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Hrblock Freereturn

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

E-file to Remain Open through Oct. 31 for Victims of Tropical Storm Irene

NH-2011-31, Sept. 8, 2011

BOSTON — Victims of Tropical Storm Irene that began on Aug. 27, 2011 in parts of New Hampshire may qualify for tax relief from the Internal Revenue Service.

The President has declared the following counties a federal disaster area: Carroll and Grafton. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Aug. 27, and on or before Oct. 31, have been postponed to Oct. 31, 2011. This includes corporations and other businesses that previously obtained an extension until Sept. 15 to file their 2010 returns, and individuals and businesses that received a similar extension until Oct. 17. It also includes the estimated tax payment for the third quarter, normally due Sept. 15.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Aug. 27, and on or before Sept. 12, as long as the deposits are made by Sept. 12, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Oct. 31 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Aug. 27 and on or before Oct. 31.

The IRS also gives affected taxpayers until Oct. 31 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after Aug. 27 and on or before Oct. 31.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after Aug. 27 and on or before Sept. 12 provided the taxpayer makes these deposits by Sept. 12.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “New Hampshire/Tropical Storm Irene” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

Related Information

Page Last Reviewed or Updated: 20-Mar-2014

The Hrblock Freereturn

Hrblock freereturn Publication 971 - Additional Material Table of Contents How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Hrblock freereturn Questions & AnswersThis section answers questions commonly asked by taxpayers about innocent spouse relief. Hrblock freereturn . Hrblock freereturn What is joint and several liability? . Hrblock freereturn How can I get relief from joint and several liability? . Hrblock freereturn What are the rules for innocent spouse relief? . Hrblock freereturn What are erroneous items? . Hrblock freereturn What is an understated tax? . Hrblock freereturn Will I qualify for innocent spouse relief in any situation where there is an understated tax? . Hrblock freereturn What are the rules for separation of liability relief? . Hrblock freereturn Why would a request for separation of liability relief be denied? . Hrblock freereturn What are the rules for equitable relief? . Hrblock freereturn How do state community property laws affect my ability to qualify for relief? . Hrblock freereturn How do I request relief? . Hrblock freereturn When should I file Form 8857? . Hrblock freereturn Where should I file Form 8857? . Hrblock freereturn I am currently undergoing an examination of my return. Hrblock freereturn How do I request innocent spouse relief? . Hrblock freereturn What if the IRS has given me notice that it will levy my account for the tax liability and I decide to request relief? . Hrblock freereturn What is injured spouse relief? . Hrblock freereturn What is joint and several liability? When you file a joint income tax return, the law makes both you and your spouse responsible for the entire tax liability. Hrblock freereturn This is called joint and several liability. Hrblock freereturn Joint and several liability applies not only to the tax liability you show on the return but also to any additional tax liability the IRS determines to be due, even if the additional tax is due to the income, deductions, or credits of your spouse or former spouse. Hrblock freereturn You remain jointly and severally liable for taxes, and the IRS still can collect from you, even if you later divorce and the divorce decree states that your former spouse will be solely responsible for the tax. Hrblock freereturn There are three types of relief for filers of joint returns: “innocent spouse relief,” “separation of liability relief,” and “equitable relief. Hrblock freereturn ” Each type has different requirements. Hrblock freereturn They are explained separately below. Hrblock freereturn To qualify for innocent spouse relief, you must meet all of the following conditions. Hrblock freereturn You must have filed a joint return which has an understated tax. Hrblock freereturn The understated tax must be due to erroneous items of your spouse (or former spouse). Hrblock freereturn You must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understated tax. Hrblock freereturn Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understated tax. Hrblock freereturn You must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Erroneous items are any deductions, credits, or bases that are incorrectly stated on the return, and any income that is not properly reported on the return. Hrblock freereturn You have an understated tax if the IRS determined that your total tax should be more than the amount actually shown on your return. Hrblock freereturn For example, you reported total tax on your 2008 return of $2,500. Hrblock freereturn IRS determined in an audit of your 2008 return that the total tax should be $3,000. Hrblock freereturn You have a $500 understated tax. Hrblock freereturn No. Hrblock freereturn There are many situations in which you may owe tax that is related to your spouse (or former spouse), but not be eligible for innocent spouse relief. Hrblock freereturn For example, you and your spouse file a joint return on which you report $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. Hrblock freereturn You are not eligible for innocent spouse relief because you have knowledge of the understated tax. Hrblock freereturn Under this type of relief, you allocate (separate) the understated tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). Hrblock freereturn The understated tax allocated to you is generally the amount you are responsible for. Hrblock freereturn To qualify for separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Hrblock freereturn You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Hrblock freereturn (Under this rule, you are no longer married if you are widowed. Hrblock freereturn ) You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857. Hrblock freereturn In addition to the above requirements, you must file a Form 8857 