certain reforestation expenses. File taxes online free federal and state Section 197 intangibles. File taxes online free federal and state Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. File taxes online free federal and state Franchises, trademarks, and trade names acquired before August 11, 1993. File taxes online free federal and state The section 179 deduction. File taxes online free federal and state Deductions for all the following costs. File taxes online free federal and state Removing barriers to the disabled and the elderly. File taxes online free federal and state Tertiary injectant expenses. File taxes online free federal and state Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). File taxes online free federal and state Environmental cleanup costs. File taxes online free federal and state Certain reforestation expenses. File taxes online free federal and state Qualified disaster expenses. File taxes online free federal and state Any basis reduction for the investment credit (minus any basis increase for credit recapture). File taxes online free federal and state Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). File taxes online free federal and state Example. File taxes online free federal and state You file your returns on a calendar year basis. File taxes online free federal and state In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. File taxes online free federal and state You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. File taxes online free federal and state You did not take the section 179 deduction. File taxes online free federal and state You sold the truck in May 2013 for $7,000. File taxes online free federal and state The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). File taxes online free federal and state Figure the gain treated as ordinary income as follows. File taxes online free federal and state 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. File taxes online free federal and state   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. File taxes online free federal and state   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. File taxes online free federal and state Depreciation allowed or allowable. File taxes online free federal and state   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. File taxes online free federal and state However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. File taxes online free federal and state If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. File taxes online free federal and state   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. File taxes online free federal and state Multiple asset accounts. File taxes online free federal and state   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. File taxes online free federal and state Example. File taxes online free federal and state In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. File taxes online free federal and state All of the depreciation was recorded in a single depreciation account. File taxes online free federal and state After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. File taxes online free federal and state You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. File taxes online free federal and state However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. File taxes online free federal and state Normal retirement. File taxes online free federal and state   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. File taxes online free federal and state Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. File taxes online free federal and state To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. File taxes online free federal and state Section 1250 property defined. File taxes online free federal and state   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. File taxes online free federal and state It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. File taxes online free federal and state A fee simple interest in land is not included because it is not depreciable. File taxes online free federal and state   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. File taxes online free federal and state Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. File taxes online free federal and state For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. File taxes online free federal and state For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. File taxes online free federal and state If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. File taxes online free federal and state You will not have additional depreciation if any of the following conditions apply to the property disposed of. File taxes online free federal and state You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. File taxes online free federal and state In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. File taxes online free federal and state The property was residential low-income rental property you held for 162/3 years or longer. File taxes online free federal and state For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. File taxes online free federal and state You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. File taxes online free federal and state The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. File taxes online free federal and state These properties are depreciated using the straight line method. File taxes online free federal and state In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. File taxes online free federal and state Depreciation taken by other taxpayers or on other property. File taxes online free federal and state   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). File taxes online free federal and state Example. File taxes online free federal and state Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. File taxes online free federal and state Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. File taxes online free federal and state On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. File taxes online free federal and state At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). File taxes online free federal and state Depreciation allowed or allowable. File taxes online free federal and state   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. File taxes online free federal and state If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. File taxes online free federal and state Retired or demolished property. File taxes online free federal and state   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. File taxes online free federal and state Example. File taxes online free federal and state A wing of your building is totally destroyed by fire. File taxes online free federal and state The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. File taxes online free federal and state Figuring straight line depreciation. File taxes online free federal and state   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. File taxes online free federal and state If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. File taxes online free federal and state   Salvage value and useful life are not used for the ACRS method of depreciation. File taxes online free federal and state Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. File taxes online free federal and state   The straight line method is applied without any basis reduction for the investment credit. File taxes online free federal and state Property held by lessee. File taxes online free federal and state   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. File taxes online free federal and state This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. File taxes online free federal and state The same rule applies to the cost of acquiring a lease. File taxes online free federal and state   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. File taxes online free federal and state However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. File taxes online free federal and state Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. File taxes online free federal and state The percentages for these types of real property are as follows. File taxes online free federal and state Nonresidential real property. File taxes online free federal and state   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. File taxes online free federal and state For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. File taxes online free federal and state Residential rental property. File taxes online free federal and state   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. File taxes online free federal and state The percentage for periods before 1976 is zero. File taxes online free federal and state Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. File taxes online free federal and state Low-income housing. File taxes online free federal and state    Low-income housing includes all the following types of residential rental property. File taxes online free federal and state Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. File taxes online free federal and state Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. File taxes online free federal and state Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. File taxes online free federal and state Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. File taxes online free federal and state   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. File taxes online free federal and state If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. File taxes online free federal and state Foreclosure. File taxes online free federal and state   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. File taxes online free federal and state Example. File taxes online free federal and state On June 1, 2001, you acquired low-income housing property. File taxes online free federal and state On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. File taxes online free federal and state The property qualifies for a reduced applicable percentage because it was held more than 100 full months. File taxes online free federal and state The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. File taxes online free federal and state Therefore, 70% of the additional depreciation is treated as ordinary income. File taxes online free federal and state Holding period. File taxes online free federal and state   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. File taxes online free federal and state For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. File taxes online free federal and state If you sold it on January 2, 2013, the holding period is exactly 192 full months. File taxes online free federal and state The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. File taxes online free federal and state Holding period for constructed, reconstructed, or erected property. File taxes online free federal and state   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. File taxes online free federal and state Property acquired by gift or received in a tax-free transfer. File taxes online free federal and state   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. File taxes online free federal and state   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. File taxes online free federal and state See Low-Income Housing With Two or More Elements, next. File taxes online free federal and state Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. File taxes online free federal and state The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. File taxes online free federal and state The following are the types of separate elements. File taxes online free federal and state A separate improvement (defined below). File taxes online free federal and state The basic section 1250 property plus improvements not qualifying as separate improvements. File taxes online free federal and state The units placed in service at different times before all the section 1250 property is finished. File taxes online free federal and state For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. File taxes online free federal and state As a result, the apartment house consists of three separate elements. File taxes online free federal and state The 36-month test for separate improvements. File taxes online free federal and state   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. File taxes online free federal and state Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. File taxes online free federal and state Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). File taxes online free federal and state $5,000. File taxes online free federal and state The 1-year test. File taxes online free federal and state   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. File taxes online free federal and state The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. File taxes online free federal and state In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. File taxes online free federal and state Example. File taxes online free federal and state The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. File taxes online free federal and state During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. File taxes online free federal and state The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. File taxes online free federal and state However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. File taxes online free federal and state Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. File taxes online free federal and state Addition to the capital account. File taxes online free federal and state   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. File taxes online free federal and state   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. File taxes online free federal and state For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. File taxes online free federal and state The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. File taxes online free federal and state The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. File taxes online free federal and state   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. File taxes online free federal and state If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. File taxes online free federal and state Unadjusted basis. File taxes online free federal and state   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. File taxes online free federal and state However, the cost of components retired before that date is not included in the unadjusted basis. File taxes online free federal and state Holding period. File taxes online free federal and state   Use the following guidelines for figuring the applicable percentage for property with two or more elements. File taxes online free federal and state The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. File taxes online free federal and state The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. File taxes online free federal and state The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. File taxes online free federal and state   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. File taxes online free federal and state Use the first day of a calendar month that is closest to the middle of the tax year. File taxes online free federal and state If there are two first days of a month that are equally close to the middle of the year, use the earlier date. File taxes online free federal and state Figuring ordinary income attributable to each separate element. File taxes online free federal and state   Figure ordinary income attributable to each separate element as follows. File taxes online free federal and state   Step 1. File taxes online free federal and state Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. File taxes online free federal and state   Step 2. File taxes online free federal and state Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). File taxes online free federal and state   Step 3. File taxes online free federal and state Multiply the result in Step 2 by the applicable percentage for the element. File taxes online free federal and state Example. File taxes online free federal and state You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. File taxes online free federal and state The property consisted of four elements (W, X, Y, and Z). File taxes online free federal and state Step 1. File taxes online free federal and state The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. File taxes online free federal and state The sum of the additional depreciation for all the elements is $24,000. File taxes online free federal and state Step 2. File taxes online free federal and state The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. File taxes online free federal and state Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). File taxes online free federal and state $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. File taxes online free federal and state Step 3. File taxes online free federal and state The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. File taxes online free federal and state From these facts, the sum of the ordinary income for each element is figured as follows. File taxes online free federal and state   Step 1 Step 2 Step 3 Ordinary Income W . File taxes online free federal and state 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . File taxes online free federal and state 25 5,000 92% 4,600 Z . File taxes online free federal and state 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. File taxes online free federal and state In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. File taxes online free federal and state In any other disposition of the property, figure the fair market value that is more than the adjusted basis. File taxes online free federal and state Figure the additional depreciation for the periods after 1975. File taxes online free federal and state Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. File taxes online free federal and state Stop here if this is residential rental property or if (2) is equal to or more than (1). File taxes online free federal and state This is the gain treated as ordinary income because of additional depreciation. File taxes online free federal and state Subtract (2) from (1). File taxes online free federal and state Figure the additional depreciation for periods after 1969 but before 1976. File taxes online free federal and state Add the lesser of (4) or (5) to the result in (3). File taxes online free federal and state This is the gain treated as ordinary income because of additional depreciation. File taxes online free federal and state A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. File taxes online free federal and state Use Form 4797, Part III, to figure the ordinary income part of the gain. File taxes online free federal and state Corporations. File taxes online free federal and state   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. File taxes online free federal and state The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. File taxes online free federal and state Report this additional ordinary income on Form 4797, Part III, line 26 (f). File taxes online free federal and state Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. File taxes online free federal and state This applies even if no payments are received in that year. File taxes online free federal and state If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. File taxes online free federal and state For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. File taxes online free federal and state If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. File taxes online free federal and state To do this, allocate the selling price and the payments you receive in the year of sale to each asset. File taxes online free federal and state Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. File taxes online free federal and state For a detailed discussion of installment sales, see Publication 537. File taxes online free federal and state Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. File taxes online free federal and state However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. File taxes online free federal and state For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. File taxes online free federal and state See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. File taxes online free federal and state Part gift and part sale or exchange. File taxes online free federal and state   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. File taxes online free federal and state If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. File taxes online free federal and state However, see Bargain sale to charity, later. File taxes online free federal and state Example. File taxes online free federal and state You transferred depreciable personal property to your son for $20,000. File taxes online free federal and state When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. File taxes online free federal and state You took depreciation of $30,000. File taxes online free federal and state You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. File taxes online free federal and state You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. File taxes online free federal and state You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. File taxes online free federal and state Gift to charitable organization. File taxes online free federal and state   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. File taxes online free federal and state Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. File taxes online free federal and state   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. File taxes online free federal and state For more information, see Giving Property That Has Increased in Value in Publication 526. File taxes online free federal and state Bargain sale to charity. File taxes online free federal and state   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. File taxes online free federal and state First, figure the ordinary income as if you had sold the property at its fair market value. File taxes online free federal and state Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. File taxes online free federal and state See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. File taxes online free federal and state Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. File taxes online free federal and state Example. File taxes online free federal and state You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. File taxes online free federal and state Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. File taxes online free federal and state If you had sold the property at its fair market value, your ordinary income would have been $5,000. File taxes online free federal and state Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). File taxes online free federal and state Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. File taxes online free federal and state For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. File taxes online free federal and state However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. File taxes online free federal and state Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. File taxes online free federal and state Example 1. File taxes online free federal and state Janet Smith owned depreciable property that, upon her death, was inherited by her son. File taxes online free federal and state No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. File taxes online free federal and state However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. File taxes online free federal and state Example 2. File taxes online free federal and state The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. File taxes online free federal and state If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. File taxes online free federal and state Ordinary income from depreciation must be reported by the trust on the transfer. File taxes online free federal and state Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. File taxes online free federal and state For information on like-kind exchanges and involuntary conversions, see chapter 1. File taxes online free federal and state Depreciable personal property. File taxes online free federal and state   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. File taxes online free federal and state The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. File taxes online free federal and state The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. File taxes online free federal and state Example 1. File taxes online free federal and state You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. File taxes online free federal and state The old machine cost you $5,000 two years ago. File taxes online free federal and state You took depreciation deductions of $3,950. File taxes online free federal and state Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. File taxes online free federal and state Example 2. File taxes online free federal and state You bought office machinery for $1,500 two years ago and deducted $780 depreciation. File taxes online free federal and state This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). File taxes online free federal and state You choose to postpone reporting gain, but replacement machinery cost you only $1,000. File taxes online free federal and state Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. File taxes online free federal and state All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. File taxes online free federal and state Example 3. File taxes online free federal and state A fire destroyed office machinery you bought for $116,000. File taxes online free federal and state The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. File taxes online free federal and state You received a $117,000 insurance payment, realizing a gain of $92,640. File taxes online free federal and state You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. File taxes online free federal and state $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. File taxes online free federal and state The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. File taxes online free federal and state The amount you must report as ordinary income on the transaction is $12,000, figured as follows. File taxes online free federal and state 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. File taxes online free federal and state Depreciable real property. File taxes online free federal and state   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. File taxes online free federal and state The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. File taxes online free federal and state The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. File taxes online free federal and state   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. File taxes online free federal and state Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. File taxes online free federal and state Example. File taxes online free federal and state The state paid you $116,000 when it condemned your depreciable real property for public use. File taxes online free federal and state You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). File taxes online free federal and state You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. File taxes online free federal and state You choose to postpone reporting the gain. File taxes online free federal and state If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. File taxes online free federal and state The ordinary income to be reported is $6,000, which is the greater of the following amounts. File taxes online free federal and state The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. File taxes online free federal and state The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. File taxes online free federal and state   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. File taxes online free federal and state Basis of property acquired. File taxes online free federal and state   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. File taxes online free federal and state   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). File taxes online free federal and state However, if you acquired both depreciable real property and other property, allocate the total basis as follows. File taxes online free federal and state Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. File taxes online free federal and state Add the fair market value (or cost) of the other property acquired to the result in (1). File taxes online free federal and state Divide the result in (1) by the result in (2). File taxes online free federal and state Multiply the total basis by the result in (3). File taxes online free federal and state This is the basis of the depreciable real property acquired. File taxes online free federal and state If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). File taxes online free federal and state Subtract the result in (4) from the total basis. File taxes online free federal and state This is the basis of the other property acquired. File taxes online free federal and state If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). File taxes online free federal and state Example 1. File taxes online free federal and state In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. File taxes online free federal and state The property's adjusted basis was $38,400, with additional depreciation of $14,932. File taxes online free federal and state On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. File taxes online free federal and state Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). File taxes online free federal and state You chose to postpone reporting the gain under the involuntary conversion rules. File taxes online free federal and state Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. File taxes online free federal and state The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. File taxes online free federal and state The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. File taxes online free federal and state If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. File taxes online free federal and state Example 2. File taxes online free federal and state John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. File taxes online free federal and state He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. File taxes online free federal and state He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. File taxes online free federal and state Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. File taxes online free federal and state The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. File taxes online free federal and state The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. File taxes online free federal and state The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. File taxes online free federal and state The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. File taxes online free federal and state 4. File taxes online free federal and state The basis of the depreciable real property is $12,000. File taxes online free federal and state This is the $30,000 total basis multiplied by the 0. File taxes online free federal and state 4 figured in (3). File taxes online free federal and state The basis of the other property (land) is $18,000. File taxes online free federal and state This is the $30,000 total basis minus the $12,000 figured in (4). File taxes online free federal and state The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. File taxes online free federal and state Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. File taxes online free federal and state Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. File taxes online free federal and state See chapter 2. File taxes online free federal and state In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. File taxes online free federal and state In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. File taxes online free federal and state These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. File taxes online free federal and state The comparison should take into account all the following facts and circumstances. File taxes online free federal and state The original cost and reproduction cost of construction, erection, or production. File taxes online free federal and state The remaining economic useful life. File taxes online free federal and state The state of obsolescence. File taxes online free federal and state The anticipated expenditures required to maintain, renovate, or modernize the properties. File taxes online free federal and state Like-kind exchanges and involuntary conversions. File taxes online free federal and state   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. File taxes online free federal and state The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. File taxes online free federal and state The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. File taxes online free federal and state   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. File taxes online free federal and state The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. File taxes online free federal and state If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. File taxes online free federal and state Example. File taxes online free federal and state A fire destroyed your property with a total fair market value of $50,000. File taxes online free federal and state It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. File taxes online free federal and state You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. File taxes online free federal and state The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. File taxes online free federal and state You choose to postpone reporting your gain from the involuntary conversion. File taxes online free federal and state You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. File taxes online free federal and state The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. File taxes online free federal and state The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. File taxes online free federal and state The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. File taxes online free federal and state Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. File taxes online free federal and state The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. File taxes online free federal and state All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. File taxes online free federal and state Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. File taxes online free federal and state However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. File taxes online free federal and state Prev  Up  Next   Home   More Online Publications