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Free Tax Filing For 2012

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Free Tax Filing For 2012

Free tax filing for 2012 4. Free tax filing for 2012   Sales and Trades of Investment Property Table of Contents IntroductionNominees. Free tax filing for 2012 Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. Free tax filing for 2012 Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. Free tax filing for 2012 Debt paid off. Free tax filing for 2012 Payment of cash. Free tax filing for 2012 Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. Free tax filing for 2012 S. Free tax filing for 2012 Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. Free tax filing for 2012 Exception 2. Free tax filing for 2012 Section 1256 contracts and straddles. Free tax filing for 2012 Market discount bonds. Free tax filing for 2012 File Form 1099-B or Form 1099-S with the IRS. Free tax filing for 2012 Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. Free tax filing for 2012 Investment property. Free tax filing for 2012   This is property that produces investment income. Free tax filing for 2012 Examples include stocks, bonds, and Treasury bills and notes. Free tax filing for 2012 Property used in a trade or business is not investment property. Free tax filing for 2012 Form 1099-B. Free tax filing for 2012   If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. Free tax filing for 2012 You should receive the statement by February 15 of the next year. Free tax filing for 2012 It will show the gross proceeds from the sale. Free tax filing for 2012 The IRS will also get a copy of Form 1099-B from the broker. Free tax filing for 2012   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Free tax filing for 2012 If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. Free tax filing for 2012 This will help you complete Form 8949. Free tax filing for 2012 Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. Free tax filing for 2012    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. Free tax filing for 2012 Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Free tax filing for 2012 Nominees. Free tax filing for 2012   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. Free tax filing for 2012   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. Free tax filing for 2012 Other property transactions. Free tax filing for 2012   Certain transfers of property are discussed in other IRS publications. Free tax filing for 2012 These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. Free tax filing for 2012 Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . Free tax filing for 2012 Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Free tax filing for 2012 What Is a Sale or Trade? This section explains what is a sale or trade. Free tax filing for 2012 It also explains certain transactions and events that are treated as sales or trades. Free tax filing for 2012 A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Free tax filing for 2012 A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. Free tax filing for 2012 Sale and purchase. Free tax filing for 2012   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Free tax filing for 2012 The sale and purchase are two separate transactions. Free tax filing for 2012 But see Like-Kind Exchanges under Nontaxable Trades, later. Free tax filing for 2012 Redemption of stock. Free tax filing for 2012   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. Free tax filing for 2012 Dividend versus sale or trade. Free tax filing for 2012   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Free tax filing for 2012 Both direct and indirect ownership of stock will be considered. Free tax filing for 2012 The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Free tax filing for 2012 Redemption or retirement of bonds. Free tax filing for 2012   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. Free tax filing for 2012 See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. Free tax filing for 2012   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Free tax filing for 2012 For details, see Regulations section 1. Free tax filing for 2012 1001-3. Free tax filing for 2012 Surrender of stock. Free tax filing for 2012   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. Free tax filing for 2012 The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Free tax filing for 2012 Trade of investment property for an annuity. Free tax filing for 2012   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. Free tax filing for 2012 If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. Free tax filing for 2012 Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. Free tax filing for 2012 Transfer by inheritance. Free tax filing for 2012   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. Free tax filing for 2012 No taxable gain or deductible loss results from the transfer. Free tax filing for 2012 Termination of certain rights and obligations. Free tax filing for 2012   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. Free tax filing for 2012 Any gain or loss is treated as a capital gain or loss. Free tax filing for 2012   This rule does not apply to the retirement of a debt instrument. Free tax filing for 2012 See Redemption or retirement of bonds , earlier. Free tax filing for 2012 Worthless Securities Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. Free tax filing for 2012 This affects whether your capital loss is long term or short term. Free tax filing for 2012 See Holding Period , later. Free tax filing for 2012 Worthless securities also include securities that you abandon after March 12, 2008. Free tax filing for 2012 To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Free tax filing for 2012 All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. Free tax filing for 2012 If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Free tax filing for 2012 Do not deduct them in the year the stock became worthless. Free tax filing for 2012 How to report loss. Free tax filing for 2012   Report worthless securities in Form 8949, Part I or Part II, whichever applies. Free tax filing for 2012    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Free tax filing for 2012 See Form 8949 and the Instructions for Form 8949. Free tax filing for 2012 Filing a claim for refund. Free tax filing for 2012   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. Free tax filing for 2012 You must use Form 1040X, Amended U. Free tax filing for 2012 S. Free tax filing for 2012 Individual Income Tax Return, to amend your return for the year the security became worthless. Free tax filing for 2012 You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Free tax filing for 2012 (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. Free tax filing for 2012 ) For more information about filing a claim, see Publication 556. Free tax filing for 2012 Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. Free tax filing for 2012 You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. Free tax filing for 2012 This gives you a new holding period for the position that begins on the date of the constructive sale. Free tax filing for 2012 Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. Free tax filing for 2012 Constructive sale. Free tax filing for 2012   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). Free tax filing for 2012   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. Free tax filing for 2012 For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. Free tax filing for 2012 Exception for nonmarketable securities. Free tax filing for 2012   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. Free tax filing for 2012 Exception for certain closed transactions. Free tax filing for 2012   Do not treat a transaction as a constructive sale if all of the following are true. Free tax filing for 2012 You closed the transaction on or before the 30th day after the end of your tax year. Free tax filing for 2012 You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. Free tax filing for 2012 Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. Free tax filing for 2012   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. Free tax filing for 2012   This exception also applies to successive short sales of an entire appreciated financial position. Free tax filing for 2012 For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. Free tax filing for 2012 This bulletin is available at www. Free tax filing for 2012 irs. Free tax filing for 2012 gov/pub/irs-irbs/irb03-03. Free tax filing for 2012 pdf. Free tax filing for 2012 Appreciated financial position. Free tax filing for 2012   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. Free tax filing for 2012 Exceptions. Free tax filing for 2012   An appreciated financial position does not include the following. Free tax filing for 2012 Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). Free tax filing for 2012 Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. Free tax filing for 2012 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). Free tax filing for 2012 Any hedge with respect to a position described in (2). Free tax filing for 2012 Certain trust instruments treated as stock. Free tax filing for 2012   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). Free tax filing for 2012 Sale of appreciated financial