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Free turbo tax 1. Free turbo tax   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Free turbo tax Amount realized on a recourse debt. Free turbo tax Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Free turbo tax S. Free turbo tax Individual Income Tax Return 1040X Amended U. Free turbo tax S. Free turbo tax Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Free turbo tax However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Free turbo tax See chapter 5 for information about getting publications and forms. Free turbo tax Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Free turbo tax An exchange is a transfer of property for other property or services. Free turbo tax The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Free turbo tax Sale or lease. Free turbo tax    Some agreements that seem to be leases may really be conditional sales contracts. Free turbo tax The intention of the parties to the agreement can help you distinguish between a sale and a lease. Free turbo tax   There is no test or group of tests to prove what the parties intended when they made the agreement. Free turbo tax You should consider each agreement based on its own facts and circumstances. Free turbo tax For more information, see chapter 3 in Publication 535, Business Expenses. Free turbo tax Cancellation of a lease. Free turbo tax    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Free turbo tax Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Free turbo tax Copyright. Free turbo tax    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Free turbo tax It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Free turbo tax Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Free turbo tax   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Free turbo tax For more information, see Section 1231 Gains and Losses in chapter 3. Free turbo tax Easement. Free turbo tax   The amount received for granting an easement is subtracted from the basis of the property. Free turbo tax If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Free turbo tax If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Free turbo tax   Any amount received that is more than the basis to be reduced is a taxable gain. Free turbo tax The transaction is reported as a sale of property. Free turbo tax   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Free turbo tax However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Free turbo tax   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Free turbo tax Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Free turbo tax See Gain or Loss From Condemnations, later. Free turbo tax Property transferred to satisfy debt. Free turbo tax   A transfer of property to satisfy a debt is an exchange. Free turbo tax Note's maturity date extended. Free turbo tax   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Free turbo tax Also, it is not considered a closed and completed transaction that would result in a gain or loss. Free turbo tax However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Free turbo tax Each case must be determined by its own facts. Free turbo tax For more information, see Regulations section 1. Free turbo tax 1001-3. Free turbo tax Transfer on death. Free turbo tax   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Free turbo tax No taxable gain or deductible loss results from the transfer. Free turbo tax Bankruptcy. Free turbo tax   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Free turbo tax Consequently, the transfer generally does not result in gain or loss. Free turbo tax For more information, see Publication 908, Bankruptcy Tax Guide. Free turbo tax Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Free turbo tax A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Free turbo tax A loss is the adjusted basis of the property that is more than the amount you realize. Free turbo tax   Table 1-1. Free turbo tax How To Figure Whether You Have a Gain or Loss IF your. Free turbo tax . Free turbo tax . Free turbo tax THEN you have a. Free turbo tax . Free turbo tax . Free turbo tax Adjusted basis is more than the amount realized, Loss. Free turbo tax Amount realized is more than the adjusted basis, Gain. Free turbo tax Basis. Free turbo tax   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Free turbo tax The basis of property you buy is usually its cost. Free turbo tax However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Free turbo tax See Basis Other Than Cost in Publication 551, Basis of Assets. Free turbo tax Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Free turbo tax See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Free turbo tax Adjusted basis. Free turbo tax   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Free turbo tax Increases include costs of any improvements having a useful life of more than 1 year. Free turbo tax Decreases include depreciation and casualty losses. Free turbo tax For more details and additional examples, see Adjusted Basis in Publication 551. Free turbo tax Amount realized. Free turbo tax   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Free turbo tax The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Free turbo tax Fair market value. Free turbo tax   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Free turbo tax If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Free turbo tax If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Free turbo tax Example. Free turbo tax You used a building in your business that cost you $70,000. Free turbo tax You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Free turbo tax You sold the building for $100,000 plus property having an FMV of $20,000. Free turbo tax The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Free turbo tax The selling expenses were $4,000. Free turbo tax Your gain on the sale is figured as follows. Free turbo tax Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Free turbo tax   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Free turbo tax Recognized gains must be included in gross income. Free turbo tax Recognized losses are deductible from gross income. Free turbo tax However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Free turbo tax See Nontaxable Exchanges, later. Free turbo tax Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Free turbo tax Interest in property. Free turbo tax   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Free turbo tax If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Free turbo tax Your basis in the property is disregarded. Free turbo tax This rule does not apply if all interests in the property are disposed of at the same time. Free turbo tax Example 1. Free turbo tax Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Free turbo tax You decide to sell your life interest in the farm. Free turbo tax The entire amount you receive is a recognized gain. Free turbo tax Your basis in the farm is disregarded. Free turbo tax Example 2. Free turbo tax The facts are the same as in Example 1, except that your brother joins you in selling the farm. Free turbo tax The entire interest in the property is sold, so your basis in the farm is not disregarded. Free turbo tax Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Free turbo tax Canceling a sale of real property. Free turbo tax   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Free turbo tax If the buyer returns the property in the year of sale, no gain or loss is recognized. Free turbo tax This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Free turbo tax If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Free turbo tax When the property is returned in a later year, you acquire a new basis in the property. Free turbo tax That basis is equal to the amount you pay to the buyer. Free turbo tax Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Free turbo tax You have a gain if the amount realized is more than your adjusted basis in the property. Free turbo tax However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Free turbo tax Bargain sales to charity. Free turbo tax   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Free turbo tax If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Free turbo tax The adjusted basis of the part sold is figured as follows. Free turbo tax Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Free turbo tax This allocation rule does not apply if a charitable contribution deduction is not allowable. Free turbo tax   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Free turbo tax Example. Free turbo tax You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Free turbo tax Your adjusted basis in the property is $4,000. Free turbo tax Your gain on the sale is $1,200, figured as follows. Free turbo tax Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Free turbo tax You must subtract depreciation you took or could have taken from the basis of the business or rental part. Free turbo tax However, see the special rule below for a home used partly for business or rental. Free turbo tax You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Free turbo tax Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Free turbo tax Any gain on the personal part of the property is a capital gain. Free turbo tax You cannot deduct a loss on the personal part. Free turbo tax Home used partly for business or rental. Free turbo tax    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Free turbo tax See Property Used Partly for Business or Rental, in Publication 523. Free turbo tax Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Free turbo tax You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Free turbo tax However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Free turbo tax Figure the loss you can deduct as follows. Free turbo tax Use the lesser of the property's adjusted basis or fair market value at the time of the change. Free turbo tax Add to (1) the cost of any improvements and other increases to basis since the change. Free turbo tax Subtract from (2) depreciation and any other decreases to basis since the change. Free turbo tax Subtract the amount you realized on the sale from the result in (3). Free turbo tax If the amount you realized is more than the result in (3), treat this result as zero. Free turbo tax The result in (4) is the loss you can deduct. Free turbo tax Example. Free turbo tax You changed your main home to rental property 5 years ago. Free turbo tax At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Free turbo tax This year, you sold the property for $55,000. Free turbo tax You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Free turbo tax Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Free turbo tax Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Free turbo tax   If you have a gain on the sale, you generally must recognize the full amount of the gain. Free turbo tax You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Free turbo tax   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Free turbo tax However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Free turbo tax   For more information, see Business Use or Rental of Home in Publication 523. Free turbo tax In addition, special rules apply if the home sold was acquired in a like-kind exchange. Free turbo tax See Special Situations in Publication 523. Free turbo tax Also see Like-Kind Exchanges, later. Free turbo tax Abandonments The abandonment of property is a disposition of property. Free turbo tax You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Free turbo tax Generally, abandonment is not treated as a sale or exchange of the property. Free turbo tax If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Free turbo tax If your adjusted basis is more than the amount you realize (if any), then you have a loss. Free turbo tax Loss from abandonment of business or investment property is deductible as a loss. Free turbo tax A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Free turbo tax This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Free turbo tax If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Free turbo tax The abandonment loss is deducted in the tax year in which the loss is sustained. Free turbo tax If the abandoned property is secured by debt, special rules apply. Free turbo tax The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Free turbo tax For more information, including examples, see chapter 3 of Publication 4681. Free turbo tax You cannot deduct any loss from abandonment of your home or other property held for personal use only. Free turbo tax Cancellation of debt. Free turbo tax   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Free turbo tax This income is separate from any loss realized from abandonment of the property. Free turbo tax   You must report this income on your tax return unless one of the following applies. Free turbo tax The cancellation is intended as a gift. Free turbo tax The debt is qualified farm debt. Free turbo tax The debt is qualified real property business debt. Free turbo tax You are insolvent or bankrupt. Free turbo tax The debt is qualified principal residence indebtedness. Free turbo tax File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Free turbo tax For more information, including other exceptions and exclusion, see Publication 4681. Free turbo tax Forms 1099-A and 1099-C. Free turbo tax   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Free turbo tax However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Free turbo tax The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free turbo tax For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Free turbo tax Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Free turbo tax The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Free turbo tax This is true even if you voluntarily return the property to the lender. Free turbo tax You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Free turbo tax Buyer's (borrower's) gain or loss. Free turbo tax   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Free turbo tax The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Free turbo tax See Gain or Loss From Sales and Exchanges, earlier. Free turbo tax You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Free turbo tax Amount realized on a nonrecourse debt. Free turbo tax   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Free turbo tax The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Free turbo tax Example 1. Free turbo tax Chris bought a new car for $15,000. Free turbo tax He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Free turbo tax Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Free turbo tax The credit company repossessed the car because he stopped making loan payments. Free turbo tax The balance due after taking into account the payments Chris made was $10,000. Free turbo tax The fair market value of the car when repossessed was $9,000. Free turbo tax The amount Chris realized on the repossession is $10,000. Free turbo tax That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Free turbo tax Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Free turbo tax He has a $5,000 nondeductible loss. Free turbo tax Example 2. Free turbo tax Abena paid $200,000 for her home. Free turbo tax She paid $15,000 down and borrowed the remaining $185,000 from a bank. Free turbo tax Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Free turbo tax The bank foreclosed on the loan because Abena stopped making payments. Free turbo tax When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Free turbo tax The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Free turbo tax She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Free turbo tax She has a $5,000 realized gain. Free turbo tax Amount realized on a recourse debt. Free turbo tax   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Free turbo tax You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Free turbo tax The amount realized does not include the canceled debt that is your income from cancellation of debt. Free turbo tax See Cancellation of debt, below. Free turbo tax Seller's (lender's) gain or loss on repossession. Free turbo tax   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Free turbo tax For more information, see Repossession in Publication 537. Free turbo tax    Table 1-2. Free turbo tax Worksheet for Foreclosures and Repossessions Part 1. Free turbo tax Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Free turbo tax Complete this part only  if you were personally liable for the debt. Free turbo tax Otherwise,  go to Part 2. Free turbo tax   1. Free turbo tax Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Free turbo tax Enter the fair market value of the transferred property   3. Free turbo tax Ordinary income from cancellation of debt upon foreclosure or    repossession. Free turbo tax * Subtract line 2 from line 1. Free turbo tax   If less than zero, enter zero   Part 2. Free turbo tax Figure your gain or loss from foreclosure or repossession. Free turbo tax   4. Free turbo tax If you completed Part 1, enter the smaller of line 1 or line 2. Free turbo tax   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Free turbo tax Enter any proceeds you received from the foreclosure sale   6. Free turbo tax Add lines 4 and 5   7. Free turbo tax Enter the adjusted basis of the transferred property   8. Free turbo tax Gain or loss from foreclosure or repossession. Free turbo tax Subtract line 7  from line 6   * The income may not be taxable. Free turbo tax See Cancellation of debt. Free turbo tax Cancellation of debt. Free turbo tax   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Free turbo tax This income is separate from any gain or loss realized from the foreclosure or repossession. Free turbo tax Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Free turbo tax    You can use Table 1-2 to figure your income from cancellation of debt. Free turbo tax   You must report this income on your tax return unless one of the following applies. Free turbo tax The cancellation is intended as a gift. Free turbo tax The debt is qualified farm debt. Free turbo tax The debt is qualified real property business debt. Free turbo tax You are insolvent or bankrupt. Free turbo tax The debt is qualified principal residence indebtedness. Free turbo tax File Form 982 to report the income exclusion. Free turbo tax Example 1. Free turbo tax Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Free turbo tax In this case, the amount he realizes is $9,000. Free turbo tax This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Free turbo tax Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Free turbo tax He has a $6,000 nondeductible loss. Free turbo tax He also is treated as receiving ordinary income from cancellation of debt. Free turbo tax That income is $1,000 ($10,000 − $9,000). Free turbo tax This is the part of the canceled debt not included in the amount realized. Free turbo tax Example 2. Free turbo tax Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Free turbo tax In this case, the amount she realizes is $170,000. Free turbo tax This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Free turbo tax Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Free turbo tax She has a $5,000 nondeductible loss. Free turbo tax She also is treated as receiving ordinary income from cancellation of debt. Free turbo tax (The debt is not exempt from tax as discussed under Cancellation of debt, above. Free turbo tax ) That income is $10,000 ($180,000 − $170,000). Free turbo tax This is the part of the canceled debt not included in the amount realized. Free turbo tax Forms 1099-A and 1099-C. Free turbo tax   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Free turbo tax However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Free turbo tax The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free turbo tax For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Free turbo tax Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Free turbo tax Involuntary conversions are also called involuntary exchanges. Free turbo tax Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Free turbo tax You report the gain or deduct the loss on your tax return for the year you realize it. Free turbo tax You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Free turbo tax However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Free turbo tax Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Free turbo tax Your basis for the new property is the same as your basis for the converted property. Free turbo tax This means that the gain is deferred until a taxable sale or exchange occurs. Free turbo tax If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Free turbo tax This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Free turbo tax If you have a gain or loss from the destruction or theft of property, see Publication 547. Free turbo tax Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Free turbo tax The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Free turbo tax The owner receives a condemnation award (money or property) in exchange for the property taken. Free turbo tax A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Free turbo tax Example. Free turbo tax A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Free turbo tax After the local government took action to condemn your property, you went to court to keep it. Free turbo tax But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Free turbo tax This is a condemnation of private property for public use. Free turbo tax Threat of condemnation. Free turbo tax   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Free turbo tax You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Free turbo tax   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Free turbo tax If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Free turbo tax Reports of condemnation. Free turbo tax   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Free turbo tax You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Free turbo tax If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Free turbo tax Example. Free turbo tax Your property lies along public utility lines. Free turbo tax The utility company has the authority to condemn your property. Free turbo tax The company informs you that it intends to acquire your property by negotiation or condemnation. Free turbo tax A threat of condemnation exists when you receive the notice. Free turbo tax Related property voluntarily sold. Free turbo tax   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Free turbo tax A substantial economic relationship exists if together the properties were one economic unit. Free turbo tax You also must show that the condemned property could not reasonably or adequately be replaced. Free turbo tax You can elect to postpone reporting the gain by buying replacement property. Free turbo tax See Postponement of Gain, later. Free turbo tax Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Free turbo tax If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Free turbo tax You can postpone reporting gain from a condemnation if you buy replacement property. Free turbo tax If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Free turbo tax See Postponement of Gain, later. Free turbo tax If your net condemnation award is less than your adjusted basis, you have a loss. Free turbo tax If your loss is from property you held for personal use, you cannot deduct it. Free turbo tax You must report any deductible loss in the tax year it happened. Free turbo tax You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Free turbo tax Main home condemned. Free turbo tax   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Free turbo tax You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free turbo tax For information on this exclusion, see Publication 523. Free turbo tax If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Free turbo tax See Postponement of Gain, later. Free turbo tax Table 1-3. Free turbo tax Worksheet for Condemnations Part 1. Free turbo tax Gain from severance damages. Free turbo tax  If you did not receive severance damages, skip Part 1 and go to Part 2. Free turbo tax   1. Free turbo tax Enter gross severance damages received   2. Free turbo tax Enter your expenses in getting severance damages   3. Free turbo tax Subtract line 2 from line 1. Free turbo tax If less than zero, enter -0-   4. Free turbo tax Enter any special assessment on remaining property taken out of your award   5. Free turbo tax Net severance damages. Free turbo tax Subtract line 4 from line 3. Free turbo tax If less than zero, enter -0-   6. Free turbo tax Enter the adjusted basis of the remaining property   7. Free turbo tax Gain from severance damages. Free turbo tax Subtract line 6 from line 5. Free turbo tax If less than zero, enter -0-   8. Free turbo tax Refigured adjusted basis of the remaining property. Free turbo tax Subtract line 5 from line 6. Free turbo tax If less than zero, enter -0-   Part 2. Free turbo tax Gain or loss from condemnation award. Free turbo tax   9. Free turbo tax Enter the gross condemnation award received   10. Free turbo tax Enter your expenses in getting the condemnation award   11. Free turbo tax If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Free turbo tax If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Free turbo tax Otherwise, enter -0-   12. Free turbo tax Add lines 10 and 11   13. Free turbo tax Net condemnation award. Free turbo tax Subtract line 12 from line 9   14. Free turbo tax Enter the adjusted basis of the condemned property   15. Free turbo tax Gain from condemnation award. Free turbo tax If line 14 is more than line 13, enter -0-. Free turbo tax Otherwise, subtract line 14 from  line 13 and skip line 16   16. Free turbo tax Loss from condemnation award. Free turbo tax Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Free turbo tax )   Part 3. Free turbo tax Postponed gain from condemnation. Free turbo tax  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Free turbo tax )   17. Free turbo tax If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Free turbo tax Otherwise, enter -0-   18. Free turbo tax If line 15 is more than zero, enter the amount from line 13. Free turbo tax Otherwise, enter -0-   19. Free turbo tax Add lines 17 and 18. Free turbo tax If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Free turbo tax Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Free turbo tax Subtract line 20 from line 19. Free turbo tax If less than zero, enter -0-   22. Free turbo tax If you completed Part 1, add lines 7 and 15. Free turbo tax Otherwise, enter the amount from line 15. Free turbo tax If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Free turbo tax Recognized gain. Free turbo tax Enter the smaller of line 21 or line 22. Free turbo tax   24. Free turbo tax Postponed gain. Free turbo tax Subtract line 23 from line 22. Free turbo tax If less than zero, enter -0-   Condemnation award. Free turbo tax   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Free turbo tax The award is also the amount you are paid for the sale of your property under threat of condemnation. Free turbo tax Payment of your debts. Free turbo tax   Amounts taken out of the award to pay your debts are considered paid to you. Free turbo tax Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Free turbo tax Example. Free turbo tax The state condemned your property for public use. Free turbo tax The award was set at $200,000. Free turbo tax The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Free turbo tax You are considered to have received the entire $200,000 as a condemnation award. Free turbo tax Interest on award. Free turbo tax   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Free turbo tax You must report the interest separately as ordinary income. Free turbo tax Payments to relocate. Free turbo tax   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Free turbo tax Do not include them in your income. Free turbo tax Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Free turbo tax Net condemnation award. Free turbo tax   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Free turbo tax If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Free turbo tax This is discussed later under Special assessment taken out of award. Free turbo tax Severance damages. Free turbo tax    Severance damages are not part of the award paid for the property condemned. Free turbo tax They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Free turbo tax   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Free turbo tax Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Free turbo tax   The contracting parties should agree on the specific amount of severance damages in writing. Free turbo tax If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Free turbo tax   You cannot make a completely new allocation of the total award after the transaction is completed. Free turbo tax However, you can show how much of the award both parties intended for severance damages. Free turbo tax The severance damages part of the award is determined from all the facts and circumstances. Free turbo tax Example. Free turbo tax You sold part of your property to the state under threat of condemnation. Free turbo tax The contract you and the condemning authority signed showed only the total purchase price. Free turbo tax It did not specify a fixed sum for severance damages. Free turbo tax However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Free turbo tax You may treat this part as severance damages. Free turbo tax Treatment of severance damages. Free turbo tax   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Free turbo tax Use them to reduce the basis of the remaining property. Free turbo tax If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Free turbo tax   If your net severance damages are more than the basis of your retained property, you have a gain. Free turbo tax You may be able to postpone reporting the gain. Free turbo tax See Postponement of Gain, later. Free turbo tax    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Free turbo tax Net severance damages. Free turbo tax   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Free turbo tax You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Free turbo tax The balance is your net severance damages. Free turbo tax Expenses of obtaining a condemnation award and severance damages. Free turbo tax   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Free turbo tax Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Free turbo tax If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Free turbo tax Example. Free turbo tax You receive a condemnation award and severance damages. Free turbo tax One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Free turbo tax You had legal expenses for the entire condemnation proceeding. Free turbo tax You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Free turbo tax You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Free turbo tax Special assessment retained out of award. Free turbo tax   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Free turbo tax An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Free turbo tax Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Free turbo tax   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Free turbo tax Example. Free turbo tax To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Free turbo tax You were awarded $5,000 for this and spent $300 to get the award. Free turbo tax Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Free turbo tax The city then paid you only $4,300. Free turbo tax Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Free turbo tax If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Free turbo tax The net award would not change, even if you later paid the assessment from the amount you received. Free turbo tax Severance damages received. Free turbo tax   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Free turbo tax Any balance of the special assessment is used to reduce the condemnation award. Free turbo tax Example. Free turbo tax You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Free turbo tax You spent $300 to obtain the severance damages. Free turbo tax A special assessment of $800 was retained out of the award. Free turbo tax The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Free turbo tax Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Free turbo tax Part business or rental. Free turbo tax   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Free turbo tax Figure your gain or loss separately because gain or loss on each part may be treated differently. Free turbo tax   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Free turbo tax Example. Free turbo tax You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Free turbo tax You rented half the building and lived in the other half. Free turbo tax You paid $25,000 for the building and spent an additional $1,000 for a new roof. Free turbo tax You claimed allowable depreciation of $4,600 on the rental half. Free turbo tax You spent $200 in legal expenses to obtain the condemnation award. Free turbo tax Figure your gain or loss as follows. Free turbo tax     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Free turbo tax Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Free turbo tax Your basis for the new property is the same as your basis for the old. Free turbo tax Money or unlike property received. Free turbo tax   You ordinarily must report the gain if you receive money or unlike property. Free turbo tax You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Free turbo tax You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Free turbo tax See Controlling interest in a corporation, later. Free turbo tax   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Free turbo tax If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Free turbo tax   The basis of the replacement property is its cost, reduced by the postponed gain. Free turbo tax Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Free turbo tax See Controlling interest in a corporation, later. Free turbo tax You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Free turbo tax Postponing gain on severance damages. Free turbo tax   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Free turbo tax See Treatment of severance damages, earlier. Free turbo tax You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Free turbo tax   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Free turbo tax If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Free turbo tax   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Free turbo tax Postponing gain on the sale of related property. Free turbo tax   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Free turbo tax You must meet the requirements explained earlier under Related property voluntarily sold. Free turbo tax You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Free turbo tax Buying replacement property from a related person. Free turbo tax   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Free turbo tax For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Free turbo tax   This rule applies to the following taxpayers. Free turbo tax C corporations. Free turbo tax Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Free turbo tax All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Free turbo tax   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Free turbo tax If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free turbo tax If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free turbo tax Exception. Free turbo tax   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Free turbo tax Advance payment. Free turbo tax   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Free turbo tax Replacement property. Free turbo tax   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Free turbo tax You do not have to use the actual funds from the condemnation award to acquire the replacement property. Free turbo tax Property you acquire by gift or inheritance does not qualify as replacement property. Free turbo tax Similar or related in service or use. Free turbo tax   Your replacement property must be similar or related in service or use to the property it replaces. Free turbo tax   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Free turbo tax For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Free turbo tax Owner-user. Free turbo tax   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Free turbo tax Example. Free turbo tax Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Free turbo tax Your replacement property is not similar or related in service or use to the condemned property. Free turbo tax To be similar or related in service or use, your replacement property must also be used by you as your home. Free turbo tax Owner-investor. Free turbo tax   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Free turbo tax You decide this by determining all the following information. Free turbo tax Whether the properties are of similar service to you. Free turbo tax The nature of the business risks connected with the properties. Free turbo tax What the properties demand of you in the way of management, service, and relations to your tenants. Free turbo tax Example. Free turbo tax You owned land and a building you rented to a manufacturing company. Free turbo tax The building was condemned. Free turbo tax During the replacement period, you had a new building built on other land you already owned. Free turbo tax You rented out the new building for use as a wholesale grocery warehouse. Free turbo tax The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Free turbo tax Your management activities. Free turbo tax The amount and kind of services you provide to your tenants. Free turbo tax The nature of your business risks connected with the properties. Free turbo tax Leasehold replaced with fee simple property. Free turbo tax   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Free turbo tax   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Free turbo tax A leasehold is property held under a lease, usually for a term of years. Free turbo tax Outdoor advertising display replaced with real property. Free turbo tax   You can elect to treat an outdoor advertising display as real property. Free turbo tax If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Free turbo tax For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Free turbo tax   You can make this election only if you did not claim a section 179 deduction for the display. Free turbo tax You cannot cancel this election unless you get the consent of the IRS. Free turbo tax   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Free turbo tax Substituting replacement property. Free turbo tax   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Free turbo tax But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Free turbo tax Controlling interest in a corporation. Free turbo tax   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Free turbo tax You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Free turbo tax Basis adjustment to corporation's property. Free turbo tax   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Free turbo tax You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Free turbo tax   Allocate this reduction to the following classes of property in the order shown below. Free turbo tax Property that is similar or related in service or use to the condemned property. Free turbo tax Depreciable property not reduced in (1). Free turbo tax All other property. Free turbo tax If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Free turbo tax The reduced basis of any single property cannot be less than zero. Free turbo tax Main home replaced. Free turbo tax   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Free turbo tax The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Free turbo tax   You must reduce the basis of your replacement property by the postponed gain. Free turbo tax Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Free turbo tax Example. Free turbo tax City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Free turbo tax The city paid you a condemnation award of $400,000. Free turbo tax Your adjusted basis in the property was $80,000. Free turbo tax You realize a gain of $320,000 ($400,000 − $80,000). Free turbo tax You purchased a new home for $100,000. Free turbo tax You can exclude $250,000 of the realized gain from your gross income. Free turbo tax The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Free turbo tax You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Free turbo tax The remaining $20,000 of realized gain is postponed. Free turbo tax Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Free turbo tax Replacement period. Free turbo tax   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Free turbo tax This is the replacement period. Free turbo tax   The replacement period for a condemnation begins on the earlier of the following dates. Free turbo tax The date on which you disposed of the condemned property. Free turbo tax The date on which the threat of condemnation began. Free turbo tax   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Free turbo tax However, see the exceptions below. Free turbo tax Three-year replacement period for certain property. Free turbo tax   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Free turbo tax However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Free turbo tax Five-year replacement period for certain property. Free turbo tax   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Free turbo tax Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Free turbo tax Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Free turbo tax Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Free turbo tax Extended replacement period for taxpayers affected by other federally declared disasters. Free turbo tax    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Free turbo tax For more information visit www. Free turbo tax irs. Free turbo tax gov/uac/Tax-Relief-in-Disaster-Situations. Free turbo tax Weather-related sales of livestock in an area eligible for federal assistance. Free turbo tax   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Free turbo tax    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Free turbo tax See Notice 2006-82. Free turbo tax You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Free turbo tax irs. Free turbo tax gov/irb/2006-39_IRB/ar13. Free turbo tax html. Free turbo tax    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Free turbo tax If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Free turbo tax You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Free turbo tax irs. Free turbo tax gov/irb/2013-45_IRB/ar04. Free turbo tax html. Free turbo tax The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Free turbo tax Determining when gain is realized. Free turbo tax   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Free turbo tax If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Free turbo tax   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Free turbo tax A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Free turbo tax   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Free turbo tax All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Free turbo tax All or part of the award is actually or constructively received. Free turbo tax For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Free turbo tax Replacement property bought before the condemnation. Free turbo tax   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Free turbo tax Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Free turbo tax Example. Free turbo tax On April 3, 2012, city authorities notified you that your property would be condemned. Free turbo tax On June 5, 2012, you acquired property to replace the property to be condemned. Free turbo tax You still had the new property when the city took possession of your old property on September 4, 2013. Free turbo tax You have made a replacement within the replacement period. Free turbo tax Extension. Free turbo tax   You can request an extension of the replacement period from the IRS director for your area. Free turbo tax You should apply before the end of the replacement period. Free turbo tax Your request should explain in detail why you need an extension. Free turbo tax The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Free turbo tax An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Free turbo tax   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Free turbo tax Extensions are usually limited to a period of 1 year or less. Free turbo tax The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Free turbo tax If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri

The Free Turbo Tax

Free turbo tax 1. Free turbo tax   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Free turbo tax It is an allowance for the wear and tear, deterioration, or obsolescence of the property. Free turbo tax This chapter discusses the general rules for depreciating property and answers the following questions. Free turbo tax What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use to depreciate your property? What is the basis of your depreciable property? How do you treat repairs and improvements? Do you have to file Form 4562? How do you correct depreciation deductions? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Free turbo tax What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. Free turbo tax You also can depreciate certain intangible property, such as patents, copyrights, and computer software. Free turbo tax To be depreciable, the property must meet all the following requirements. Free turbo tax It must be property you own. Free turbo tax It must be used in your business or income-producing activity. Free turbo tax It must have a determinable useful life. Free turbo tax It must be expected to last more than one year. Free turbo tax The following discussions provide information about these requirements. Free turbo tax Property You Own To claim depreciation, you usually must be the owner of the property. Free turbo tax You are considered as owning property even if it is subject to a debt. Free turbo tax Example 1. Free turbo tax You made a down payment to purchase rental property and assumed the previous owner's mortgage. Free turbo tax You own the property and you can depreciate it. Free turbo tax Example 2. Free turbo tax You bought a new van that you will use only for your courier business. Free turbo tax You will be making payments on the van over the next 5 years. Free turbo tax You own the van and you can depreciate it. Free turbo tax Leased property. Free turbo tax   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). Free turbo tax This means you bear the burden of exhaustion of the capital investment in the property. Free turbo tax Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Free turbo tax You can, however, depreciate any capital improvements you make to the property. Free turbo tax See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. Free turbo tax   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Free turbo tax However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property. Free turbo tax Incidents of ownership. Free turbo tax   Incidents of ownership in property include the following. Free turbo tax The legal title to the property. Free turbo tax The legal obligation to pay for the property. Free turbo tax The responsibility to pay maintenance and operating expenses. Free turbo tax The duty to pay any taxes on the property. Free turbo tax The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. Free turbo tax Life tenant. Free turbo tax   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Free turbo tax However, see Certain term interests in property under Excepted Property, later. Free turbo tax Cooperative apartments. Free turbo tax   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. Free turbo tax   Figure your depreciation deduction as follows. Free turbo tax Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. Free turbo tax If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Free turbo tax Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. Free turbo tax Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Free turbo tax Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Free turbo tax Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Free turbo tax Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. Free turbo tax Multiply the result of (2) by the percentage you figured in (3). Free turbo tax This is your depreciation on the stock. Free turbo tax   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. Free turbo tax You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. Free turbo tax Example. Free turbo tax You figure your share of the cooperative housing corporation's depreciation to be $30,000. Free turbo tax Your adjusted basis in the stock of the corporation is $50,000. Free turbo tax You use one half of your apartment solely for business purposes. Free turbo tax Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). Free turbo tax Change to business use. Free turbo tax   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. Free turbo tax The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Free turbo tax The fair market value of the property on the date you change your apartment to business use. Free turbo tax This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Free turbo tax The corporation's adjusted basis in the property on that date. Free turbo tax Do not subtract depreciation when figuring the corporation's adjusted basis. Free turbo tax   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. Free turbo tax The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Free turbo tax   For a discussion of fair market value and adjusted basis, see Publication 551. Free turbo tax Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Free turbo tax If you use property to produce income (investment use), the income must be taxable. Free turbo tax You cannot depreciate property that you use solely for personal activities. Free turbo tax Partial business or investment use. Free turbo tax   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. Free turbo tax For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. Free turbo tax    You must keep records showing the business, investment, and personal use of your property. Free turbo tax For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. Free turbo tax    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. Free turbo tax For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. Free turbo tax Office in the home. Free turbo tax   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. Free turbo tax For information about depreciating your home office, see Publication 587. Free turbo tax Inventory. Free turbo tax   You cannot depreciate inventory because it is not held for use in your business. Free turbo tax Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Free turbo tax   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. Free turbo tax See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. Free turbo tax   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. Free turbo tax If it is unclear, examine carefully all the facts in the operation of the particular business. Free turbo tax The following example shows how a careful examination of the facts in two similar situations results in different conclusions. Free turbo tax Example. Free turbo tax Maple Corporation is in the business of leasing cars. Free turbo tax At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. Free turbo tax Maple does not have a showroom, used car lot, or individuals to sell the cars. Free turbo tax Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. Free turbo tax Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. Free turbo tax If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. Free turbo tax In this situation, the cars are held primarily for sale to customers in the ordinary course of business. Free turbo tax Containers. Free turbo tax   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. Free turbo tax However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. Free turbo tax They qualify as property used in your business. Free turbo tax Title to the containers does not pass to the buyer. Free turbo tax   To determine if these requirements are met, consider the following questions. Free turbo tax Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Free turbo tax This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free turbo tax Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. Free turbo tax Example. Free turbo tax You maintain a library for use in your profession. Free turbo tax You can depreciate it. Free turbo tax However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Free turbo tax Instead, you deduct their cost as a business expense. Free turbo tax What Property Cannot Be Depreciated? Certain property cannot be depreciated. Free turbo tax This includes land and certain excepted property. Free turbo tax Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free turbo tax The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Free turbo tax Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Free turbo tax These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Free turbo tax Example. Free turbo tax You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Free turbo tax Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. Free turbo tax If you replace the building, you would have to destroy the bushes and trees right next to it. Free turbo tax These bushes and trees are closely associated with the building, so they have a determinable useful life. Free turbo tax Therefore, you can depreciate them. Free turbo tax Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Free turbo tax Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. Free turbo tax Property placed in service and disposed of in the same year. Free turbo tax Determining when property is placed in service is explained later. Free turbo tax Equipment used to build capital improvements. Free turbo tax You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Free turbo tax See Uniform Capitalization Rules in Publication 551. Free turbo tax Section 197 intangibles. Free turbo tax You must amortize these costs. Free turbo tax Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. Free turbo tax Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. Free turbo tax See Intangible Property , later. Free turbo tax Certain term interests. Free turbo tax Certain term interests in property. Free turbo tax   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Free turbo tax A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. Free turbo tax Related persons. Free turbo tax   For a description of related persons, see Related Persons, later. Free turbo tax For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Free turbo tax Basis adjustments. Free turbo tax   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. Free turbo tax   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. Free turbo tax However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. Free turbo tax The term interest is held by an organization exempt from tax. Free turbo tax The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. Free turbo tax Exceptions. Free turbo tax   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Free turbo tax They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. Free turbo tax When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Free turbo tax You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Free turbo tax Placed in Service You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Free turbo tax Even if you are not using the property, it is in service when it is ready and available for its specific use. Free turbo tax Example 1. Free turbo tax Donald Steep bought a machine for his business. Free turbo tax The machine was delivered last year. Free turbo tax However, it was not installed and operational until this year. Free turbo tax It is considered placed in service this year. Free turbo tax If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. Free turbo tax Example 2. Free turbo tax On April 6, Sue Thorn bought a house to use as residential rental property. Free turbo tax She made several repairs and had it ready for rent on July 5. Free turbo tax At that time, she began to advertise it for rent in the local newspaper. Free turbo tax The house is considered placed in service in July when it was ready and available for rent. Free turbo tax She can begin to depreciate it in July. Free turbo tax Example 3. Free turbo tax James Elm is a building contractor who specializes in constructing office buildings. Free turbo tax He bought a truck last year that had to be modified to lift materials to second-story levels. Free turbo tax The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. Free turbo tax The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. Free turbo tax Conversion to business use. Free turbo tax   If you place property in service in a personal activity, you cannot claim depreciation. Free turbo tax However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. Free turbo tax You place the property in service in the business or income-producing activity on the date of the change. Free turbo tax Example. Free turbo tax You bought a home and used it as your personal home several years before you converted it to rental property. Free turbo tax Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Free turbo tax You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. Free turbo tax Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). Free turbo tax For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Free turbo tax Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Free turbo tax You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Free turbo tax See What Is the Basis of Your Depreciable Property , later. Free turbo tax Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Free turbo tax You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Free turbo tax You sell or exchange the property. Free turbo tax You convert the property to personal use. Free turbo tax You abandon the property. Free turbo tax You transfer the property to a supplies or scrap account. Free turbo tax The property is destroyed. Free turbo tax If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. Free turbo tax What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. Free turbo tax MACRS is discussed in chapter 4. Free turbo tax You cannot use MACRS to depreciate the following property. Free turbo tax Property you placed in service before 1987. Free turbo tax Certain property owned or used in 1986. Free turbo tax Intangible property. Free turbo tax Films, video tapes, and recordings. Free turbo tax Certain corporate or partnership property acquired in a nontaxable transfer. Free turbo tax Property you elected to exclude from MACRS. Free turbo tax The following discussions describe the property listed above and explain what depreciation method should be used. Free turbo tax Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Free turbo tax Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. Free turbo tax For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. Free turbo tax Use of real property changed. Free turbo tax   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Free turbo tax Improvements made after 1986. Free turbo tax   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Free turbo tax Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Free turbo tax For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. Free turbo tax Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. Free turbo tax If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. Free turbo tax For the following discussions, do not treat property as owned before you placed it in service. Free turbo tax If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. Free turbo tax Personal property. Free turbo tax   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. Free turbo tax You or someone related to you owned or used the property in 1986. Free turbo tax You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. Free turbo tax You lease the property to a person (or someone related to this person) who owned or used the property in 1986. Free turbo tax You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. Free turbo tax Real property. Free turbo tax   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. Free turbo tax You or someone related to you owned the property in 1986. Free turbo tax You lease the property to a person who owned the property in 1986 (or someone related to that person). Free turbo tax You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. Free turbo tax MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. Free turbo tax It does not apply to the carried-over part of the basis. Free turbo tax Exceptions. Free turbo tax   The rules above do not apply to the following. Free turbo tax Residential rental property or nonresidential real property. Free turbo tax Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. Free turbo tax For information on how to figure depreciation under ACRS, see Publication 534. Free turbo tax Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. Free turbo tax Related persons. Free turbo tax   For this purpose, the following are related persons. Free turbo tax An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Free turbo tax A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. Free turbo tax Two corporations that are members of the same controlled group. Free turbo tax A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Free turbo tax The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Free turbo tax The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Free turbo tax A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Free turbo tax Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. Free turbo tax A corporation and a partnership if the same persons own both of the following. Free turbo tax More than 10% of the value of the outstanding stock of the corporation. Free turbo tax More than 10% of the capital or profits interest in the partnership. Free turbo tax The executor and beneficiary of any estate. Free turbo tax A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. Free turbo tax Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. Free turbo tax The related person and a person who is engaged in trades or businesses under common control. Free turbo tax See section 52(a) and 52(b) of the Internal Revenue Code. Free turbo tax When to determine relationship. Free turbo tax   You must determine whether you are related to another person at the time you acquire the property. Free turbo tax   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. Free turbo tax For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. Free turbo tax Constructive ownership of stock or partnership interest. Free turbo tax   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. Free turbo tax Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Free turbo tax However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. Free turbo tax An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. Free turbo tax An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. Free turbo tax For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. Free turbo tax However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. Free turbo tax Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. Free turbo tax However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). Free turbo tax You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. Free turbo tax Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. Free turbo tax To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Free turbo tax Subtract the salvage value, if any, from the adjusted basis. Free turbo tax The balance is the total depreciation you can take over the useful life of the property. Free turbo tax Divide the balance by the number of years in the useful life. Free turbo tax This gives you your yearly depreciation deduction. Free turbo tax Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. Free turbo tax If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Free turbo tax Example. Free turbo tax In April, Frank bought a patent for $5,100 that is not a section 197 intangible. Free turbo tax He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. Free turbo tax He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. Free turbo tax He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. Free turbo tax Next year, Frank can deduct $300 for the full year. Free turbo tax Patents and copyrights. Free turbo tax   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. Free turbo tax The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. Free turbo tax However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. Free turbo tax Computer software. Free turbo tax   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. Free turbo tax   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Free turbo tax It is readily available for purchase by the general public. Free turbo tax It is subject to a nonexclusive license. Free turbo tax It has not been substantially modified. Free turbo tax   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. Free turbo tax If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. Free turbo tax    Tax-exempt use property subject to a lease. Free turbo tax   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term. Free turbo tax Certain created intangibles. Free turbo tax   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. Free turbo tax For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. Free turbo tax   The following are not eligible. Free turbo tax Any intangible asset acquired from another person. Free turbo tax Created financial interests. Free turbo tax Any intangible asset that has a useful life that can be estimated with reasonable accuracy. Free turbo tax Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. Free turbo tax Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Free turbo tax   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. Free turbo tax For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. Free turbo tax Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. Free turbo tax Motion picture films or video tapes. Free turbo tax Sound recordings. Free turbo tax Copyrights. Free turbo tax Books. Free turbo tax Patents. Free turbo tax Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. Free turbo tax The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. Free turbo tax For more information, see section 167(g) of the Internal Revenue Code. Free turbo tax Films, video tapes, and recordings. Free turbo tax   You cannot use MACRS for motion picture films, video tapes, and sound recordings. Free turbo tax For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. Free turbo tax You can depreciate this property using either the straight line method or the income forecast method. Free turbo tax Participations and residuals. Free turbo tax   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. Free turbo tax The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. Free turbo tax For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. Free turbo tax   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. Free turbo tax Videocassettes. Free turbo tax   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. Free turbo tax If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. Free turbo tax Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. Free turbo tax You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. Free turbo tax However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. Free turbo tax The nontaxable transfers covered by this rule include the following. Free turbo tax A distribution in complete liquidation of a subsidiary. Free turbo tax A transfer to a corporation controlled by the transferor. Free turbo tax An exchange of property solely for corporate stock or securities in a reorganization. Free turbo tax A contribution of property to a partnership in exchange for a partnership interest. Free turbo tax A partnership distribution of property to a partner. Free turbo tax Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. Free turbo tax You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. Free turbo tax You must make this election by the return due date (including extensions) for the tax year you place your property in service. Free turbo tax However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Free turbo tax Attach the election to the amended return and write “Filed pursuant to section 301. Free turbo tax 9100-2” on the election statement. Free turbo tax File the amended return at the same address you filed the original return. Free turbo tax Use of standard mileage rate. Free turbo tax   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. Free turbo tax See Publication 463 for a discussion of the standard mileage rate. Free turbo tax What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Free turbo tax To determine basis, you need to know the cost or other basis of your property. Free turbo tax Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. Free turbo tax The cost includes the amount you pay in cash, debt obligations, other property, or services. Free turbo tax Exception. Free turbo tax   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Free turbo tax If you make that choice, you cannot include those sales taxes as part of your cost basis. Free turbo tax Assumed debt. Free turbo tax   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. Free turbo tax Example. Free turbo tax You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Free turbo tax Your total cost is $140,000, the cash you paid plus the mortgage you assumed. Free turbo tax Settlement costs. Free turbo tax   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. Free turbo tax These generally are shown on your settlement statement and include the following. Free turbo tax Legal and recording fees. Free turbo tax Abstract fees. Free turbo tax Survey charges. Free turbo tax Owner's title insurance. Free turbo tax Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Free turbo tax   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. Free turbo tax Property you construct or build. Free turbo tax   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. Free turbo tax For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. Free turbo tax Other Basis Other basis usually refers to basis that is determined by the way you received the property. Free turbo tax For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. Free turbo tax If you acquired property in this or some other way, see Publication 551 to determine your basis. Free turbo tax Property changed from personal use. Free turbo tax   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. Free turbo tax The fair market value (FMV) of the property on the date of the change in use. Free turbo tax Your original cost or other basis adjusted as follows. Free turbo tax Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. Free turbo tax Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Free turbo tax Example. Free turbo tax Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. Free turbo tax Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Free turbo tax Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. Free turbo tax Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). Free turbo tax On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Free turbo tax The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). Free turbo tax Property acquired in a nontaxable transaction. Free turbo tax   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Free turbo tax Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. Free turbo tax See Like-kind exchanges and involuntary conversions. Free turbo tax under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. Free turbo tax   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. Free turbo tax See How Do You Use General Asset Accounts in chapter 4. Free turbo tax Adjusted Basis To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Free turbo tax These events could include the following. Free turbo tax Installing utility lines. Free turbo tax Paying legal fees for perfecting the title. Free turbo tax Settling zoning issues. Free turbo tax Receiving rebates. Free turbo tax Incurring a casualty or theft loss. Free turbo tax For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. Free turbo tax If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. Free turbo tax For more information, see What Is the Basis for Depreciation in chapter 4. Free turbo tax . Free turbo tax Basis adjustment for depreciation allowed or allowable. Free turbo tax   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Free turbo tax Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Free turbo tax Depreciation allowable is depreciation you are entitled to deduct. Free turbo tax   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Free turbo tax   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Free turbo tax How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. Free turbo tax Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. Free turbo tax You generally deduct the cost of repairing business property in the same way as any other business expense. Free turbo tax However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Free turbo tax Example. Free turbo tax You repair a small section on one corner of the roof of a rental house. Free turbo tax You deduct the cost of the repair as a rental expense. Free turbo tax However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Free turbo tax You depreciate the cost of the new roof. Free turbo tax Improvements to rented property. Free turbo tax   You can depreciate permanent improvements you make to business property you rent from someone else. Free turbo tax Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. Free turbo tax Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. Free turbo tax A section 179 deduction for the current year or a section 179 carryover from a prior year. Free turbo tax See chapter 2 for information on the section 179 deduction. Free turbo tax Depreciation for property placed in service during the current year. Free turbo tax Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Free turbo tax See chapter 5 for information on listed property. Free turbo tax A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Free turbo tax Amortization of costs if the current year is the first year of the amortization period. Free turbo tax Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. Free turbo tax S. Free turbo tax Income Tax Return for an S Corporation) regardless of when it was placed in service. Free turbo tax You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. Free turbo tax Table 1-1 presents an overview of the purpose of the various parts of Form 4562. Free turbo tax Employee. Free turbo tax   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. Free turbo tax Instead, use either Form 2106 or Form 2106-EZ. Free turbo tax Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. Free turbo tax How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Free turbo tax See Filing an Amended Return , next. Free turbo tax If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Free turbo tax See Changing Your Accounting Method , later. Free turbo tax Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Free turbo tax You claimed the incorrect amount because of a mathematical error made in any year. Free turbo tax You claimed the incorrect amount because of a posting error made in any year. Free turbo tax You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Free turbo tax You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Free turbo tax Adoption of accounting method defined. Free turbo tax   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. Free turbo tax   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Free turbo tax irs. Free turbo tax gov/pub/irs-irbs/irb11-04. Free turbo tax pdf. Free turbo tax (Note. Free turbo tax Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Free turbo tax For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Free turbo tax irs. Free turbo tax gov/pub/irs-irbs/irb12-14. Free turbo tax pdf. Free turbo tax )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Free turbo tax irs. Free turbo tax gov/pub/irs-irbs/irb07-29. Free turbo tax pdf. Free turbo tax When to file. Free turbo tax   If an amended return is allowed, you must file it by the later of the following. Free turbo tax 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Free turbo tax A return filed before an unextended due date is considered filed on that due date. Free turbo tax 2 years from the time you paid your tax for that year. Free turbo tax Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Free turbo tax You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. Free turbo tax The following are examples of a change in method of accounting for depreciation. Free turbo tax A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. Free turbo tax A change in the treatment of an asset from nondepreciable to depreciable or vice versa. Free turbo tax A change in the depreciation method, period of recovery, or convention of a depreciable asset. Free turbo tax A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. Free turbo tax A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). Free turbo tax Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. Free turbo tax An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. Free turbo tax A change in use of an asset in the hands of the same taxpayer. Free turbo tax Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). Free turbo tax If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Free turbo tax Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. Free turbo tax You must submit a request for a letter ruling to make a late election or revoke an election. Free turbo tax Any change in the placed in service date of a depreciable asset. Free turbo tax See section 1. Free turbo tax 446-1(e)(2)(ii)(d) of the regulations for more information and examples. Free turbo tax IRS approval. Free turbo tax   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. Free turbo tax If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. Free turbo tax B. Free turbo tax 680. Free turbo tax Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. Free turbo tax Additional guidance. Free turbo tax    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Free turbo tax irs. Free turbo tax gov/pub/irs-irbs/irb11-04. Free turbo tax pdf. Free turbo tax (Note. Free turbo tax Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Free turbo tax For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Free turbo tax irs. Free turbo tax gov/pub/irs-irbs/irb12-14. Free turbo tax pdf. Free turbo tax )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Free turbo tax irs. Free turbo tax gov/pub/irs-irbs/irb07-29. Free turbo tax pdf. Free turbo tax Table 1-1. Free turbo tax Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. Free turbo tax For more information, see Form 4562 and its instructions. Free turbo tax Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. Free turbo tax   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. Free turbo tax The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. Free turbo tax If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. Free turbo tax A negative section 481(a) adjustment results in a decrease in taxable income. Free turbo tax It is taken into account in the year of change and is reported on your business tax returns as “other expenses. Free turbo tax ” A positive section 481(a) adjustment results in an increase in taxable income. Free turbo tax It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. Free turbo tax ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Free turbo tax Make the election by completing the appropriate line on Form 3115. Free turbo tax   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. Free turbo tax Prev  Up  Next   Home   More Online Publications