within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Even if you meet the requirements listed earlier, a request for separation of liability relief will not be granted in the following situations. Hrblock freereturn The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Hrblock freereturn The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that are allocable to your spouse (or former spouse). Hrblock freereturn Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Hrblock freereturn Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn How can I get relief from joint and several liability? There are three types of relief for filers of joint returns: “innocent spouse relief,” “separation of liability relief,” and “equitable relief. Hrblock freereturn ” Each type has different requirements. Hrblock freereturn They are explained separately below. Hrblock freereturn To qualify for innocent spouse relief, you must meet all of the following conditions. Hrblock freereturn You must have filed a joint return which has an understated tax. Hrblock freereturn The understated tax must be due to erroneous items of your spouse (or former spouse). Hrblock freereturn You must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understated tax. Hrblock freereturn Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understated tax. Hrblock freereturn You must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Erroneous items are any deductions, credits, or bases that are incorrectly stated on the return, and any income that is not properly reported on the return. Hrblock freereturn You have an understated tax if the IRS determined that your total tax should be more than the amount actually shown on your return. Hrblock freereturn For example, you reported total tax on your 2008 return of $2,500. Hrblock freereturn IRS determined in an audit of your 2008 return that the total tax should be $3,000. Hrblock freereturn You have a $500 understated tax. Hrblock freereturn No. Hrblock freereturn There are many situations in which you may owe tax that is related to your spouse (or former spouse), but not be eligible for innocent spouse relief. Hrblock freereturn For example, you and your spouse file a joint return on which you report $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. Hrblock freereturn You are not eligible for innocent spouse relief because you have knowledge of the understated tax. Hrblock freereturn Under this type of relief, you allocate (separate) the understated tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). Hrblock freereturn The understated tax allocated to you is generally the amount you are responsible for. Hrblock freereturn To qualify for separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Hrblock freereturn You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Hrblock freereturn (Under this rule, you are no longer married if you are widowed. Hrblock freereturn ) You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857. Hrblock freereturn In addition to the above requirements, you must file a Form 8857 within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Even if you meet the requirements listed earlier, a request for separation of liability relief will not be granted in the following situations. Hrblock freereturn The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Hrblock freereturn The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that are allocable to your spouse (or former spouse). Hrblock freereturn Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Hrblock freereturn Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn What are the rules for innocent spouse relief? To qualify for innocent spouse relief, you must meet all of the following conditions. Hrblock freereturn You must have filed a joint return which has an understated tax. Hrblock freereturn The understated tax must be due to erroneous items of your spouse (or former spouse). Hrblock freereturn You must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understated tax. Hrblock freereturn Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understated tax. Hrblock freereturn You must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Erroneous items are any deductions, credits, or bases that are incorrectly stated on the return, and any income that is not properly reported on the return. Hrblock freereturn You have an understated tax if the IRS determined that your total tax should be more than the amount actually shown on your return. Hrblock freereturn For example, you reported total tax on your 2008 return of $2,500. Hrblock freereturn IRS determined in an audit of your 2008 return that the total tax should be $3,000. Hrblock freereturn You have a $500 understated tax. Hrblock freereturn No. Hrblock freereturn There are many situations in which you may owe tax that is related to your spouse (or former spouse), but not be eligible for innocent spouse relief. Hrblock freereturn For example, you and your spouse file a joint return on which you report $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. Hrblock freereturn You are not eligible for innocent spouse relief because you have knowledge of the understated tax. Hrblock freereturn Under this type of relief, you allocate (separate) the understated tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). Hrblock freereturn The understated tax allocated to you is generally the amount you are responsible for. Hrblock freereturn To qualify for separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Hrblock freereturn You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Hrblock freereturn (Under this rule, you are no longer married if you are widowed. Hrblock freereturn ) You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857. Hrblock freereturn In addition to the above requirements, you must file a Form 8857 within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Even if you meet the requirements listed earlier, a request for separation of liability relief will not be granted in the following situations. Hrblock freereturn The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Hrblock freereturn The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that are allocable to your spouse (or former spouse). Hrblock freereturn Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Hrblock freereturn Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn What are “erroneous items”? Erroneous items are any deductions, credits, or bases that are incorrectly stated on the return, and any income that is not properly reported on the return. Hrblock freereturn You have an understated tax if the IRS determined that your total tax should be more than the amount actually shown on your return. Hrblock freereturn For example, you reported total tax on your 2008 return of $2,500. Hrblock freereturn IRS determined in an audit of your 2008 return that the total tax should be $3,000. Hrblock freereturn You have a $500 understated tax. Hrblock freereturn No. Hrblock freereturn There are many situations in which you may owe tax that is related to your spouse (or former spouse), but not be eligible for innocent spouse relief. Hrblock freereturn For example, you and your spouse file a joint return on which you report $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. Hrblock freereturn You are not eligible for innocent spouse relief because you have knowledge of the understated tax. Hrblock freereturn Under this type of relief, you allocate (separate) the understated tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). Hrblock freereturn The understated tax allocated to you is generally the amount you are responsible for. Hrblock freereturn To qualify for separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Hrblock freereturn You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Hrblock freereturn (Under this rule, you are no longer married if you are widowed. Hrblock freereturn ) You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857. Hrblock freereturn In addition to the above requirements, you must file a Form 8857 within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Even if you meet the requirements listed earlier, a request for separation of liability relief will not be granted in the following situations. Hrblock freereturn The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Hrblock freereturn The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that are allocable to your spouse (or former spouse). Hrblock freereturn Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Hrblock freereturn Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn What is an “understated tax”? You have an understated tax if the IRS determined that your total tax should be more than the amount actually shown on your return. Hrblock freereturn For example, you reported total tax on your 2008 return of $2,500. Hrblock freereturn IRS determined in an audit of your 2008 return that the total tax should be $3,000. Hrblock freereturn You have a $500 understated tax. Hrblock freereturn No. Hrblock freereturn There are many situations in which you may owe tax that is related to your spouse (or former spouse), but not be eligible for innocent spouse relief. Hrblock freereturn For example, you and your spouse file a joint return on which you report $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. Hrblock freereturn You are not eligible for innocent spouse relief because you have knowledge of the understated tax. Hrblock freereturn Under this type of relief, you allocate (separate) the understated tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). Hrblock freereturn The understated tax allocated to you is generally the amount you are responsible for. Hrblock freereturn To qualify for separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Hrblock freereturn You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Hrblock freereturn (Under this rule, you are no longer married if you are widowed. Hrblock freereturn ) You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857. Hrblock freereturn In addition to the above requirements, you must file a Form 8857 within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Even if you meet the requirements listed earlier, a request for separation of liability relief will not be granted in the following situations. Hrblock freereturn The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Hrblock freereturn The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that are allocable to your spouse (or former spouse). Hrblock freereturn Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Hrblock freereturn Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn Will I qualify for innocent spouse relief in any situation where there is an understated tax? No. Hrblock freereturn There are many situations in which you may owe tax that is related to your spouse (or former spouse), but not be eligible for innocent spouse relief. Hrblock freereturn For example, you and your spouse file a joint return on which you report $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. Hrblock freereturn You are not eligible for innocent spouse relief because you have knowledge of the understated tax. Hrblock freereturn Under this type of relief, you allocate (separate) the understated tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). Hrblock freereturn The understated tax allocated to you is generally the amount you are responsible for. Hrblock freereturn To qualify for separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Hrblock freereturn You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Hrblock freereturn (Under this rule, you are no longer married if you are widowed. Hrblock freereturn ) You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857. Hrblock freereturn In addition to the above requirements, you must file a Form 8857 within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Even if you meet the requirements listed earlier, a request for separation of liability relief will not be granted in the following situations. Hrblock freereturn The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Hrblock freereturn The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that are allocable to your spouse (or former spouse). Hrblock freereturn Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Hrblock freereturn Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn What are the rules for separation of liability relief? Under this type of relief, you allocate (separate) the understated tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). Hrblock freereturn The understated tax allocated to you is generally the amount you are responsible for. Hrblock freereturn To qualify for separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Hrblock freereturn You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Hrblock freereturn (Under this rule, you are no longer married if you are widowed. Hrblock freereturn ) You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857. Hrblock freereturn In addition to the above requirements, you must file a Form 8857 within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998. Hrblock freereturn Even if you meet the requirements listed earlier, a request for separation of liability relief will not be granted in the following situations. Hrblock freereturn The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Hrblock freereturn The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that are allocable to your spouse (or former spouse). Hrblock freereturn Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Hrblock freereturn Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn Why would a request for separation of liability relief be denied? Even if you meet the requirements listed earlier, a request for separation of liability relief will not be granted in the following situations. Hrblock freereturn The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Hrblock freereturn The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that are allocable to your spouse (or former spouse). Hrblock freereturn Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Hrblock freereturn Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn What are the rules for equitable relief? Equitable relief is only available if you meet all of the following conditions. Hrblock freereturn You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Hrblock freereturn You have an understated tax or underpaid tax. Hrblock freereturn See Note later. Hrblock freereturn You did not pay the tax. Hrblock freereturn However, see Refunds , earlier, for exceptions. Hrblock freereturn The IRS determines that it is unfair to hold you liable for the understated or underpaid tax taking into account all the facts and circumstances. Hrblock freereturn You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Hrblock freereturn Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Hrblock freereturn You did not file or fail to file your return with the intent to commit fraud. Hrblock freereturn The income tax liability for which you seek relief is attributable to your spouse (or former spouse) with whom you filed the joint return. Hrblock freereturn For exceptions to this condition, see item (8) under Conditions for Getting Equitable Relief , earlier. Hrblock freereturn You timely file Form 8857 as explained earlier in Exception for equitable relief under How To Request Relief. Hrblock freereturn Note. Hrblock freereturn Unlike innocent spouse relief or separation of liability relief, if you qualify for equitable relief, you can also get relief from an underpaid tax. Hrblock freereturn (An underpaid tax is tax that is properly shown on the return, but has not been paid. Hrblock freereturn ) Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or resume collecting from you. Hrblock freereturn The 10-year period will be increased by the amount of time your request for relief was pending plus 60 days. Hrblock freereturn See Publication 594 for more information. Hrblock freereturn Injured spouse relief is different from innocent spouse relief. Hrblock freereturn When a joint return is filed and the refund is used to pay one spouse's past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or federal non-tax debt, such as a student loan, the other spouse may be considered an injured spouse. Hrblock freereturn The injured spouse can get back his or her share of the joint overpayment using Form 8379, Injured Spouse Allocation. Hrblock freereturn You are considered an injured spouse if: You are not legally obligated to pay the past-due amount, and You meet any of the following conditions: You made and reported tax payments (such as federal income tax withholding or estimated tax payments). Hrblock freereturn You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit. Hrblock freereturn You claimed a refundable tax credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax. Hrblock freereturn Note. Hrblock freereturn If your residence was in a community property state at any time during the year, you may file Form 8379 even if only item (1) above applies. Hrblock freereturn . Hrblock freereturn How do state community property laws affect my ability to qualify for relief? Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hrblock freereturn Generally, community property laws require you to allocate community income and expenses equally between both spouses. Hrblock freereturn However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Hrblock freereturn      File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Hrblock freereturn You must file an additional Form 8857 if you are requesting relief for more than three years. Hrblock freereturn If you are requesting innocent spouse relief or separation of liability relief, file Form 8857 no later than two years after the date on which the IRS first began collection activities against you after July 22, 1998. Hrblock freereturn If you are requesting equitable relief, see Exception for equitable relief. Hrblock freereturn under How To Request Relief, earlier, for when to file Form 8857. Hrblock freereturn If you are requesting relief from liability arising from community property law, see How and When To Request Relief under Community Property Laws, earlier, for when to file Form 8857. Hrblock freereturn Use the address or fax number shown in the Instructions for Form 8857. Hrblock freereturn File Form 8857 at the address or send it to the fax number shown in the Instructions for Form 8857. Hrblock freereturn Do not file it with the employee assigned to examine your return. Hrblock freereturn Generally, the IRS has 10 years to collect an amount you owe. Hrblock freereturn This is the collection statute of limitations. Hrblock freereturn By law, the IRS is not allowed to collect from you after the 10-year period ends. Hrblock freereturn If you request relief for any tax year, the IRS cannot collect from you for that year while your request is pending. Hrblock freereturn But interest and penalties continue to accrue. Hrblock freereturn Your request is generally considered pending from the date the IRS receives your Form 8857 until the date your request is resolved. Hrblock freereturn This includes the time the Tax Court is considering your request. Hrblock freereturn After your case is resolved, the IRS can begin or