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Handr Block

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Handr Block

Handr block 7. Handr block   Costs You Can Deduct or Capitalize Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Carrying Charges Research and Experimental CostsProduct. Handr block Costs not included. Handr block Intangible Drilling Costs Exploration CostsPartnerships and S corporations. Handr block Development Costs Circulation Costs Business Start-Up and Organizational Costs Reforestation Costs Retired Asset Removal Costs Barrier Removal CostsOther barrier removals. Handr block Film and Television Production Costs What's New Film and television productions costs. Handr block  The election to expense film and television production costs does not apply to productions that begin after December 31, 2013. Handr block See Film and Television Production Costs , later. Handr block Introduction This chapter discusses costs you can elect to deduct or capitalize. Handr block You generally deduct a cost as a current business expense by subtracting it from your income in either the year you incur it or the year you pay it. Handr block If you capitalize a cost, you may be able to recover it over a period of years through periodic deductions for amortization, depletion, or depreciation. Handr block When you capitalize a cost, you add it to the basis of property to which it relates. Handr block A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for exploration costs for mineral deposits. Handr block Each individual partner, shareholder, or beneficiary elects whether to deduct or capitalize exploration costs. Handr block You may be subject to the alternative minimum tax (AMT) if you deduct research and experimental, intangible drilling, exploration, development, circulation, or business organizational costs. Handr block For more information on the alternative minimum tax, see the instructions for the following forms. Handr block Form 6251, Alternative Minimum Tax—Individuals. Handr block Form 4626, Alternative Minimum Tax—Corporations. Handr block Topics - This chapter discusses: Carrying charges Research and experimental costs Intangible drilling costs Exploration costs Development costs Circulation costs Qualified disaster expenses Business start-up and organizational costs Reforestation costs Retired asset removal costs Barrier removal costs Film and television production costs Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 3468 Investment Credit 8826 Disabled Access Credit See chapter 12 for information about getting publications and forms. Handr block Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Handr block Certain carrying charges must be capitalized under the uniform capitalization rules. Handr block (For information on capitalization of interest, see chapter 4 . Handr block ) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. Handr block You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Handr block For unimproved and unproductive real property, your election is good for only 1 year. Handr block You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. Handr block For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. Handr block For personal property, your election is effective until the date you install or first use it, whichever is later. Handr block How to make the election. Handr block   To make the election to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. Handr block 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 6 months of the due date of the return (excluding extensions). Handr block Attach the statement to the amended return and write “Filed pursuant to section 301. Handr block 9100-2” on the statement. Handr block File the amended return at the same address you filed the original return. Handr block Research and Experimental Costs The costs of research and experimentation are generally capital expenses. Handr block However, you can elect to deduct these costs as a current business expense. Handr block Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. Handr block If you meet certain requirements, you may elect to defer and amortize research and experimental costs. Handr block For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8. Handr block Research and experimental costs defined. Handr block   Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Handr block Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Handr block Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement. Handr block      The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. Handr block However, costs paid or incurred to obtain another's patent are not research and experimental costs. Handr block Product. Handr block   The term “product” includes any of the following items. Handr block Formula. Handr block Invention. Handr block Patent. Handr block Pilot model. Handr block Process. Handr block Technique. Handr block Property similar to the items listed above. Handr block It also includes products used by you in your trade or business or held for sale, lease, or license. Handr block Costs not included. Handr block   Research and experimental costs do not include expenses for any of the following activities. Handr block Advertising or promotions. Handr block Consumer surveys. Handr block Efficiency surveys. Handr block Management studies. Handr block Quality control testing. Handr block Research in connection with literary, historical, or similar projects. Handr block The acquisition of another's patent, model, production, or process. Handr block When and how to elect. Handr block   You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. Handr block If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. Handr block Deducting or Amortizing Research and Experimentation Costs IF you . Handr block . Handr block . Handr block THEN . Handr block . Handr block . Handr block Elect to deduct research and experimental costs as a current business expense Deduct all research and experimental costs in the first year you pay or incur the costs and all later years. Handr block Do not deduct research and experimental costs as a current business expense If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. Handr block See Research and Experimental Costs in chapter 8. Handr block Research credit. Handr block   If you pay or incur qualified research expenses, you may be able to take the research credit. Handr block For more information see Form 6765, Credit for Increasing Research Activities and its instructions. Handr block Intangible Drilling Costs The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. Handr block You can usually recover them through depreciation or depletion. Handr block However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. Handr block These are certain drilling and development costs for wells in the United States in which you hold an operating or working interest. Handr block You can deduct only costs for drilling or preparing a well for the production of oil, gas, or geothermal steam or hot water. Handr block You can elect to deduct only the costs of items with no salvage value. Handr block These include wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production. Handr block Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. Handr block However, see Amounts paid to contractor that must be capitalized , later. Handr block You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. Handr block It does not matter whether there is any intent to produce hydrocarbons. Handr block If you do not elect to deduct your IDCs as a current business expense, you can elect to deduct them over the 60-month period beginning with the month they were paid or incurred. Handr block Amounts paid to contractor that must be capitalized. Handr block   Amounts paid to a contractor must be capitalized if they are either: Amounts properly allocable to the cost of depreciable property, or Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient. Handr block How to make the election. Handr block   You elect to deduct IDCs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. Handr block No formal statement is required. Handr block If you file Schedule C (Form 1040), enter these costs under “Other expenses. Handr block ”   For oil and gas wells, your election is binding for the year it is made and for all later years. Handr block For geothermal wells, your election can be revoked by the filing of an amended return on which you do not take the deduction. Handr block You can file the amended return for the year up to the normal time