position. Free tax filing for 2012   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. Free tax filing for 2012 However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. Free tax filing for 2012 Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. Free tax filing for 2012 Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. Free tax filing for 2012 Exceptions. Free tax filing for 2012   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. Free tax filing for 2012 For more details, including definitions of these terms, see section 1256. Free tax filing for 2012 Regulated futures contract. Free tax filing for 2012   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. Free tax filing for 2012 A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. Free tax filing for 2012 Foreign currency contract. Free tax filing for 2012   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. Free tax filing for 2012   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. Free tax filing for 2012   Special rules apply to certain foreign currency transactions. Free tax filing for 2012 These transactions may result in ordinary gain or loss treatment. Free tax filing for 2012 For details, see Internal Revenue Code section 988 and Regulations sections 1. Free tax filing for 2012 988-1(a)(7) and 1. Free tax filing for 2012 988-3. Free tax filing for 2012 Nonequity option. Free tax filing for 2012   This is any listed option (defined later) that is not an equity option. Free tax filing for 2012 Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. Free tax filing for 2012 A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). Free tax filing for 2012 Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. Free tax filing for 2012 Cash-settled options. Free tax filing for 2012   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. Free tax filing for 2012   This rule does not apply to options established before the SEC determines that the stock index is broad based. Free tax filing for 2012 Listed option. Free tax filing for 2012   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). Free tax filing for 2012 A listed option, however, does not include an option that is a right to acquire stock from the issuer. Free tax filing for 2012 Dealer equity option. Free tax filing for 2012   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. Free tax filing for 2012   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. Free tax filing for 2012 Equity option. Free tax filing for 2012   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. Free tax filing for 2012  Equity options include options on a group of stocks only if the group is a narrow-based stock index. Free tax filing for 2012 Dealer securities futures contract. Free tax filing for 2012   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). Free tax filing for 2012 A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . Free tax filing for 2012 Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. Free tax filing for 2012 That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. Free tax filing for 2012 Hedging exception. Free tax filing for 2012   The marked-to-market rules do not apply to hedging transactions. Free tax filing for 2012 See Hedging Transactions , later. Free tax filing for 2012 60/40 rule. Free tax filing for 2012   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. Free tax filing for 2012 This is true regardless of how long you actually held the property. Free tax filing for 2012 Example. Free tax filing for 2012 On June 22, 2012, you bought a regulated futures contract for $50,000. Free tax filing for 2012 On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. Free tax filing for 2012 You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. Free tax filing for 2012 On February 1, 2013, you sold the contract for $56,000. Free tax filing for 2012 Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. Free tax filing for 2012 Limited partners or entrepreneurs. Free tax filing for 2012   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). Free tax filing for 2012 Instead, these gains or losses are treated as short term. Free tax filing for 2012 Terminations and transfers. Free tax filing for 2012   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. Free tax filing for 2012 In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. Free tax filing for 2012 Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. Free tax filing for 2012 Loss carryback election. Free tax filing for 2012   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. Free tax filing for 2012 See How To Report , later, for information about reporting this election on your return. Free tax filing for 2012   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. Free tax filing for 2012 In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. Free tax filing for 2012   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. Free tax filing for 2012 In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. Free tax filing for 2012   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. Free tax filing for 2012 (See Capital Losses under Reporting Capital Gains and Losses, later. Free tax filing for 2012 ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. Free tax filing for 2012 In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. Free tax filing for 2012 Net section 1256 contracts loss. Free tax filing for 2012   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. Free tax filing for 2012 Net section 1256 contracts gain. Free tax filing for 2012   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. Free tax filing for 2012  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. Free tax filing for 2012 Traders in section 1256 contracts. Free tax filing for 2012   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. Free tax filing for 2012 However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. Free tax filing for 2012 Treatment of underlying property. Free tax filing for 2012   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. Free tax filing for 2012 How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. Free tax filing for 2012 Form 6781. Free tax filing for 2012   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. Free tax filing for 2012 This includes the amount shown in box 10 of Form 1099-B. Free tax filing for 2012 Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. Free tax filing for 2012 Include a copy of Form 6781 with your income tax return. Free tax filing for 2012   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. Free tax filing for 2012 Follow the Form 6781 instructions for completing Part I. Free tax filing for 2012 Loss carryback election. Free tax filing for 2012   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. Free tax filing for 2012 Follow the instructions for completing Form 6781 for the loss year to make this election. Free tax filing for 2012 Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. Free tax filing for 2012 A transaction is a hedging transaction if both of the following conditions are met. Free tax filing for 2012 You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. Free tax filing for 2012 You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. Free tax filing for 2012 This hedging transaction exception does not apply to transactions entered into by or for any syndicate. Free tax filing for 2012 A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. Free tax filing for 2012 A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. Free tax filing for 2012 However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. Free tax filing for 2012 Hedging loss limit. Free tax filing for 2012   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. Free tax filing for 2012 A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. Free tax filing for 2012   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. Free tax filing for 2012 Ignore any hedging transaction items in determining this taxable income. Free tax filing for 2012 If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. Free tax filing for 2012   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. Free tax filing for 2012   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. Free tax filing for 2012 The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. Free tax filing for 2012 Sale of property used in a hedge. Free tax filing for 2012   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. Free tax filing for 2012 Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. Free tax filing for 2012 See the Instructions for Schedule SE (Form 1040). Free tax filing for 2012 In addition, the rules relating to contributions to self-employment retirement plans apply. Free tax filing for 2012 For information on retirement plan contributions, see Publication 560 and Publication 590. Free tax filing for 2012 Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. Free tax filing for 2012 You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. Free tax filing for 2012 Investment property you buy normally has an original basis equal to its cost. Free tax filing for 2012 If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. Free tax filing for 2012 Cost Basis The basis of property you buy is usually its cost. Free tax filing for 2012 The cost is the amount you pay in cash, debt obligations, or other property or services. Free tax filing for 2012 Unstated interest. Free tax filing for 2012   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 the amount considered to be unstated interest. Free tax filing for 2012 You generally have unstated interest if your interest rate is less than the applicable federal rate. Free tax filing for 2012 For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Free tax filing for 2012 Basis Other Than Cost There are times when you must use a basis other than cost. Free tax filing for 2012 In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. Free tax filing for 2012 Fair market value. Free tax filing for 2012   This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Free tax filing for 2012 Sales of similar property, around the same date, may be helpful in figuring fair market value. Free tax filing for 2012 Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. Free tax filing for 2012 The amount you include in income then becomes your basis in the property. Free tax filing for 2012 If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. Free tax filing for 2012 Restricted property. Free tax filing for 2012   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. Free tax filing for 2012 Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. Free tax filing for 2012 See Restricted Property in Publication 525 for more information. Free tax filing for 2012 Bargain purchases. Free tax filing for 2012   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. Free tax filing for 2012 Your basis in the property is the price you pay plus the amount you include in income. Free tax filing for 2012 Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. Free tax filing for 2012 Example. Free tax filing for 2012 You trade A Company stock for B Company stock having a fair market value of $1,200. Free tax filing for 2012 If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. Free tax filing for 2012 If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. Free tax filing for 2012 The basis of your B Company stock is $1,200. Free tax filing for 2012 If you later sell the B Company stock for $1,300, you will have a gain of $100. Free tax filing for 2012 Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. Free tax filing for 2012 See Nontaxable Trades , later. Free tax filing for 2012 The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. Free tax filing for 2012 Increase this amount by any cash you paid, additional costs you had, and any gain recognized. Free tax filing for 2012 Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. Free tax filing for 2012 Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. Free tax filing for 2012 See Transfers Between Spouses , later. Free tax filing for 2012 Recordkeeping. Free tax filing for 2012 The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. Free tax filing for 2012 Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. Free tax filing for 2012 Fair market value less than donor's adjusted basis. Free tax filing for 2012   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Free tax filing for 2012 Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. Free tax filing for 2012 No gain or loss. Free tax filing for 2012   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. Free tax filing for 2012 Example. Free tax filing for 2012 You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. Free tax filing for 2012 The fair market value at the time of the gift is $9,000. Free tax filing for 2012 You later sell the property for $9,500. Free tax filing for 2012 You have neither gain nor loss. Free tax filing for 2012 Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. Free tax filing for 2012 Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. Free tax filing for 2012 Fair market value equal to or more than donor's adjusted basis. Free tax filing for 2012   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Free tax filing for 2012 Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. Free tax filing for 2012 Gift received before 1977. Free tax filing for 2012   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. Free tax filing for 2012 However, your basis cannot be more than the fair market value of the gift at the time it was given to you. Free tax filing for 2012 Example 1. Free tax filing for 2012 You were given XYZ Company stock in 1976. Free tax filing for 2012 At the time of the gift, the stock had a fair market value of $21,000. Free tax filing for 2012 The donor's adjusted basis was $20,000. Free tax filing for 2012 The donor paid a gift tax of $500 on the gift. Free tax filing for 2012 Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. Free tax filing for 2012 Example 2. Free tax filing for 2012 The facts are the same as in Example 1 except that the gift tax paid was $1,500. Free tax filing for 2012 Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. Free tax filing for 2012 Gift received after 1976. Free tax filing for 2012   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. Free tax filing for 2012 You figure this part by multiplying the gift tax paid on the gift by a fraction. Free tax filing for 2012 The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. Free tax filing for 2012   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. Free tax filing for 2012 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. Free tax filing for 2012 Example. Free tax filing for 2012 In 2013, you received a gift of property from your mother. Free tax filing for 2012 At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. Free tax filing for 2012 The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. Free tax filing for 2012 You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . Free tax filing for 2012 701 ($61,000 ÷ $87,000) . Free tax filing for 2012 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. Free tax filing for 2012   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. Free tax filing for 2012 Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. Free tax filing for 2012 For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. Free tax filing for 2012 Gift tax information. Free tax filing for 2012   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Free tax filing for 2012 For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. Free tax filing for 2012 Property Received as Inheritance Before or after 2010. Free tax filing for 2012   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. Free tax filing for 2012 If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. Free tax filing for 2012 For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. Free tax filing for 2012 Appreciated property you gave the decedent. Free tax filing for 2012   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. Free tax filing for 2012 This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. Free tax filing for 2012 Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. Free tax filing for 2012 More information. Free tax filing for 2012   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. Free tax filing for 2012 Inherited in 2010 and executor elected to file Form 8939. Free tax filing for 2012   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. Free tax filing for 2012 Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. Free tax filing for 2012 The result of these adjustments to the basis is the adjusted basis. Free tax filing for 2012 Adjustments to the basis of stocks and bonds are explained in the following discussion. Free tax filing for 2012 For information about other adjustments to basis, see Publication 551. Free tax filing for 2012 Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. Free tax filing for 2012 If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . Free tax filing for 2012 The basis of stock must be adjusted for certain events that occur after purchase. Free tax filing for 2012 For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. Free tax filing for 2012 You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). Free tax filing for 2012 These distributions, up to the amount of your basis, are a nontaxable return of capital. Free tax filing for 2012 The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. Free tax filing for 2012 To find out more, go to www. Free tax filing for 2012 irs. Free tax filing for 2012 gov/Filing/Filing-Options. Free tax filing for 2012 Identifying stock or bonds sold. Free tax filing for 2012   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 stock or bonds. Free tax filing for 2012 Adequate identification. Free tax filing for 2012   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. Free tax filing for 2012 Broker holds stock. Free tax filing for 2012   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Free tax filing for 2012  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. Free tax filing for 2012 Single stock certificate. Free tax filing for 2012   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Free tax filing for 2012   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. Free tax filing for 2012 Bonds. Free tax filing for 2012   These methods of identification also apply to bonds sold or transferred. Free tax filing for 2012 Identification not possible. Free tax filing for 2012   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. Free tax filing for 2012 Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. Free tax filing for 2012 Example. Free tax filing for 2012 You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. Free tax filing for 2012 In January 1999 you bought another 200 shares for $11 a share. Free tax filing for 2012 In July 1999 you gave your son 50 shares. Free tax filing for 2012 In December 2001 you bought 100 shares for $9 a share. Free tax filing for 2012 In April 2013 you sold 130 shares. Free tax filing for 2012 You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. Free tax filing for 2012 The shares of stock you gave your son had a basis of $500 (50 × $10). Free tax filing for 2012 You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. Free tax filing for 2012    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. Free tax filing for 2012 Example. Free tax filing for 2012 You bought 100 shares of Fund A for $10 a share. Free tax filing for 2012 You paid a $50 commission to the broker for the purchase. Free tax filing for 2012 Your cost basis for each share is $10. Free tax filing for 2012 50 ($1,050 ÷ 100). Free tax filing for 2012 Commissions and load charges. Free tax filing for 2012   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. Free tax filing for 2012 You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. Free tax filing for 2012 A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). Free tax filing for 2012   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. Free tax filing for 2012 You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. Free tax filing for 2012 You dispose of the shares within 90 days of the purchase date. Free tax filing for 2012 You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. Free tax filing for 2012   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. Free tax filing for 2012 The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). Free tax filing for 2012 Choosing average basis for mutual fund shares. Free tax filing for 2012   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. Free tax filing for 2012 The methods you can use to figure average basis are explained later. Free tax filing for 2012 Undistributed capital gains. Free tax filing for 2012   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. Free tax filing for 2012 See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. Free tax filing for 2012 Reinvestment right. Free tax filing for 2012   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. Free tax filing for 2012      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. Free tax filing for 2012 This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. Free tax filing for 2012 Table 4-1. Free tax filing for 2012 This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Free tax filing for 2012 Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. Free tax filing for 2012 This worksheet will help you figure the adjusted basis when you sell or redeem shares. Free tax filing for 2012 Table 4-1. Free tax filing for 2012 Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. Free tax filing for 2012 2 Cost plus or minus adjustments. Free tax filing for 2012 Automatic investment service. Free tax filing for 2012   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. Free tax filing for 2012 Dividend reinvestment plans. Free tax filing for 2012   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. Free tax filing for 2012 You must include the amount of the discount in your income. Free tax filing for 2012 Public utilities. Free tax filing for 2012   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. Free tax filing for 2012 Stock dividends. Free tax filing for 2012   Stock dividends are distributions made by a corporation of its own stock. Free tax filing for 2012 Generally, stock dividends are not taxable to you. Free tax filing for 2012 However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. Free tax filing for 2012 If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. Free tax filing for 2012 New and old stock identical. Free tax filing for 2012   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. Free tax filing for 2012 The result is your basis for each share of stock. Free tax filing for 2012 Example 1. Free tax filing for 2012 You owned one share of common stock that you bought for $45. Free tax filing for 2012 The corporation distributed two new shares of common stock for each share held. Free tax filing for 2012 You then had three shares of common stock. Free tax filing for 2012 Your basis in each share is $15 ($45 ÷ 3). Free tax filing for 2012 Example 2. Free tax filing for 2012 You owned two shares of common stock. Free tax filing for 2012 You bought one for $30 and the other for $45. Free tax filing for 2012 The corporation distributed two new shares of common stock for each share held. Free tax filing for 2012 You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). Free tax filing for 2012 New and old stock not identical. Free tax filing for 2012   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. Free tax filing for 2012 Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. Free tax filing for 2012 Example. Free tax filing for 2012 You bought a share of common stock for $100. Free tax filing for 2012 Later, the corporation distributed a share of preferred stock for each share of common stock held. Free tax filing for 2012 At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. Free tax filing for 2012 You figure the basis of the old and new stock by dividing your $100 basis between them. Free tax filing for 2012 The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). Free tax filing for 2012 Stock bought at various times. Free tax filing for 2012   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. Free tax filing for 2012 Taxable stock dividends. Free tax filing for 2012   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. Free tax filing for 2012 The basis of your old stock does not change. Free tax filing for 2012 Stock splits. Free tax filing for 2012   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. Free tax filing for 2012 Stock rights. Free tax filing for 2012   A stock right is a right to acquire a corporation's stock. Free tax filing for 2012 It may be exercised, it may be sold if it has a market value, or it may expire. Free tax filing for 2012 Stock rights are rarely taxable when you receive them. Free tax filing for 2012 See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. Free tax filing for 2012 Taxable stock rights. Free tax filing for 2012   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. Free tax filing for 2012 The basis of the old stock does not change. Free tax filing for 2012 Nontaxable stock rights. Free tax filing for 2012   If you receive nontaxable stock rights and allow them to expire, they have no basis. Free tax filing for 2012   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. Free tax filing for 2012 Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. Free tax filing for 2012   If the fair market value of the stock rights was less than 15%, their basis is zero. Free tax filing for 2012 However, you can choose to divide the basis of the old stock between the old stock and the stock rights. Free tax filing for 2012 To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. Free tax filing for 2012 Basis of new stock. Free tax filing for 2012   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. Free tax filing for 2012 Example. Free tax filing for 2012 You own 100 shares of ABC Company stock, which cost you $22 per share. Free tax filing for 2012 The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. Free tax filing for 2012 At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. Free tax filing for 2012 Each stock right had a market value of $3. Free tax filing for 2012 The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. Free tax filing for 2012 You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. Free tax filing for 2012 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. Free tax filing for 2012 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. Free tax filing for 2012 18 ($21. Free tax filing for 2012 78 ÷ 10) per right. Free tax filing for 2012 If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. Free tax filing for 2012 18), or $28. Free tax filing for 2012 18 per share. Free tax filing for 2012 The remaining basis of the old stock is $21. Free tax filing for 2012 78 per share. Free tax filing for 2012 Investment property received in liquidation. Free tax filing for 2012   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. Free tax filing for 2012 S corporation stock. Free tax filing for 2012   You must increase your basis in stock of an S corporation by your pro rata share of the following items. Free tax filing for 2012 All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. Free tax filing for 2012 The nonseparately stated income of the S corporation. Free tax filing for 2012 The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. Free tax filing for 2012   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. Free tax filing for 2012 Distributions by the S corporation that were not included in your income. Free tax filing for 2012 All loss and deduction items of the S corporation that are separately stated and passed through to you. Free tax filing for 2012 Any nonseparately stated loss of the S corporation. Free tax filing for 2012 Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. Free tax filing for 2012 The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. Free tax filing for 2012 However, your basis in the stock cannot be reduced below zero. Free tax filing for 2012 Specialized small business investment company stock or partnership interest. Free tax filing for 2012   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. Free tax filing for 2012 See Rollover of Gain From Publicly Traded Securities , later. Free tax filing for 2012 Qualified small business stock. Free tax filing for 2012   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. Free tax filing for 2012 See Gains on Qualified Small Business Stock , later. Free tax filing for 2012 Short sales. Free tax filing for 2012   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. Free tax filing for 2012   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. Free tax filing for 2012 Premiums on bonds. Free tax filing for 2012   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. Free tax filing for 2012 If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. Free tax filing for 2012   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. Free tax filing for 2012 You must reduce the basis of the bond by the premium you amortized for the period you held the bond. Free tax filing for 2012   See Bond Premium Amortization in chapter 3 for more information. Free tax filing for 2012 Market discount on bonds. Free tax filing for 2012   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. Free tax filing for 2012 See Market Discount Bonds in chapter 1 for more information. Free tax filing for 2012 Bonds purchased at par value. Free tax filing for 2012   A bond purchased at par value (face amount) has no premium or discount. Free tax filing for 2012 When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. Free tax filing for 2012 Example. Free tax filing for 2012 You purchased a bond several years ago for its par value of $10,000. Free tax filing for 2012 You sold the bond this year for $10,100. Free tax filing for 2012 You have a gain of $100. Free tax filing for 2012 However, if you had sold the bond for $9,900, you would have a loss of $100. Free tax filing for 2012 Acquisition discount on short-term obligations. Free tax filing for 2012   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. Free tax filing for 2012 See Discount on Short-Term Obligations in chapter 1 for more information. Free tax filing for 2012 Original issue discount (OID) on debt instruments. Free tax filing for 2012   Increase the basis of a debt instrument by the OID you include in your income. Free tax filing for 2012 See Original Issue Discount (OID) in chapter 1. Free tax filing for 2012 Discounted tax-exempt obligations. Free tax filing for 2012   OID on tax-exempt obligations is generally not taxable. Free tax filing for 2012 However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Free tax filing for 2012 The accrued OID is added to the basis of the obligation to determine your gain or loss. Free tax filing for 2012   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. Free tax filing for 2012   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. Free tax filing for 2012 See Discount on Short-Term Obligations in chapter 1. Free tax filing for 2012 Stripped tax-exempt obligation. Free tax filing for 2012   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. Free tax filing for 2012 For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. Free tax filing for 2012 You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . Free tax filing for 2012   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. Free tax filing for 2012 Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. Free tax filing for 2012 In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. Free tax filing for 2012 How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. Free tax filing for 2012 Gain. Free tax filing for 2012   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. Free tax filing for 2012 Loss. Free tax filing for 2012   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Free tax filing for 2012 Amount realized. Free tax filing for 2012   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Free tax filing for 2012 Amount realized includes the money you receive plus the fair market value of any property or services you receive. Free tax filing for 2012   If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. Free tax filing for 2012 For more information, see Publication 537. Free tax filing for 2012   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. Free tax filing for 2012 See Regulations section 1. Free tax filing for 2012 1001-1(g). Free tax filing for 2012 However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. Free tax filing for 2012 Fair market value. Free tax filing for 2012   Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Free tax filing for 2012 Example. Free tax filing for 2012 You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Free tax filing for 2012 Your gain is $3,000 ($10,000 – $7,000). Free tax filing for 2012 If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). Free tax filing for 2012 Debt paid off. Free tax filing for 2012   A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. Free tax filing for 2012 This is true even if neither you nor the buyer is personally liable for the debt. Free tax filing for 2012 For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. Free tax filing for 2012 Example. Free tax filing for 2012 You sell stock that you had pledged as security for a bank loan of $8,000. Free tax filing for 2012 Your basis in the stock is $6,000. Free tax filing for 2012 The buyer pays off your bank loan and pays you $20,000 in cash. Free tax filing for 2012 The amount realized is $28,000 ($20,000 + $8,000). Free tax filing for 2012 Your gain is $22,000 ($28,000 – $6,000). Free tax filing for 2012 Payment of cash. Free tax filing for 2012   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Free tax filing for 2012 Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. Free tax filing for 2012 If the result is a positive number, it is a gain. Free tax filing for 2012 If the result is a negative number, it is a loss. Free tax filing for 2012 No gain or loss. Free tax filing for 2012   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Free tax filing for 2012 In this case, you may have neither a gain nor a loss. Free tax filing for 2012 See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. Free tax filing for 2012 Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. Free tax filing for 2012 If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu
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The Free Tax Filing For 2012

Free tax filing for 2012 10. Free tax filing for 2012   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Free tax filing for 2012 Revoking the election. Free tax filing for 2012 More information. Free tax filing for 2012 Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Free tax filing for 2012 Summary. Free tax filing for 2012 Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Free tax filing for 2012 If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Free tax filing for 2012 This method of reporting gain is called the installment method. Free tax filing for 2012 You cannot use the installment method to report a loss. Free tax filing for 2012 You can choose to report all of your gain in the year of sale. Free tax filing for 2012 Installment obligation. Free tax filing for 2012   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Free tax filing for 2012 Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Free tax filing for 2012 Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Free tax filing for 2012 It generally includes the sale of real property and personal property reportable on the installment method. Free tax filing for 2012 It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Free tax filing for 2012 See Inventory , later. Free tax filing for 2012 The selling price must be allocated to determine the amount received for each class of asset. Free tax filing for 2012 The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Free tax filing for 2012 (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Free tax filing for 2012 ) Separate computations must be made to figure the gain or loss for each class of asset sold. Free tax filing for 2012 See Sale of a Farm in chapter 8. Free tax filing for 2012 If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Free tax filing for 2012 See Depreciation recapture , later. Free tax filing for 2012 This applies even if no payments are received in that year. Free tax filing for 2012 Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Free tax filing for 2012 A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Free tax filing for 2012 See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Free tax filing for 2012 If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Free tax filing for 2012 Electing out of the installment method. Free tax filing for 2012   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Free tax filing for 2012   To make this election, do not report your sale on Form 6252. Free tax filing for 2012 Instead, report it on Schedule D (Form 1040), Form 4797, or both. Free tax filing for 2012 When to elect out. Free tax filing for 2012   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Free tax filing for 2012   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free tax filing for 2012 Write “Filed pursuant to section 301. Free tax filing for 2012 9100-2” at the top of the amended return and file it where the original return was filed. Free tax filing for 2012 Revoking the election. Free tax filing for 2012   Once made, the election can be revoked only with IRS approval. Free tax filing for 2012 A revocation is retroactive. Free tax filing for 2012 More information. Free tax filing for 2012   See Electing Out of the Installment Method in Publication 537 for more information. Free tax filing for 2012 Inventory. Free tax filing for 2012   The sale of farm inventory items cannot be reported on the installment method. Free tax filing for 2012 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Free tax filing for 2012   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Free tax filing for 2012 If you do not, each payment must be allocated between the inventory and the other assets sold. Free tax filing for 2012 Sale at a loss. Free tax filing for 2012   If your sale results in a loss, you cannot use the installment method. Free tax filing for 2012 If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Free tax filing for 2012 Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Free tax filing for 2012 Interest income. Free tax filing for 2012 Return of your adjusted basis in the property. Free tax filing for 2012 Gain on the sale. Free tax filing for 2012 In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Free tax filing for 2012 You do not include in income the part that is the return of your basis in the property. Free tax filing for 2012 Basis is the amount of your investment in the property for installment sale purposes. Free tax filing for 2012 Interest income. Free tax filing for 2012   You must report interest as ordinary income. Free tax filing for 2012 Interest is generally not included in a down payment. Free tax filing for 2012 However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Free tax filing for 2012 Interest provided in the agreement is called stated interest. Free tax filing for 2012 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Free tax filing for 2012 See Unstated interest , later. Free tax filing for 2012    You must continue to report the interest income on payments you receive in subsequent years as interest income. Free tax filing for 2012 Adjusted basis and installment sale income (gain on sale). Free tax filing for 2012   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Free tax filing for 2012 A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Free tax filing for 2012 Figuring adjusted basis for installment sale purposes. Free tax filing for 2012   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Free tax filing for 2012 When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Free tax filing for 2012    Worksheet 10-1. Free tax filing for 2012 Figuring Adjusted Basis and Gross Profit Percentage 1. Free tax filing for 2012 Enter the selling price for the property   2. Free tax filing for 2012 Enter your adjusted basis for the property     3. Free tax filing for 2012 Enter your selling expenses     4. Free tax filing for 2012 Enter any depreciation recapture     5. Free tax filing for 2012 Add lines 2, 3, and 4. Free tax filing for 2012  This is your adjusted basis  for installment sale purposes   6. Free tax filing for 2012 Subtract line 5 from line 1. Free tax filing for 2012 If zero or less, enter -0-. Free tax filing for 2012  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Free tax filing for 2012 You cannot use the installment method. Free tax filing for 2012   7. Free tax filing for 2012 Enter the contract price for the property   8. Free tax filing for 2012 Divide line 6 by line 7. Free tax filing for 2012 This is your gross profit percentage   Selling price. Free tax filing for 2012   The selling price is the total cost of the property to the buyer and includes the following. Free tax filing for 2012 Any money you are to receive. Free tax filing for 2012 The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Free tax filing for 2012 Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Free tax filing for 2012 Any of your selling expenses the buyer pays. Free tax filing for 2012 Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Free tax filing for 2012 Adjusted basis for installment sale purposes. Free tax filing for 2012   Your adjusted basis is the total of the following three items. Free tax filing for 2012 Adjusted basis. Free tax filing for 2012 Selling expenses. Free tax filing for 2012 Depreciation recapture. Free tax filing for 2012 Adjusted basis. Free tax filing for 2012   Basis is your investment in the property for installment sale purposes. Free tax filing for 2012 The way you figure basis depends on how you acquire the property. Free tax filing for 2012 The basis of property you buy is generally its cost. Free tax filing for 2012 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Free tax filing for 2012   While you own property, various events may change your original basis. Free tax filing for 2012 Some events, such as adding rooms or making permanent improvements, increase basis. Free tax filing for 2012 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Free tax filing for 2012 The result is adjusted basis. Free tax filing for 2012 See chapter 6 and Publication 551, Basis of Assets, for more information. Free tax filing for 2012 Selling expenses. Free tax filing for 2012   Selling expenses relate to the sale of the property. Free tax filing for 2012 They include commissions, attorney fees, and any other expenses paid on the sale. Free tax filing for 2012 Selling expenses are added to the basis of the sold property. Free tax filing for 2012 Depreciation recapture. Free tax filing for 2012   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Free tax filing for 2012 See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Free tax filing for 2012 Gross profit. Free tax filing for 2012   Gross profit is the total gain you report on the installment method. Free tax filing for 2012   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Free tax filing for 2012 If the property you sold was your home, subtract from the gross profit any gain you can exclude. Free tax filing for 2012 Contract price. Free tax filing for 2012   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Free tax filing for 2012 Gross profit percentage. Free tax filing for 2012   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Free tax filing for 2012 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Free tax filing for 2012   The gross profit percentage generally remains the same for each payment you receive. Free tax filing for 2012 However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Free tax filing for 2012 Amount to report as installment sale income. Free tax filing for 2012   Multiply the payments you receive each year (less interest) by the gross profit percentage. Free tax filing for 2012 The result is your installment sales income for the tax year. Free tax filing for 2012 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Free tax filing for 2012 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Free tax filing for 2012 For a detailed discussion, see Payments Received or Considered Received , later. Free tax filing for 2012 Selling price reduced. Free tax filing for 2012   If the selling price is reduced at a later date, the gross profit on the sale also will change. Free tax filing for 2012 You then must refigure the gross profit percentage for the remaining payments. Free tax filing for 2012 Refigure your gross profit using Worksheet 10-2. Free tax filing for 2012 New Gross Profit Percentage — Selling Price Reduced. Free tax filing for 2012 You will spread any remaining gain over future installments. Free tax filing for 2012    Worksheet 10-2. Free tax filing for 2012 New Gross Profit Percentage — Selling Price Reduced 1. Free tax filing for 2012 Enter the reduced selling  price for the property   2. Free tax filing for 2012 Enter your adjusted  basis for the  property     3. Free tax filing for 2012 Enter your selling  expenses     4. Free tax filing for 2012 Enter any depreciation  recapture     5. Free tax filing for 2012 Add lines 2, 3, and 4. Free tax filing for 2012   6. Free tax filing for 2012 Subtract line 5 from line 1. Free tax filing for 2012  This is your adjusted  gross profit   7. Free tax filing for 2012 Enter any installment sale  income reported in  prior year(s)   8. Free tax filing for 2012 Subtract line 7 from line 6   9. Free tax filing for 2012 Future installments     10. Free tax filing for 2012 Divide line 8 by line 9. Free tax filing for 2012  This is your new  gross profit percentage*. Free tax filing for 2012   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free tax filing for 2012 Example. Free tax filing for 2012 In 2011, you sold land with a basis of $40,000 for $100,000. Free tax filing for 2012 Your gross profit was $60,000. Free tax filing for 2012 You received a $20,000 down payment and the buyer's note for $80,000. Free tax filing for 2012 The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Free tax filing for 2012 Your gross profit percentage was 60%. Free tax filing for 2012 You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Free tax filing for 2012 You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Free tax filing for 2012 60)) in 2012. Free tax filing for 2012 In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Free tax filing for 2012 The new gross profit percentage, 47. Free tax filing for 2012 32%, is figured in Example — Worksheet 10-2. Free tax filing for 2012 Example — Worksheet 10-2. Free tax filing for 2012 New Gross Profit Percentage — Selling Price Reduced 1. Free tax filing for 2012 Enter the reduced selling  price for the property 85,000 2. Free tax filing for 2012 Enter your adjusted  basis for the  property 40,000   3. Free tax filing for 2012 Enter your selling  expenses -0-   4. Free tax filing for 2012 Enter any depreciation  recapture -0-   5. Free tax filing for 2012 Add lines 2, 3, and 4. Free tax filing for 2012 40,000 6. Free tax filing for 2012 Subtract line 5 from line 1. Free tax filing for 2012  This is your adjusted  gross profit 45,000 7. Free tax filing for 2012 Enter any installment sale  income reported in  prior year(s) 22,605 8. Free tax filing for 2012 Subtract line 7 from line 6 22,395 9. Free tax filing for 2012 Future installments   47,325 10. Free tax filing for 2012 Divide line 8 by line 9. Free tax filing for 2012  This is your new  gross profit percentage*. Free tax filing for 2012 47. Free tax filing for 2012 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free tax filing for 2012 You will report installment sale income of $6,878 (47. Free tax filing for 2012 32% of $14,535) in 2013, $7,449 (47. Free tax filing for 2012 32% of $15,742) in 2014, and $8,067 (47. Free tax filing for 2012 32% of $17,048) in 2015. Free tax filing for 2012 Form 6252. Free tax filing for 2012   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Free tax filing for 2012 Attach it to your tax return for each year. Free tax filing for 2012 Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Free tax filing for 2012 It is considered gain or loss on the sale of the property for which you received the installment obligation. Free tax filing for 2012 Cancellation. Free tax filing for 2012   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Free tax filing for 2012 Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Free tax filing for 2012 If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Free tax filing for 2012 Transfer due to death. Free tax filing for 2012   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Free tax filing for 2012 Any unreported gain from the installment obligation is not treated as gross income to the decedent. Free tax filing for 2012 No income is reported on the decedent's return due to the transfer. Free tax filing for 2012 Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Free tax filing for 2012   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Free tax filing for 2012 The estate must figure its gain or loss on the disposition. Free tax filing for 2012 If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Free tax filing for 2012 More information. Free tax filing for 2012   For more information on the disposition of an installment obligation, see Publication 537. Free tax filing for 2012 Sale of depreciable property. Free tax filing for 2012   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Free tax filing for 2012 See Sale to a Related Person in Publication 537. Free tax filing for 2012   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Free tax filing for 2012 However, report any gain greater than the recapture income on the installment method. Free tax filing for 2012   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Free tax filing for 2012   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Free tax filing for 2012 Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Free tax filing for 2012    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Free tax filing for 2012 See the Form 6252 instructions for details. Free tax filing for 2012   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Free tax filing for 2012 For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Free tax filing for 2012 Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Free tax filing for 2012 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Free tax filing for 2012 These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Free tax filing for 2012 However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Free tax filing for 2012 Buyer pays seller's expenses. Free tax filing for 2012   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Free tax filing for 2012 Include these expenses in the selling and contract prices when figuring the gross profit percentage. Free tax filing for 2012 Buyer assumes mortgage. Free tax filing for 2012   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Free tax filing for 2012 Mortgage less than basis. Free tax filing for 2012   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Free tax filing for 2012 It is considered a recovery of your basis. Free tax filing for 2012 The contract price is the selling price minus the mortgage. Free tax filing for 2012 Example. Free tax filing for 2012 You sell property with an adjusted basis of $19,000. Free tax filing for 2012 You have selling expenses of $1,000. Free tax filing for 2012 The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Free tax filing for 2012 The selling price is $25,000 ($15,000 + $10,000). Free tax filing for 2012 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Free tax filing for 2012 The contract price is $10,000 ($25,000 − $15,000 mortgage). Free tax filing for 2012 Your gross profit percentage is 50% ($5,000 ÷ $10,000). Free tax filing for 2012 You report half of each $2,000 payment received as gain from the sale. Free tax filing for 2012 You also report all interest you receive as ordinary income. Free tax filing for 2012 Mortgage more than basis. Free tax filing for 2012   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Free tax filing for 2012 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Free tax filing for 2012   To figure the contract price, subtract the mortgage from the selling price. Free tax filing for 2012 This is the total amount (other than interest) you will receive directly from the buyer. Free tax filing for 2012 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Free tax filing for 2012 The contract price is then the same as your gross profit from the sale. Free tax filing for 2012    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Free tax filing for 2012 Example. Free tax filing for 2012 The selling price for your property is $9,000. Free tax filing for 2012 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Free tax filing for 2012 Your adjusted basis in the property is $4,400. Free tax filing for 2012 You have selling expenses of $600, for a total installment sale basis of $5,000. Free tax filing for 2012 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Free tax filing for 2012 This amount is included in the contract price and treated as a payment received in the year of sale. Free tax filing for 2012 The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. Free tax filing for 2012 Report 100% of each payment (less interest) as gain from the sale. Free tax filing for 2012 Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Free tax filing for 2012 Buyer assumes other debts. Free tax filing for 2012   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Free tax filing for 2012   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Free tax filing for 2012 Compare the debt to your installment sale basis in the property being sold. Free tax filing for 2012 If the debt is less than your installment sale basis, none of it is treated as a payment. Free tax filing for 2012 If it is more, only the difference is treated as a payment. Free tax filing for 2012 If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Free tax filing for 2012 These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Free tax filing for 2012 However, they apply only to the following types of debt the buyer assumes. Free tax filing for 2012 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Free tax filing for 2012 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Free tax filing for 2012   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Free tax filing for 2012 The value of the assumed debt is then considered a payment to you in the year of sale. Free tax filing for 2012 Property used as a payment. Free tax filing for 2012   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Free tax filing for 2012 However, see Trading property for like-kind property , later. Free tax filing for 2012 Generally, the amount of the payment is the property's FMV on the date you receive it. Free tax filing for 2012 Exception. Free tax filing for 2012   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Free tax filing for 2012 See Unstated interest , later. Free tax filing for 2012 Examples. Free tax filing for 2012 If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Free tax filing for 2012 If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Free tax filing for 2012 In these examples, use the above rules to determine the amount you should consider as payment in the year received. Free tax filing for 2012 Debt not payable on demand. Free tax filing for 2012   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Free tax filing for 2012 This is true even if the debt is guaranteed by a third party, including a government agency. Free tax filing for 2012 Fair market value (FMV). Free tax filing for 2012   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Free tax filing for 2012 Third-party note. Free tax filing for 2012   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Free tax filing for 2012 Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Free tax filing for 2012 The excess of the note's face value over its FMV is interest. Free tax filing for 2012 Exclude this interest in determining the selling price of the property. Free tax filing for 2012 However, see Exception under Property used as a payment , earlier. Free tax filing for 2012 Example. Free tax filing for 2012 You sold real estate in an installment sale. Free tax filing for 2012 As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Free tax filing for 2012 The FMV of the third-party note at the time of the sale was $30,000. Free tax filing for 2012 This amount, not $50,000, is a payment to you in the year of sale. Free tax filing for 2012 The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Free tax filing for 2012 The remaining 40% is interest taxed as ordinary income. Free tax filing for 2012 Bond. Free tax filing for 2012   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Free tax filing for 2012 For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Free tax filing for 2012   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Free tax filing for 2012 However, see Exception under Property used as a payment , earlier. Free tax filing for 2012 Buyer's note. Free tax filing for 2012   The buyer's note (unless payable on demand) is not considered payment on the sale. Free tax filing for 2012 However, its full face value is included when figuring the selling price and the contract price. Free tax filing for 2012 Payments you receive on the note are used to figure your gain in the year received. Free tax filing for 2012 Sale to a related person. Free tax filing for 2012   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Free tax filing for 2012 For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Free tax filing for 2012 Trading property for like-kind property. Free tax filing for 2012   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Free tax filing for 2012 See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Free tax filing for 2012   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Free tax filing for 2012 The contract price is reduced by the FMV of the like-kind property received in the trade. Free tax filing for 2012 The gross profit is reduced by any gain on the trade that can be postponed. Free tax filing for 2012 Like-kind property received in the trade is not considered payment on the installment obligation. Free tax filing for 2012 Unstated interest. Free tax filing for 2012   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Free tax filing for 2012 Interest provided in the contract is called stated interest. Free tax filing for 2012   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Free tax filing for 2012 If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Free tax filing for 2012   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Free tax filing for 2012   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Free tax filing for 2012 Therefore, the buyer cannot deduct the unstated interest. Free tax filing for 2012 The seller must report the unstated interest as income. Free tax filing for 2012 Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Free tax filing for 2012   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Free tax filing for 2012   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Free tax filing for 2012 It increases the seller's interest income and the buyer's interest expense. Free tax filing for 2012   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Free tax filing for 2012    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Free tax filing for 2012 You can get this information by contacting an IRS office. Free tax filing for 2012 IRBs are also available at IRS. Free tax filing for 2012 gov. Free tax filing for 2012 More information. Free tax filing for 2012   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Free tax filing for 2012 Example. Free tax filing for 2012 You sell property at a contract price of $6,000 and your gross profit is $1,500. Free tax filing for 2012 Your gross profit percentage is 25% ($1,500 ÷ $6,000). Free tax filing for 2012 After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Free tax filing for 2012 The remainder (balance) of each payment is the tax-free return of your adjusted basis. Free tax filing for 2012 Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Free tax filing for 2012 You received $50,000 down and the buyer's note for $200,000. Free tax filing for 2012 In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Free tax filing for 2012 The total selling price was $300,000. Free tax filing for 2012 The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Free tax filing for 2012 Your selling expenses were $15,000. Free tax filing for 2012 Adjusted basis and depreciation. Free tax filing for 2012   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Free tax filing for 2012   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Free tax filing for 2012 The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Free tax filing for 2012   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Free tax filing for 2012   The buildings are section 1250 property. Free tax filing for 2012 There is no depreciation recapture income for them because they were depreciated using the straight line method. Free tax filing for 2012 See chapter 9 for more information on depreciation recapture. Free tax filing for 2012   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Free tax filing for 2012 See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Free tax filing for 2012 See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Free tax filing for 2012 Installment sale basis and gross profit. Free tax filing for 2012   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Free tax filing for 2012     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Free tax filing for 2012   The gain on the farm land and buildings is reported as section 1231 gains. Free tax filing for 2012 See Section 1231 Gains and Losses in chapter 9. Free tax filing for 2012 Contract price and gross profit percentage. Free tax filing for 2012   The contract price is $250,000 for the part of the sale reported on the installment method. Free tax filing for 2012 This is the selling price ($300,000) minus the mortgage assumed ($50,000). Free tax filing for 2012   Gross profit percentage for the sale is 47. Free tax filing for 2012 70% ($119,260 gross profit ÷ $250,000 contract price). Free tax filing for 2012 The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Free tax filing for 2012 256 Buildings ($36,120 ÷ $250,000) 14. Free tax filing for 2012 448 Total 47. Free tax filing for 2012 70 Figuring the gain to report on the installment method. Free tax filing for 2012   One hundred percent (100%) of each payment is reported on the installment method. Free tax filing for 2012 The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Free tax filing for 2012 The installment sale part of the total payments received in 2013 is also $75,000. Free tax filing for 2012 Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Free tax filing for 2012   Income Farm land—33. Free tax filing for 2012 256% × $75,000 $24,942 Buildings—14. Free tax filing for 2012 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Free tax filing for 2012   Report the installment sale on Form 6252. Free tax filing for 2012 Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Free tax filing for 2012 Attach a separate page to Form 6252 that shows the computations in the example. Free tax filing for 2012 If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Free tax filing for 2012 Section 1231 gains. Free tax filing for 2012   The gains on the farm land and buildings are section 1231 gains. Free tax filing for 2012 They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Free tax filing for 2012 A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Free tax filing for 2012 Installment income for years after 2013. Free tax filing for 2012   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Free tax filing for 2012 If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Free tax filing for 2012 You realize income as follows:   Income Farm land—33. Free tax filing for 2012 256% × $50,000 $16,628 Buildings—14. Free tax filing for 2012 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Free tax filing for 2012 You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Free tax filing for 2012 The interest received with each payment will be included in full as ordinary income. Free tax filing for 2012 Summary. Free tax filing for 2012   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Free tax filing for 2012 70% 23,850 Gain reported in 2014:   $50,000 × 47. Free tax filing for 2012 70% 23,850 Gain reported in 2015:   $50,000 × 47. Free tax filing for 2012 70% 23,850 Gain reported in 2016:   $25,000 × 47. Free tax filing for 2012 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications