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Form1040x 4. Form1040x Reporting Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Information Returns Schedule D and Form 8949Long and Short Term Net Gain or Loss Treatment of Capital Losses Capital Gains Tax Rates Form 4797Mark-to-market election. Form1040x Introduction This chapter explains how to report capital gains and losses and ordinary gains and losses from sales, exchanges, and other dispositions of property. Form1040x Although this discussion refers to Schedule D (Form 1040) and Form 8949, many of the rules discussed here also apply to taxpayers other than individuals. Form1040x However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Form1040x Topics - This chapter discusses: Information returns Schedule D (Form 1040) Form 4797 Form 8949 Useful Items - You may want to see: Publication 550 Investment Income and Expenses 537 Installment Sales Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1099-B Proceeds From Broker and Barter Exchange Transactions 1099-S Proceeds From Real Estate Transactions 4684 Casualties and Thefts 4797 Sales of Business Property 6252 Installment Sale Income 6781 Gains and Losses from Section 1256 Contracts and Straddles 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Form1040x Information Returns If you sell or exchange certain assets, you should receive an information return showing the proceeds of the sale. Form1040x This information is also provided to the IRS. Form1040x Form 1099-B. Form1040x If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a substitute statement from the broker. Form1040x Use the Form 1099-B or a substitute statement to complete Form 8949 and/or Schedule D. Form1040x Whether or not you receive 1099-B, you must report all taxable sales of stock, bonds, commodities, etc. Form1040x on Form 8949 and/or Schedule D, as applicable. Form1040x For more information on figuring gains and losses from these transactions, see chapter 4 in Publication 550. Form1040x For information on reporting the gains and losses, see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Form1040x Form 1099-S. Form1040x An information return must be provided on certain real estate transactions. Form1040x Generally, the person responsible for closing the transaction (the “real estate reporting person”) must report on Form 1099-S sales or exchanges of the following types of property. Form1040x Land (improved or unimproved), including air space. Form1040x An inherently permanent structure, including any residential, commercial, or industrial building. Form1040x A condominium unit and its related fixtures and common elements (including land). Form1040x Stock in a cooperative housing corporation. Form1040x If you sold or exchanged any of the above types of property, the “real estate reporting person” must give you a copy of Form 1099-S or a statement containing the same information as the Form 1099-S. Form1040x The “real estate reporting person” could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property. Form1040x For more information see chapter 4 in Publication 550. Form1040x Also, see the Instructions for Form 8949. Form1040x Schedule D and Form 8949 Form 8949. Form1040x Individuals, corporations, and partnerships, use Form 8949 to report the following. Form1040x Sales or exchanges of capital assets, including stocks, bonds, etc. Form1040x , and real estate (if not reported on another form or schedule such as Form 4684, 4797, 6252, 6781, or 8824). Form1040x Include these transactions even if you did not receive a Form 1099-B or 1099-S. Form1040x Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit. Form1040x Nonbusiness bad debts. Form1040x Individuals, If you are filing a joint return, complete as many copies of Form 8949 as you need to report all of your and your spouse's transactions. Form1040x You and your spouse may list your transactions on separate forms or you may combine them. Form1040x However, you must include on your Schedule D the totals from all Forms 8949 for both you and your spouse. Form1040x Corporations and electing large partnerships also use Form 8949 to report their share of gain or loss from a partnership, S Corporation, estate or trust. Form1040x Business entities meeting certain criteria, may have an exception to some of the normal requirements for completing Form 8949. Form1040x See the Instructions for Form 8949. Form1040x Schedule D. Form1040x Use Schedule D (Form 1040) to figure the overall gain or loss from transactions reported on Form 8949, and to report certain transactions you do not have to report on Form 8949. Form1040x Before completing Schedule D, you may have to complete other forms as shown below. Form1040x Complete all applicable lines of Form 8949 before completing lines 1b, 2, 3, 8b, 9, or 10 of your applicable Schedule D. Form1040x Enter on Schedule D the combined totals from all your Forms 8949. Form1040x For a sale, exchange, or involuntary conversion of business property, complete Form 4797 (discussed later). Form1040x For a like-kind exchange, complete Form 8824. Form1040x See Reporting the exchange under Like-Kind Exchanges in chapter 1. Form1040x For an installment sale, complete Form 6252. Form1040x See Publication 537. Form1040x For an involuntary conversion due to casualty or theft, complete Form 4684. Form1040x See Publication 547, Casualties, Disasters, and Thefts. Form1040x For a disposition of an interest in, or property used in, an activity to which the at-risk rules apply, complete Form 6198, At-Risk Limitations. Form1040x See Publication 925, Passive Activity and At-Risk Rules. Form1040x For a disposition of an interest in, or property used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations. Form1040x See Publication 925. Form1040x For gains and losses from section 1256 contracts and straddles, complete Form 6781. Form1040x See Publication 550. Form1040x Personal-use property. Form1040x Report gain on the sale or exchange of property held for personal use (such as your home) on Form 8949 and Schedule D (Form 1040), as applicable. Form1040x Loss from the sale or exchange of property held for personal use is not deductible. Form1040x But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, report the transaction on Form 8949 and Schedule D, even though the loss is not deductible. Form1040x See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for information on how to report the transaction. Form1040x Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Form1040x The time you own an asset before disposing of it is the holding period. Form1040x If you received a Form 1099-B, (or substitute statement) box 1c may help you determine whether the gain or loss is short-term or long-term. Form1040x If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. Form1040x Report it in Part I of Form 8949 and/or Schedule D, as applicable. Form1040x If you hold a capital asset longer than 1 year, the gain or loss from its disposition is long term. Form1040x Report it in Part II of Form 8949 and/or Schedule D, as applicable. Form1040x Table 4-1. Form1040x Do I Have a Short-Term or Long-Term Gain or Loss? IF you hold the property. Form1040x . Form1040x . Form1040x THEN you have a. Form1040x . Form1040x . Form1040x 1 year or less, Short-term capital gain or loss. Form1040x More than 1 year, Long-term capital gain or loss. Form1040x These distinctions are essential to correctly arrive at your net capital gain or loss. Form1040x Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income. Form1040x See Capital Gains Tax Rates, later. Form1040x Holding period. Form1040x To figure if you held property longer than 1 year, start counting on the day following the day you acquired the property. Form1040x The day you disposed of the property is part of your holding period. Form1040x Example. Form1040x If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Form1040x If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Form1040x Patent property. Form1040x If you dispose of patent property, you generally are considered to have held the property longer than 1 year, no matter how long you actually held it. Form1040x For more information, see Patents in chapter 2. Form1040x Inherited property. Form1040x If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Form1040x Installment sale. Form1040x The gain from an installment sale of an asset qualifying for long-term capital gain treatment in the year of sale continues to be long term in later tax years. Form1040x If it is short term in the year of sale, it continues to be short term when payments are received in later tax years. Form1040x The date the installment payment is received determines the capital gains rate that should be applied not the date the asset was sold under an installment contract. Form1040x Nontaxable exchange. Form1040x If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Form1040x That is, it begins on the same day as your holding period for the old property. Form1040x Example. Form1040x You bought machinery on December 4, 2012. Form1040x On June 4, 2013, you traded this machinery for other machinery in a nontaxable exchange. Form1040x On December 5, 2013, you sold the machinery you got in the exchange. Form1040x Your holding period for this machinery began on December 5, 2012. Form1040x Therefore, you held it longer than 1 year. Form1040x Corporate liquidation. Form1040x The holding period for property you receive in a liquidation generally starts on the day after you receive it if gain or loss is recognized. Form1040x Profit-sharing plan. Form1040x The holding period of common stock withdrawn from a qualified contributory profit-sharing plan begins on the day following the day the plan trustee delivered the stock to the transfer agent with instructions to reissue the stock in your name. Form1040x Gift. Form1040x If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Form1040x For more information on basis, see Publication 551, Basis of Assets. Form1040x Real property. Form1040x To figure how long you held real property, start counting on the day after you received title to it or, if earlier, the day after you took possession of it and assumed the burdens and privileges of ownership. Form1040x However, taking possession of real property under an option agreement is not enough to start the holding period. Form1040x The holding period cannot start until there is an actual contract of sale. Form1040x The holding period of the seller cannot end before that time. Form1040x Repossession. Form1040x If you sell real property but keep a security interest in it and then later repossess it, your holding period for a later sale includes the period you held the property before the original sale, as well as the period after the repossession. Form1040x Your holding period does not include the time between the original sale and the repossession. Form1040x That is, it does not include the period during which the first buyer held the property. Form1040x Nonbusiness bad debts. Form1040x Nonbusiness bad debts are short-term capital losses. Form1040x For information on nonbusiness bad debts, see chapter 4 of Publication 550. Form1040x Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Form1040x Net short-term capital gain or loss. Form1040x Combine your short-term capital gains and losses, including your share of short-term capital gains or losses from partnerships, S corporations, and fiduciaries and any short-term capital loss carryover. Form1040x Do this by adding all your short-term capital gains. Form1040x Then add all your short-term capital losses. Form1040x Subtract the lesser total from the other. Form1040x The result is your net short-term capital gain or loss. Form1040x Net long-term capital gain or loss. Form1040x Follow the same steps to combine your long-term capital gains and losses. Form1040x Include the following items. Form1040x Net section 1231 gain from Part I, Form 4797, after any adjustment for nonrecaptured section 1231 losses from prior tax years. Form1040x Capital gain distributions from regulated investment companies (mutual funds) and real estate investment trusts. Form1040x Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries. Form1040x Any long-term capital loss carryover. Form1040x The result from combining these items with other long-term capital gains and losses is your net long-term capital gain or loss. Form1040x Net gain. Form1040x If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Form1040x Different tax rates may apply to the part that is a net capital gain. Form1040x See Capital Gains Tax Rates, later. Form1040x Net loss. Form1040x If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Form1040x But there are limits on how much loss you can deduct and when you can deduct it. Form1040x See Treatment of Capital Losses, next. Form1040x Treatment of Capital Losses If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. Form1040x The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Form1040x Table 4-2. Form1040x Holding Period for Different Types of Acquisitions Type of acquisition: When your holding period starts: Stocks and bonds bought on a securities market Day after trading date you bought security. Form1040x Ends on trading date you sold security. Form1040x U. Form1040x S. Form1040x Treasury notes and bonds If bought at auction, day after notification of bid acceptance. Form1040x If bought through subscription, day after subscription was submitted. Form1040x Nontaxable exchanges Day after date you acquired old property. Form1040x Gift If your basis is giver's adjusted basis, same day as giver's holding period began. Form1040x If your basis is FMV, day after date of gift. Form1040x Real property bought Generally, day after date you received title to the property. Form1040x Real property repossessed Day after date you originally received title to the property, but does not include time between the original sale and date of repossession. Form1040x Capital loss carryover. Form1040x Generally, you have a capital loss carryover if either of the following situations applies to you. Form1040x Your net loss is more than the yearly limit. Form1040x Your taxable income without your deduction for exemptions is less than zero. Form1040x If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carryover to 2014. Form1040x Example. Form1040x Bob and Gloria Sampson sold property in 2013. Form1040x The sale resulted in a capital loss of $7,000. Form1040x The Sampsons had no other capital transactions. Form1040x On their joint 2013 return, the Sampsons deduct $3,000, the yearly limit. Form1040x They had taxable income of $2,000. Form1040x The unused part of the loss, $4,000 ($7,000 − $3,000), is carried over to 2014. Form1040x If the Sampsons' capital loss had been $2,000, it would not have been more than the yearly limit. Form1040x Their capital loss deduction would have been $2,000. Form1040x They would have no carryover to 2014. Form1040x Short-term and long-term losses. Form1040x When you carry over a loss, it retains its original character as either long term or short term. Form1040x A short-term loss you carry over to the next tax year is added to short-term losses occurring in that year. Form1040x A long-term loss you carry over to the next tax year is added to long-term losses occurring in that year. Form1040x A long-term capital loss you carry over to the next year reduces that year's long-term gains before its short-term gains. Form1040x If you have both short-term and long-term losses, your short-term losses are used first against your allowable capital loss deduction. Form1040x If, after using your short-term losses, you have not reached the limit on the capital loss deduction, use your long-term losses until you reach the limit. Form1040x To figure your capital loss carryover from 2013 to 2014 use the Capital Loss Carryover Worksheet in the 2013 Instructions for Schedule D (Form 1040). Form1040x Joint and separate returns. Form1040x On a joint return, the capital gains and losses of spouses are figured as the gains and losses of an individual. Form1040x If you are married and filing a separate return, your yearly capital loss deduction is limited to $1,500. Form1040x Neither you nor your spouse can deduct any part of the other's loss. Form1040x If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. Form1040x However, if you and your spouse once filed jointly and are now filing separately, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss. Form1040x Death of taxpayer. Form1040x Capital losses cannot be carried over after a taxpayer's death. Form1040x They are deductible only on the final income tax return filed on the decedent's behalf. Form1040x The yearly limit discussed earlier still applies in this situation. Form1040x Even if the loss is greater than the limit, the decedent's estate cannot deduct the difference or carry it over to following years. Form1040x Corporations. Form1040x A corporation can deduct capital losses only up to the amount of its capital gains. Form1040x In other words, if a corporation has a net capital loss, it cannot be deducted in the current tax year. Form1040x It must be carried to other tax years and deducted from capital gains occurring in those years. Form1040x For more information, see Publication 542. Form1040x Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Form1040x These lower rates are called the maximum capital gains rates. Form1040x The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Form1040x For 2013, the maximum tax rates for individuals are 0%, 15%, 20%, 25%, and 28%. Form1040x Also, individuals, use the Qualified Dividends and Capital Gain Worksheet in the Instructions for Form 1040, or the Schedule D Tax Computation Worksheet in the Instructions for Schedule D (Form 1040) (whichever applies) to figure your tax if you have qualified dividends or net capital gain. Form1040x For more information, see chapter 4 of Publication 550. Form1040x Also see the Instructions for Schedule D (Form 1040). Form1040x Unrecaptured section 1250 gain. Form1040x Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation. Form1040x Unrecaptured section 1250 gain cannot be more than the net section 1231 gain or include any gain otherwise treated as ordinary income. Form1040x Use the worksheet in the Schedule D instructions to figure your unrecaptured section 1250 gain. Form1040x For more information about section 1250 property and net section 1231 gain, see chapter 3. Form1040x Form 4797 Use Form 4797 to report: The sale or exchange of: Property used in your trade or business; Depreciable and amortizable property; Oil, gas, geothermal, or other mineral properties; and Section 126 property. Form1040x The involuntary conversion (from other than casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. Form1040x The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business). Form1040x The disposition of capital assets not reported on Schedule D. Form1040x The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations. Form1040x The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less. Form1040x Gains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f). Form1040x You can use Form 4797 with Form 1040, 1065, 1120, or 1120S. Form1040x Section 1231 gains and losses. Form1040x Show any section 1231 gains and losses in Part I. Form1040x Carry a net gain to Schedule D (Form 1040) as a long-term capital gain. Form1040x Carry a net loss to Part II of Form 4797 as an ordinary loss. Form1040x If you had any nonrecaptured net section 1231 losses from the preceding 5 tax years, reduce your net gain by those losses and report the amount of the reduction as an ordinary gain in Part II. Form1040x Report any remaining gain on Schedule D (Form 1040). Form1040x See Section 1231 Gains and Losses in chapter 3. Form1040x Ordinary gains and losses. Form1040x Show any ordinary gains and losses in Part II. Form1040x This includes a net loss or a recapture of losses from prior years figured in Part I of Form 4797. Form1040x It also includes ordinary gain figured in Part III. Form1040x Mark-to-market election. Form1040x If you made a mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D (Form 1040). Form1040x See the Instructions for Form 4797. Form1040x Also see Special Rules for Traders in Securities, in chapter 4 of Publication 550. Form1040x Ordinary income from depreciation. Form1040x Figure the ordinary income from depreciation on personal property and additional depreciation on real property (as discussed in chapter 3) in Part III. Form1040x Carry the ordinary income to Part II of Form 4797 as an ordinary gain. Form1040x Carry any remaining gain to Part I as section 1231 gain, unless it is from a casualty or theft. Form1040x Carry any remaining gain from a casualty or theft to Form 4684. Form1040x Prev Up Next Home More Online Publications
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Form1040x 13. Form1040x Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Form1040x It is divided into the following sections. Form1040x Cost basis. Form1040x Adjusted basis. Form1040x Basis other than cost. Form1040x Your basis is the amount of your investment in property for tax purposes. Form1040x Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Form1040x Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Form1040x If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Form1040x Only the basis allocated to the business or investment use of the property can be depreciated. Form1040x Your original basis in property is adjusted (increased or decreased) by certain events. Form1040x For example, if you make improvements to the property, increase your basis. Form1040x If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Form1040x Keep accurate records of all items that affect the basis of your property. Form1040x For more information on keeping records, see chapter 1. Form1040x Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Form1040x The cost is the amount you pay in cash, debt obligations, other property, or services. Form1040x Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). Form1040x In addition, the basis of real estate and business assets may include other items. Form1040x Loans with low or no interest. Form1040x If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. Form1040x You generally have unstated interest if your interest rate is less than the applicable federal rate. Form1040x For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Form1040x Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Form1040x If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Form1040x Lump sum purchase. Form1040x If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Form1040x Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Form1040x Figure the basis of each asset by multiplying the lump sum by a fraction. Form1040x The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Form1040x If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Form1040x Fair market value (FMV). Form1040x FMV 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 necessary facts. Form1040x Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Form1040x Assumption of mortgage. Form1040x If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Form1040x Settlement costs. Form1040x Your basis includes the settlement fees and closing costs you paid for buying the property. Form1040x (A fee for buying property is a cost that must be paid even if you buy the property for cash. Form1040x ) Do not include fees and costs for getting a loan on the property in your basis. Form1040x The following are some of the settlement fees or closing costs you can include in the basis of your property. Form1040x Abstract fees (abstract of title fees). Form1040x Charges for installing utility services. Form1040x Legal fees (including fees for the title search and preparation of the sales contract and deed). Form1040x Recording fees. Form1040x Survey fees. Form1040x Transfer taxes. Form1040x Owner's title insurance. Form1040x Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Form1040x Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Form1040x The following are some of the settlement fees and closing costs you cannot include in the basis of property. Form1040x Casualty insurance premiums. Form1040x Rent for occupancy of the property before closing. Form1040x Charges for utilities or other services related to occupancy of the property before closing. Form1040x Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Form1040x Fees for refinancing a mortgage. Form1040x Real estate taxes. Form1040x If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Form1040x You cannot deduct them as an expense. Form1040x If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Form1040x Do not include that amount in the basis of your property. Form1040x If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Form1040x Points. Form1040x If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Form1040x Generally, you deduct the points over the term of the loan. Form1040x For more information on how to deduct points, see chapter 23. Form1040x Points on home mortgage. Form1040x Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Form1040x If certain requirements are met, you can deduct the points in full for the year in which they are paid. Form1040x Reduce the basis of your home by any seller-paid points. Form1040x Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Form1040x The result is the adjusted basis. Form1040x Increases to Basis Increase the basis of any property by all items properly added to a capital account. Form1040x Examples of items that increase basis are shown in Table 13-1. Form1040x These include the items discussed below. Form1040x Improvements. Form1040x Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Form1040x For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. Form1040x Assessments for local improvements. Form1040x Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Form1040x Do not deduct them as taxes. Form1040x However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Form1040x Example. Form1040x Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Form1040x Add the assessment to your property's basis. Form1040x In this example, the assessment is a depreciable asset. Form1040x Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Form1040x Examples of items that decrease basis are shown in Table 13-1. Form1040x These include the items discussed below. Form1040x Table 13-1. Form1040x Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of Putting an addition on your home subsidies for energy conservation Replacing an entire roof measures Paving your driveway Installing central air conditioning • Casualty or theft loss deductions Rewiring your home and insurance reimbursements • Assessments for local improvements: Water connections Extending utility service lines to the property • Postponed gain from the sale of a home Sidewalks • Alternative motor vehicle credit (Form 8910) Roads • Alternative fuel vehicle refueling property credit (Form 8911) • Residential energy credits (Form 5695) • Casualty losses: • Depreciation and section 179 deduction Restoring damaged property • Nontaxable corporate distributions • Legal fees: Cost of defending and perfecting a title • Certain canceled debt excluded from Fees for getting a reduction of an assessment income • Zoning costs • Easements • Adoption tax benefits Casualty and theft losses. Form1040x If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Form1040x You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Form1040x For more information on casualty and theft losses, see chapter 25. Form1040x Depreciation and section 179 deduction. Form1040x Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Form1040x For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Form1040x Example. Form1040x You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Form1040x You added an improvement to the duplex that cost $10,000. Form1040x In February last year, the duplex was damaged by fire. Form1040x Up to that time, you had been allowed depreciation of $23,000. Form1040x You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Form1040x You deducted a casualty loss of $1,000 on your income tax return for last year. Form1040x You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Form1040x You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Form1040x Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700 Deducted casualty loss 1,000 Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Form1040x Your basis in the land is its original cost of $5,000. Form1040x Easements. Form1040x The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Form1040x It reduces the basis of the affected part of the property. Form1040x If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Form1040x If the gain is on a capital asset, see chapter 16 for information about how to report it. Form1040x If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Form1040x Exclusion of subsidies for energy conservation measures. Form1040x You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Form1040x Reduce the basis of the property for which you received the subsidy by the excluded amount. Form1040x For more information about this subsidy, see chapter 12. Form1040x Postponed gain from sale of home. Form1040x If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Form1040x For more information on the rules for the sale of a home, see chapter 15. Form1040x Basis Other Than Cost There are many times when you cannot use cost as basis. Form1040x In these cases, the fair market value or the adjusted basis of the property can be used. Form1040x Fair market value (FMV) and adjusted basis were discussed earlier. Form1040x Property Received for Services If you receive property for your services, include the FMV of the property in income. Form1040x The amount you include in income becomes your basis. Form1040x If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Form1040x Restricted property. Form1040x If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. Form1040x However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Form1040x Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Form1040x For more information, see Restricted Property in Publication 525. Form1040x Bargain purchases. Form1040x A bargain purchase is a purchase of an item for less than its FMV. Form1040x If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Form1040x Your basis in the property is its FMV (your purchase price plus the amount you include in income). Form1040x If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Form1040x However, your basis in the property is still its FMV. Form1040x See Employee Discounts in Publication 15-B. Form1040x Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Form1040x A taxable gain or deductible loss also is known as a recognized gain or loss. Form1040x If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Form1040x Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Form1040x Similar or related property. Form1040x If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Form1040x Decrease the basis by the following. Form1040x Any loss you recognize on the involuntary conversion. Form1040x Any money you receive that you do not spend on similar property. Form1040x Increase the basis by the following. Form1040x Any gain you recognize on the involuntary conversion. Form1040x Any cost of acquiring the replacement property. Form1040x Money or property not similar or related. Form1040x If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. Form1040x Example. Form1040x The state condemned your property. Form1040x The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Form1040x You realized a gain of $5,000 ($31,000 − $26,000). Form1040x You bought replacement property similar in use to the converted property for $29,000. Form1040x You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Form1040x Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Form1040x The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Form1040x If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Form1040x Basis for depreciation. Form1040x Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Form1040x For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Form1040x Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Form1040x If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Form1040x See Nontaxable Trades in chapter 14. Form1040x Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Form1040x To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Form1040x Qualifying property. Form1040x Like-kind property. Form1040x The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Form1040x If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Form1040x Qualifying property. Form1040x In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Form1040x Like-kind property. Form1040x There must be an exchange of like-kind property. Form1040x Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Form1040x The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Form1040x Example. Form1040x You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Form1040x The dealer allows you $2,000 on the old truck, and you pay $4,800. Form1040x This is a like-kind exchange. Form1040x The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Form1040x If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Form1040x The basis of the new truck is the price you pay the dealer. Form1040x Partially nontaxable exchanges. Form1040x A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Form1040x The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Form1040x Decrease the basis by the following amounts. Form1040x Any money you receive. Form1040x Any loss you recognize on the exchange. Form1040x Increase the basis by the following amounts. Form1040x Any additional costs you incur. Form1040x Any gain you recognize on the exchange. Form1040x If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Form1040x Allocation of basis. Form1040x If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Form1040x The rest is the basis of the like-kind property. Form1040x More information. Form1040x See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Form1040x Basis for depreciation. Form1040x Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Form1040x For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Form1040x Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Form1040x The same rule applies to a transfer by your former spouse that is incident to divorce. Form1040x However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Form1040x If the property transferred to you is a series E, series EE, or series I U. Form1040x S. Form1040x savings bond, the transferor must include in income the interest accrued to the date of transfer. Form1040x Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Form1040x For more information on these bonds, see chapter 7. Form1040x At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Form1040x For more information about the transfer of property from a spouse, see chapter 14. Form1040x Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Form1040x FMV less than donor's adjusted basis. Form1040x If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Form1040x Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Form1040x Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Form1040x See Adjusted Basis , earlier. Form1040x Example. Form1040x You received an acre of land as a gift. Form1040x At the time of the gift, the land had an FMV of $8,000. Form1040x The donor's adjusted basis was $10,000. Form1040x After you received the property, no events occurred to increase or decrease your basis. Form1040x If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Form1040x If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Form1040x If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Form1040x Business property. Form1040x If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Form1040x FMV equal to or greater than donor's adjusted basis. Form1040x If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Form1040x Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Form1040x Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Form1040x See Adjusted Basis , earlier. Form1040x If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Form1040x Figure the increase by multiplying the gift tax paid by a fraction. Form1040x The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Form1040x The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Form1040x The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Form1040x Example. Form1040x In 2013, you received a gift of property from your mother that had an FMV of $50,000. Form1040x Her adjusted basis was $20,000. Form1040x The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Form1040x She paid a gift tax of $7,320 on the property. Form1040x Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Form1040x 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Form1040x If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Form1040x However, your basis cannot exceed the FMV of the gift at the time it was given to you. Form1040x Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Form1040x The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Form1040x The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Form1040x The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Form1040x If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Form1040x For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Form1040x Property inherited from a decedent who died in 2010. Form1040x If you inherited property from a decedent who died in 2010, special rules may apply. Form1040x For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Form1040x Community property. Form1040x In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Form1040x When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Form1040x For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Form1040x Example. Form1040x You and your spouse owned community property that had a basis of $80,000. Form1040x When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Form1040x The FMV of the community interest was $100,000. Form1040x The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Form1040x The basis of the other half to your spouse's heirs is also $50,000. Form1040x For more information about community property, see Publication 555, Community Property. Form1040x Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. Form1040x To do so, you must figure its basis for depreciation at the time of the change. Form1040x An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Form1040x Basis for depreciation. Form1040x The basis for depreciation is the lesser of the following amounts. Form1040x The FMV of the property on the date of the change. Form1040x Your adjusted basis on the date of the change. Form1040x Example. Form1040x Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Form1040x You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Form1040x Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Form1040x Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Form1040x On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Form1040x The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Form1040x Sale of property. Form1040x If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Form1040x Gain. Form1040x The basis for figuring a gain is your adjusted basis in the property when you sell the property. Form1040x Example. Form1040x Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Form1040x Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Form1040x Loss. Form1040x Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Form1040x Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Form1040x Example. Form1040x Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Form1040x In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Form1040x Reduce that amount ($180,000) by the depreciation deductions ($37,500). Form1040x The basis for loss is $142,500 ($180,000 − $37,500). Form1040x Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Form1040x If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Form1040x You must adjust the basis of stocks for certain events that occur after purchase. Form1040x For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Form1040x This rule applies only when the additional stock received is identical to the stock held. Form1040x Also reduce your basis when you receive nontaxable distributions. Form1040x They are a return of capital. Form1040x Example. Form1040x In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Form1040x In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Form1040x In 2013 XYZ declared a 2-for-1 stock split. Form1040x You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Form1040x Other basis. Form1040x There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Form1040x For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Form1040x Identifying stocks or bonds sold. Form1040x If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. Form1040x If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Form1040x For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Form1040x Mutual fund shares. Form1040x If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Form1040x For more information, see Publication 550. Form1040x Bond premium. Form1040x If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Form1040x See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Form1040x Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Form1040x Original issue discount (OID) on debt instruments. Form1040x You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Form1040x See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Form1040x Tax-exempt obligations. Form1040x OID on tax-exempt obligations is generally not taxable. Form1040x However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Form1040x The accrued OID is added to the basis of the obligation to determine your gain or loss. Form1040x See chapter 4 of Publication 550. Form1040x Prev Up Next Home More Online Publications