of expiration for filing a claim for credit or refund, generally, within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. Handr block Energy credit for costs of geothermal wells. Handr block   If you capitalize the drilling and development costs of geothermal wells that you place in service during the tax year, you may be able to claim a business energy credit. Handr block See the Instructions for Form 3468 for more information. Handr block Nonproductive well. Handr block   If you capitalize your IDCs, you have another option if the well is nonproductive. Handr block You can deduct the IDCs of the nonproductive well as an ordinary loss. Handr block You must indicate and clearly state your election on your tax return for the year the well is completed. Handr block Once made, the election for oil and gas wells is binding for all later years. Handr block You can revoke your election for a geothermal well by filing an amended return that does not claim the loss. Handr block Costs incurred outside the United States. Handr block   You cannot deduct as a current business expense all the IDCs paid or incurred for an oil, gas, or geothermal well located outside the United States. Handr block However, you can elect to include the costs in the adjusted basis of the well to figure depletion or depreciation. Handr block If you do not make this election, you can deduct the costs over the 10-year period beginning with the tax year in which you paid or incurred them. Handr block These rules do not apply to a nonproductive well. Handr block Exploration Costs The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. Handr block You recover these costs through depletion as the mineral is removed from the ground. Handr block However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil and gas wells). Handr block How to make the election. Handr block   You elect to deduct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Handr block Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. Handr block The election applies to the tax year you make this election and all later tax years. Handr block Partnerships and S corporations. Handr block   Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. Handr block Each shareholder, not the S corporation, elects whether to capitalize or to deduct that shareholder's share of exploration costs. Handr block Reduced corporate deductions for exploration costs. Handr block   A corporation (other than an S corporation) can deduct only 70% of its domestic exploration costs. Handr block It must capitalize the remaining 30% of costs and amortize them over the 60-month period starting with the month the exploration costs are paid or incurred. Handr block A corporation may also elect to capitalize and amortize mining exploration costs over a 10-year period. Handr block For more information on this method of amortization, see Internal Revenue Code section 59(e). Handr block   The 30% the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. Handr block However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. Handr block See Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Handr block   These rules also apply to the deduction of development costs by corporations. Handr block See Development Costs , later. Handr block Recapture of exploration expenses. Handr block   When your mine reaches the producing stage, you must recapture any exploration costs you elected to deduct. Handr block Use either of the following methods. Handr block Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Handr block Your election must be clearly indicated on the return. Handr block Increase your adjusted basis in the mine by the amount included in income. Handr block Generally, you must elect this recapture method by the due date (including extensions) of your return. Handr block 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 6 months of the due date of the return (excluding extensions). Handr block Make the election on your amended return and write “Filed pursuant to section 301. Handr block 9100-2” on the form where you are including the income. Handr block File the amended return at the same address you filed the original return. Handr block Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Handr block   You also must recapture deducted exploration costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Handr block Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Handr block   Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income. Handr block Under these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. Handr block If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your adjusted exploration costs. Handr block Foreign exploration costs. Handr block   If you pay or incur exploration costs for a mine or other natural deposit located outside the United States, you cannot deduct all the costs in the current year. Handr block You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost depletion. Handr block (Cost depletion is discussed in chapter 9 . Handr block ) If you do not make this election, you must deduct the costs over the 10-year period beginning with the tax year in which you pay or incur them. Handr block These rules also apply to foreign development costs. Handr block Development Costs You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. Handr block These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Handr block Development costs also include depreciation on improvements used in the development of ores or minerals and costs incurred for you by a contractor. Handr block Development costs do not include the costs for the acquisition or improvement of depreciable property. Handr block Instead of deducting development costs in the year paid or incurred, you can elect to treat the cost as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. Handr block This election applies each tax year to expenses paid or incurred in that year. Handr block Once made, the election is binding for the year and cannot be revoked for any reason. Handr block How to make the election. Handr block   The election to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indication on your return or by a statement filed with the IRS office where you file your return. Handr block Generally, you must make the election by the due date of the return (including extensions). Handr block 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 6 months of the due date of the return (excluding extensions). Handr block Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Handr block 9100-2. Handr block ” File the amended return at the same address you filed the original return. Handr block Foreign development costs. Handr block   The rules discussed earlier for foreign exploration costs apply to foreign development costs. Handr block Reduced corporate deductions for development costs. Handr block   The rules discussed earlier for reduced corporate deductions for exploration costs also apply to corporate deductions for development costs. Handr block Circulation Costs A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. Handr block For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Handr block Circulation costs are deductible even if they normally would be capitalized. Handr block This rule does not apply to the following costs that must be capitalized. Handr block The purchase of land or depreciable property. Handr block The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers. Handr block Other treatment of circulation costs. Handr block   If you do not want to deduct circulation costs as a current business expense, you can elect one of the following ways to recover these costs. Handr block Capitalize all circulation costs that are properly chargeable to a capital account (see chapter 1 ). Handr block Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred. Handr block How to make the election. Handr block   You elect to capitalize circulation costs by attaching a statement to your return for the first tax year the election applies. Handr block Your election is binding for the year it is made and for all later years, unless you get IRS approval to revoke it. Handr block Business Start-Up and Organizational Costs Business start-up and organizational costs are generally capital expenditures. Handr block However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. Handr block The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Handr block Any remaining costs must be amortized. Handr block For information about amortizing start-up and organizational costs, see chapter 8 . Handr block Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Handr block Organizational costs include the costs of creating a corporation. Handr block For more information on start-up and organizational costs, see chapter 8 . Handr block How to make the election. Handr block   You elect to deduct the start-up or organizational costs by claiming the deduction on your income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. Handr block 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 6 months of the due date of the return (excluding extensions). Handr block Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Handr block 9100-2. Handr block ” File the amended return at the same address you filed the original return. Handr block The election applies when computing taxable income for the current tax year and all subsequent years. Handr block Reforestation Costs Reforestation costs are generally capital expenditures. Handr block However, you can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Handr block The remaining costs can be amortized over an 84-month period. Handr block For information about amortizing reforestation costs, see chapter 8 . Handr block Qualifying reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Handr block Qualified timber property is property that contains trees in significant commercial quantities. Handr block See chapter 8 for more information on qualifying reforestation costs and qualified timber property. Handr block If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each was applied. Handr block Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. Handr block How to make the election. Handr block   You elect to deduct qualifying reforestation costs by claiming the deduction on your timely filed income tax return (including extensions) for the tax year the expenses were paid or incurred. Handr block If Form T (Timber), Forest Activities Schedule, is required, complete Part IV of Form T. Handr block If Form T is not required, attach a statement containing the following information for each qualified timber property for which an election is being made. Handr block The unique stand identification numbers. Handr block The total number of acres reforested during the tax year. Handr block The nature of the reforestation treatments. Handr block The total amounts of qualified reforestation expenditures eligible to be amortized or deducted. Handr block   If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Handr block Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Handr block 9100-2. Handr block ” File the amended return at the same address you filed the original return. Handr block The election applies when computing taxable income for the current tax year and all subsequent years. Handr block   For additional information on reforestation costs, see chapter 8 . Handr block Recapture. Handr block   This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the expenditure. Handr block For more information on recapturing the deduction, see Depreciation Recapture in Publication 544. Handr block Retired Asset Removal Costs If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. Handr block However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair. Handr block Barrier Removal Costs The cost of an improvement to a business asset is normally a capital expense. Handr block However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. Handr block You must own or lease the facility or vehicle for use in connection with your trade or business. Handr block A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. Handr block A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services). Handr block You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business. Handr block Deduction limit. Handr block   The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. Handr block However, you can add any costs over this limit to the basis of the property and depreciate these excess costs. Handr block Partners and partnerships. Handr block   The $15,000 limit applies to a partnership and also to each partner in the partnership. Handr block A partner can allocate the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. Handr block If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property. Handr block   A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). Handr block If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership's costs in full. Handr block Example. Handr block Emilio Azul's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. Handr block Emilio had $12,000 of similar expenses in his sole proprietorship. Handr block He elected to deduct $7,000 of them. Handr block Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. Handr block Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Handr block Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partnership's expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property. Handr block Qualification standards. Handr block   You can deduct your costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board under the Americans with Disabilities Act (ADA) of 1990. Handr block You can view the Americans with Disabilities Act at www. Handr block ada. Handr block gov/pubs/ada. Handr block htm. Handr block   The following is a list of some architectural barrier removal costs that can be deducted. Handr block Ground and floor surfaces. Handr block Walks. Handr block Parking lots. Handr block Ramps. Handr block Entrances. Handr block Doors and doorways. Handr block Stairs. Handr block Floors. Handr block Toilet rooms. Handr block Water fountains. Handr block Public telephones. Handr block Elevators. Handr block Controls. Handr block Signage. Handr block Alarms. Handr block Protruding objects. Handr block Symbols of accessibility. Handr block You can find the ADA guidelines and requirements for architectural barrier removal at www. Handr block usdoj. Handr block gov/crt/ada/reg3a. Handr block html. Handr block   The costs for removal of transportation barriers from rail facilities, buses, and rapid and light rail vehicles are deductible. Handr block You can find the guidelines and requirements for transportation barrier removal at www. Handr block fta. Handr block dot. Handr block gov. Handr block   Also, you can access the ADA website at www. Handr block ada. Handr block gov for additional information. Handr block Other barrier removals. Handr block   To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests. Handr block The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly. Handr block The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users). Handr block The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly. Handr block How to make the election. Handr block   If you elect to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Handr block Identify the deduction as a separate item. Handr block The election applies to all the qualifying costs you have during the year, up to the $15,000 limit. Handr block If you make this election, you must maintain adequate records to support your deduction. Handr block   For your election to be valid, you generally must file your return by its due date, including extensions. Handr block 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 6 months of the due date of the return (excluding extensions). Handr block Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Handr block 9100-2. Handr block ” File the amended return at the same address you filed the original return. Handr block Your election is irrevocable after the due date, including extensions, of your return. Handr block Disabled access credit. Handr block   If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. Handr block If you choose to claim the credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Handr block   For more information, see Form 8826, Disabled Access Credit. Handr block Film and Television Production Costs Film and television production costs are generally capital expenses. Handr block However, you can elect to deduct costs paid or incurred for certain productions commencing before January 1, 2014. Handr block For more information, see section 181 of the Internal Revenue Code and the related Treasury Regulations. 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The Handr Block

Handr block 1. Handr block   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. Handr block Amount realized on a recourse debt. Handr block 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. Handr block S. Handr block Individual Income Tax Return 1040X Amended U. Handr block S. Handr block 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. Handr block However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Handr block See chapter 5 for information about getting publications and forms. Handr block Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Handr block An exchange is a transfer of property for other property or services. Handr block The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Handr block Sale or lease. Handr block    Some agreements that seem to be leases may really be conditional sales contracts. Handr block The intention of the parties to the agreement can help you distinguish between a sale and a lease. Handr block   There is no test or group of tests to prove what the parties intended when they made the agreement. Handr block You should consider each agreement based on its own facts and circumstances. Handr block For more information, see chapter 3 in Publication 535, Business Expenses. Handr block Cancellation of a lease. Handr block    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Handr block 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. Handr block Copyright. Handr block    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. Handr block 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. Handr block Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Handr block   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. Handr block For more information, see Section 1231 Gains and Losses in chapter 3. Handr block Easement. Handr block   The amount received for granting an easement is subtracted from the basis of the property. Handr block 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. Handr block 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. Handr block   Any amount received that is more than the basis to be reduced is a taxable gain. Handr block The transaction is reported as a sale of property. Handr block   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. Handr block 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. Handr block   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. Handr block 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. Handr block See Gain or Loss From Condemnations, later. Handr block Property transferred to satisfy debt. Handr block   A transfer of property to satisfy a debt is an exchange. Handr block Note's maturity date extended. Handr block   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Handr block Also, it is not considered a closed and completed transaction that would result in a gain or loss. Handr block 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. Handr block Each case must be determined by its own facts. Handr block For more information, see Regulations section 1. Handr block 1001-3. Handr block Transfer on death. Handr block   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. Handr block No taxable gain or deductible loss results from the transfer. Handr block Bankruptcy. Handr block   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Handr block Consequently, the transfer generally does not result in gain or loss. Handr block For more information, see Publication 908, Bankruptcy Tax Guide. Handr block Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Handr block A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Handr block A loss is the adjusted basis of the property that is more than the amount you realize. Handr block   Table 1-1. Handr block How To Figure Whether You Have a Gain or Loss IF your. Handr block . Handr block . Handr block THEN you have a. Handr block . Handr block . Handr block Adjusted basis is more than the amount realized, Loss. Handr block Amount realized is more than the adjusted basis, Gain. Handr block Basis. Handr block   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Handr block The basis of property you buy is usually its cost. Handr block 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. Handr block See Basis Other Than Cost in Publication 551, Basis of Assets. Handr block 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. Handr block See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Handr block Adjusted basis. Handr block   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Handr block Increases include costs of any improvements having a useful life of more than 1 year. Handr block Decreases include depreciation and casualty losses. Handr block For more details and additional examples, see Adjusted Basis in Publication 551. Handr block Amount realized. Handr block   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. Handr block 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. Handr block Fair market value. Handr block   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. Handr block If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Handr block If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Handr block Example. Handr block You used a building in your business that cost you $70,000. Handr block You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Handr block You sold the building for $100,000 plus property having an FMV of $20,000. Handr block The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Handr block The selling expenses were $4,000. Handr block Your gain on the sale is figured as follows. Handr block 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. Handr block   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Handr block Recognized gains must be included in gross income. Handr block Recognized losses are deductible from gross income. Handr block However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Handr block See Nontaxable Exchanges, later. Handr block 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. Handr block Interest in property. Handr block   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. Handr block 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. Handr block Your basis in the property is disregarded. Handr block This rule does not apply if all interests in the property are disposed of at the same time. Handr block Example 1. Handr block Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Handr block You decide to sell your life interest in the farm. Handr block The entire amount you receive is a recognized gain. Handr block Your basis in the farm is disregarded. Handr block Example 2. Handr block The facts are the same as in Example 1, except that your brother joins you in selling the farm. Handr block The entire interest in the property is sold, so your basis in the farm is not disregarded. Handr block Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Handr block Canceling a sale of real property. Handr block   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. Handr block If the buyer returns the property in the year of sale, no gain or loss is recognized. Handr block 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. Handr block 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. Handr block When the property is returned in a later year, you acquire a new basis in the property. Handr block That basis is equal to the amount you pay to the buyer. Handr block 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. Handr block You have a gain if the amount realized is more than your adjusted basis in the property. Handr block However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Handr block Bargain sales to charity. Handr block   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Handr block 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. Handr block The adjusted basis of the part sold is figured as follows. Handr block 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. Handr block This allocation rule does not apply if a charitable contribution deduction is not allowable. Handr block   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Handr block Example. Handr block 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. Handr block Your adjusted basis in the property is $4,000. Handr block Your gain on the sale is $1,200, figured as follows. Handr block 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. Handr block You must subtract depreciation you took or could have taken from the basis of the business or rental part. Handr block However, see the special rule below for a home used partly for business or rental. Handr block You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Handr block 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. Handr block Any gain on the personal part of the property is a capital gain. Handr block You cannot deduct a loss on the personal part. Handr block Home used partly for business or rental. Handr block    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. Handr block See Property Used Partly for Business or Rental, in Publication 523. Handr block 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. Handr block 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. Handr block 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. Handr block Figure the loss you can deduct as follows. Handr block Use the lesser of the property's adjusted basis or fair market value at the time of the change. Handr block Add to (1) the cost of any improvements and other increases to basis since the change. Handr block Subtract from (2) depreciation and any other decreases to basis since the change. Handr block Subtract the amount you realized on the sale from the result in (3). Handr block If the amount you realized is more than the result in (3), treat this result as zero. Handr block The result in (4) is the loss you can deduct. Handr block Example. Handr block You changed your main home to rental property 5 years ago. Handr block At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Handr block This year, you sold the property for $55,000. Handr block You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Handr block 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. Handr block 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. Handr block   If you have a gain on the sale, you generally must recognize the full amount of the gain. Handr block You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Handr block   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. Handr block However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Handr block   For more information, see Business Use or Rental of Home in Publication 523. Handr block In addition, special rules apply if the home sold was acquired in a like-kind exchange. Handr block See Special Situations in Publication 523. Handr block Also see Like-Kind Exchanges, later. Handr block Abandonments The abandonment of property is a disposition of property. Handr block 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. Handr block Generally, abandonment is not treated as a sale or exchange of the property. Handr block If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Handr block If your adjusted basis is more than the amount you realize (if any), then you have a loss. Handr block Loss from abandonment of business or investment property is deductible as a loss. Handr block A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Handr block This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Handr block If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Handr block The abandonment loss is deducted in the tax year in which the loss is sustained. Handr block If the abandoned property is secured by debt, special rules apply. Handr block 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). Handr block For more information, including examples, see chapter 3 of Publication 4681. Handr block You cannot deduct any loss from abandonment of your home or other property held for personal use only. Handr block Cancellation of debt. Handr block   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. Handr block This income is separate from any loss realized from abandonment of the property. Handr block   You must report this income on your tax return unless one of the following applies. Handr block The cancellation is intended as a gift. Handr block The debt is qualified farm debt. Handr block The debt is qualified real property business debt. Handr block You are insolvent or bankrupt. Handr block The debt is qualified principal residence indebtedness. Handr block File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Handr block For more information, including other exceptions and exclusion, see Publication 4681. Handr block Forms 1099-A and 1099-C. Handr block   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. Handr block 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. Handr block 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. Handr block For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Handr block 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. Handr block The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Handr block This is true even if you voluntarily return the property to the lender. Handr block You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Handr block Buyer's (borrower's) gain or loss. Handr block   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. Handr block The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Handr block See Gain or Loss From Sales and Exchanges, earlier. Handr block You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Handr block Amount realized on a nonrecourse debt. Handr block   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. Handr block The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Handr block Example 1. Handr block Chris bought a new car for $15,000. Handr block He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Handr block Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Handr block The credit company repossessed the car because he stopped making loan payments. Handr block The balance due after taking into account the payments Chris made was $10,000. Handr block The fair market value of the car when repossessed was $9,000. Handr block The amount Chris realized on the repossession is $10,000. Handr block 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. Handr block Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Handr block He has a $5,000 nondeductible loss. Handr block Example 2. Handr block Abena paid $200,000 for her home. Handr block She paid $15,000 down and borrowed the remaining $185,000 from a bank. Handr block Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Handr block The bank foreclosed on the loan because Abena stopped making payments. Handr block 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. Handr block The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Handr block She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Handr block She has a $5,000 realized gain. Handr block Amount realized on a recourse debt. Handr block   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. Handr block 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. Handr block The amount realized does not include the canceled debt that is your income from cancellation of debt. Handr block See Cancellation of debt, below. Handr block Seller's (lender's) gain or loss on repossession. Handr block   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. Handr block For more information, see Repossession in Publication 537. Handr block    Table 1-2. Handr block Worksheet for Foreclosures and Repossessions Part 1. Handr block Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Handr block Complete this part only  if you were personally liable for the debt. Handr block Otherwise,  go to Part 2. Handr block   1. Handr block 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. Handr block Enter the fair market value of the transferred property   3. Handr block Ordinary income from cancellation of debt upon foreclosure or    repossession. Handr block * Subtract line 2 from line 1. Handr block   If less than zero, enter zero   Part 2. Handr block Figure your gain or loss from foreclosure or repossession. Handr block   4. Handr block If you completed Part 1, enter the smaller of line 1 or line 2. Handr block   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Handr block Enter any proceeds you received from the foreclosure sale   6. Handr block Add lines 4 and 5   7. Handr block Enter the adjusted basis of the transferred property   8. Handr block Gain or loss from foreclosure or repossession. Handr block Subtract line 7  from line 6   * The income may not be taxable. Handr block See Cancellation of debt. Handr block Cancellation of debt. Handr block   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. Handr block This income is separate from any gain or loss realized from the foreclosure or repossession. Handr block Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Handr block    You can use Table 1-2 to figure your income from cancellation of debt. Handr block   You must report this income on your tax return unless one of the following applies. Handr block The cancellation is intended as a gift. Handr block The debt is qualified farm debt. Handr block The debt is qualified real property business debt. Handr block You are insolvent or bankrupt. Handr block The debt is qualified principal residence indebtedness. Handr block File Form 982 to report the income exclusion. Handr block Example 1. Handr block 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). Handr block In this case, the amount he realizes is $9,000. Handr block This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Handr block Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Handr block He has a $6,000 nondeductible loss. Handr block He also is treated as receiving ordinary income from cancellation of debt. Handr block That income is $1,000 ($10,000 − $9,000). Handr block This is the part of the canceled debt not included in the amount realized. Handr block Example 2. Handr block 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). Handr block In this case, the amount she realizes is $170,000. Handr block This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Handr block Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Handr block She has a $5,000 nondeductible loss. Handr block She also is treated as receiving ordinary income from cancellation of debt. Handr block (The debt is not exempt from tax as discussed under Cancellation of debt, above. Handr block ) That income is $10,000 ($180,000 − $170,000). Handr block This is the part of the canceled debt not included in the amount realized. Handr block Forms 1099-A and 1099-C. Handr block   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. Handr block 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. Handr block 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. Handr block For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Handr block 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. Handr block Involuntary conversions are also called involuntary exchanges. Handr block Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Handr block You report the gain or deduct the loss on your tax return for the year you realize it. Handr block 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. Handr block However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Handr block Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Handr block Your basis for the new property is the same as your basis for the converted property. Handr block This means that the gain is deferred until a taxable sale or exchange occurs. Handr block 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. Handr block This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Handr block If you have a gain or loss from the destruction or theft of property, see Publication 547. Handr block Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Handr block 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. Handr block The owner receives a condemnation award (money or property) in exchange for the property taken. Handr block A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Handr block Example. Handr block A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Handr block After the local government took action to condemn your property, you went to court to keep it. Handr block But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Handr block This is a condemnation of private property for public use. Handr block Threat of condemnation. Handr block   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. Handr block You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Handr block   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. Handr block 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. Handr block Reports of condemnation. Handr block   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. Handr block You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Handr block 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. Handr block Example. Handr block Your property lies along public utility lines. Handr block The utility company has the authority to condemn your property. Handr block The company informs you that it intends to acquire your property by negotiation or condemnation. Handr block A threat of condemnation exists when you receive the notice. Handr block Related property voluntarily sold. Handr block   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. Handr block A substantial economic relationship exists if together the properties were one economic unit. Handr block You also must show that the condemned property could not reasonably or adequately be replaced. Handr block You can elect to postpone reporting the gain by buying replacement property. Handr block See Postponement of Gain, later. Handr block 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. Handr block If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Handr block You can postpone reporting gain from a condemnation if you buy replacement property. Handr block 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. Handr block See Postponement of Gain, later. Handr block If your net condemnation award is less than your adjusted basis, you have a loss. Handr block If your loss is from property you held for personal use, you cannot deduct it. Handr block You must report any deductible loss in the tax year it happened. Handr block You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Handr block Main home condemned. Handr block   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. Handr block You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Handr block For information on this exclusion, see Publication 523. Handr block 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. Handr block See Postponement of Gain, later. Handr block Table 1-3. Handr block Worksheet for Condemnations Part 1. Handr block Gain from severance damages. Handr block  If you did not receive severance damages, skip Part 1 and go to Part 2. Handr block   1. Handr block Enter gross severance damages received   2. Handr block Enter your expenses in getting severance damages   3. Handr block Subtract line 2 from line 1. Handr block If less than zero, enter -0-   4. Handr block Enter any special assessment on remaining property taken out of your award   5. Handr block Net severance damages. Handr block Subtract line 4 from line 3. Handr block If less than zero, enter -0-   6. Handr block Enter the adjusted basis of the remaining property   7. Handr block Gain from severance damages. Handr block Subtract line 6 from line 5. Handr block If less than zero, enter -0-   8. Handr block Refigured adjusted basis of the remaining property. Handr block Subtract line 5 from line 6. Handr block If less than zero, enter -0-   Part 2. Handr block Gain or loss from condemnation award. Handr block   9. Handr block Enter the gross condemnation award received   10. Handr block Enter your expenses in getting the condemnation award   11. Handr block If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Handr block If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Handr block Otherwise, enter -0-   12. Handr block Add lines 10 and 11   13. Handr block Net condemnation award. Handr block Subtract line 12 from line 9   14. Handr block Enter the adjusted basis of the condemned property   15. Handr block Gain from condemnation award. Handr block If line 14 is more than line 13, enter -0-. Handr block Otherwise, subtract line 14 from  line 13 and skip line 16   16. Handr block Loss from condemnation award. Handr block Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Handr block )   Part 3. Handr block Postponed gain from condemnation. Handr block  (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. Handr block )   17. Handr block If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Handr block Otherwise, enter -0-   18. Handr block If line 15 is more than zero, enter the amount from line 13. Handr block Otherwise, enter -0-   19. Handr block Add lines 17 and 18. Handr block If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Handr block Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Handr block Subtract line 20 from line 19. Handr block If less than zero, enter -0-   22. Handr block If you completed Part 1, add lines 7 and 15. Handr block Otherwise, enter the amount from line 15. Handr block If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Handr block Recognized gain. Handr block Enter the smaller of line 21 or line 22. Handr block   24. Handr block Postponed gain. Handr block Subtract line 23 from line 22. Handr block If less than zero, enter -0-   Condemnation award. Handr block   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Handr block The award is also the amount you are paid for the sale of your property under threat of condemnation. Handr block Payment of your debts. Handr block   Amounts taken out of the award to pay your debts are considered paid to you. Handr block 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. Handr block Example. Handr block The state condemned your property for public use. Handr block The award was set at $200,000. Handr block The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Handr block You are considered to have received the entire $200,000 as a condemnation award. Handr block Interest on award. Handr block   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Handr block You must report the interest separately as ordinary income. Handr block Payments to relocate. Handr block   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. Handr block Do not include them in your income. Handr block Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Handr block Net condemnation award. Handr block   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. Handr block 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. Handr block This is discussed later under Special assessment taken out of award. Handr block Severance damages. Handr block    Severance damages are not part of the award paid for the property condemned. Handr block 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. Handr block   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. Handr block 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. Handr block   The contracting parties should agree on the specific amount of severance damages in writing. Handr block If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Handr block   You cannot make a completely new allocation of the total award after the transaction is completed. Handr block However, you can show how much of the award both parties intended for severance damages. Handr block The severance damages part of the award is determined from all the facts and circumstances. Handr block Example. Handr block You sold part of your property to the state under threat of condemnation. Handr block The contract you and the condemning authority signed showed only the total purchase price. Handr block It did not specify a fixed sum for severance damages. Handr block However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Handr block You may treat this part as severance damages. Handr block Treatment of severance damages. Handr block   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Handr block Use them to reduce the basis of the remaining property. Handr block 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. Handr block   If your net severance damages are more than the basis of your retained property, you have a gain. Handr block You may be able to postpone reporting the gain. Handr block See Postponement of Gain, later. Handr block    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. Handr block Net severance damages. Handr block   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Handr block 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. Handr block The balance is your net severance damages. Handr block Expenses of obtaining a condemnation award and severance damages. Handr block   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Handr block Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Handr block If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Handr block Example. Handr block You receive a condemnation award and severance damages. Handr block One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Handr block You had legal expenses for the entire condemnation proceeding. Handr block You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Handr block You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Handr block Special assessment retained out of award. Handr block   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. Handr block An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Handr block Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Handr block   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Handr block Example. Handr block To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Handr block You were awarded $5,000 for this and spent $300 to get the award. Handr block Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Handr block The city then paid you only $4,300. Handr block Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Handr block 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). Handr block The net award would not change, even if you later paid the assessment from the amount you received. Handr block Severance damages received. Handr block   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. Handr block Any balance of the special assessment is used to reduce the condemnation award. Handr block Example. Handr block You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Handr block You spent $300 to obtain the severance damages. Handr block A special assessment of $800 was retained out of the award. Handr block The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Handr block Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Handr block Part business or rental. Handr block   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. Handr block Figure your gain or loss separately because gain or loss on each part may be treated differently. Handr block   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. Handr block Example. Handr block You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Handr block You rented half the building and lived in the other half. Handr block You paid $25,000 for the building and spent an additional $1,000 for a new roof. Handr block You claimed allowable depreciation of $4,600 on the rental half. Handr block You spent $200 in legal expenses to obtain the condemnation award. Handr block Figure your gain or loss as follows. Handr block     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. Handr block 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. Handr block Your basis for the new property is the same as your basis for the old. Handr block Money or unlike property received. Handr block   You ordinarily must report the gain if you receive money or unlike property. Handr block 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. Handr block 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. Handr block See Controlling interest in a corporation, later. Handr block   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Handr block 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. Handr block   The basis of the replacement property is its cost, reduced by the postponed gain. Handr block 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. Handr block See Controlling interest in a corporation, later. Handr block You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Handr block Postponing gain on severance damages. Handr block   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. Handr block See Treatment of severance damages, earlier. Handr block 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). Handr block   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. Handr block 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. Handr block   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Handr block Postponing gain on the sale of related property. Handr block   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. Handr block You must meet the requirements explained earlier under Related property voluntarily sold. Handr block 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). Handr block Buying replacement property from a related person. Handr block   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Handr block For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Handr block   This rule applies to the following taxpayers. Handr block C corporations. Handr block Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Handr block 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. Handr block   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Handr block If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Handr block If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Handr block Exception. Handr block   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Handr block Advance payment. Handr block   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). Handr block Replacement property. Handr block   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Handr block You do not have to use the actual funds from the condemnation award to acquire the replacement property. Handr block Property you acquire by gift or inheritance does not qualify as replacement property. Handr block Similar or related in service or use. Handr block   Your replacement property must be similar or related in service or use to the property it replaces. Handr block   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. Handr block For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Handr block Owner-user. Handr block   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. Handr block Example. Handr block Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Handr block Your replacement property is not similar or related in service or use to the condemned property. Handr block To be similar or related in service or use, your replacement property must also be used by you as your home. Handr block Owner-investor. Handr block   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. Handr block You decide this by determining all the following information. Handr block Whether the properties are of similar service to you. Handr block The nature of the business risks connected with the properties. Handr block What the properties demand of you in the way of management, service, and relations to your tenants. Handr block Example. Handr block You owned land and a building you rented to a manufacturing company. Handr block The building was condemned. Handr block During the replacement period, you had a new building built on other land you already owned. Handr block You rented out the new building for use as a wholesale grocery warehouse. Handr block 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. Handr block Your management activities. Handr block The amount and kind of services you provide to your tenants. Handr block The nature of your business risks connected with the properties. Handr block Leasehold replaced with fee simple property. Handr block   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. Handr block   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. Handr block A leasehold is property held under a lease, usually for a term of years. Handr block Outdoor advertising display replaced with real property. Handr block   You can elect to treat an outdoor advertising display as real property. Handr block 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. Handr block 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. Handr block   You can make this election only if you did not claim a section 179 deduction for the display. Handr block You cannot cancel this election unless you get the consent of the IRS. Handr block   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. Handr block Substituting replacement property. Handr block   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Handr block But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Handr block Controlling interest in a corporation. Handr block   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. Handr block 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. Handr block Basis adjustment to corporation's property. Handr block   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Handr block 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). Handr block   Allocate this reduction to the following classes of property in the order shown below. Handr block Property that is similar or related in service or use to the condemned property. Handr block Depreciable property not reduced in (1). Handr block All other property. Handr block 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. Handr block The reduced basis of any single property cannot be less than zero. Handr block Main home replaced. Handr block   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. Handr block The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Handr block   You must reduce the basis of your replacement property by the postponed gain. Handr block 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. Handr block Example. Handr block City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Handr block The city paid you a condemnation award of $400,000. Handr block Your adjusted basis in the property was $80,000. Handr block You realize a gain of $320,000 ($400,000 − $80,000). Handr block You purchased a new home for $100,000. Handr block You can exclude $250,000 of the realized gain from your gross income. Handr block 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). Handr block You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Handr block The remaining $20,000 of realized gain is postponed. Handr block Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Handr block Replacement period. Handr block   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Handr block This is the replacement period. Handr block   The replacement period for a condemnation begins on the earlier of the following dates. Handr block The date on which you disposed of the condemned property. Handr block The date on which the threat of condemnation began. Handr block   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. Handr block However, see the exceptions below. Handr block Three-year replacement period for certain property. Handr block   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. Handr block 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. Handr block Five-year replacement period for certain property. Handr block   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. Handr block 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. Handr block 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. Handr block 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. Handr block Extended replacement period for taxpayers affected by other federally declared disasters. Handr block    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. Handr block For more information visit www. Handr block irs. Handr block gov/uac/Tax-Relief-in-Disaster-Situations. Handr block Weather-related sales of livestock in an area eligible for federal assistance. Handr block   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. Handr block    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. Handr block See Notice 2006-82. Handr block You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Handr block irs. Handr block gov/irb/2006-39_IRB/ar13. Handr block html. Handr block    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. Handr block 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. Handr block You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Handr block irs. Handr block gov/irb/2013-45_IRB/ar04. Handr block html. Handr block The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Handr block Determining when gain is realized. Handr block   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Handr block 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. Handr block   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Handr block 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. Handr block   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Handr block All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Handr block All or part of the award is actually or constructively received. Handr block 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. Handr block Replacement property bought before the condemnation. Handr block   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. Handr block Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Handr block Example. Handr block On April 3, 2012, city authorities notified you that your property would be condemned. Handr block On June 5, 2012, you acquired property to replace the property to be condemned. Handr block You still had the new property when the city took possession of your old property on September 4, 2013. Handr block You have made a replacement within the replacement period. Handr block Extension. Handr block   You can request an extension of the replacement period from the IRS director for your area. Handr block You should apply before the end of the replacement period. Handr block Your request should explain in detail why you need an extension. Handr block The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Handr block An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Handr block   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Handr block Extensions are usually limited to a period of 1 year or less. Handr block The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Handr block If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri