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Irs gov efile 3. Irs gov efile   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. Irs gov efile 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. Irs gov efile Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Irs gov efile 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. Irs gov efile Any remaining gain is a section 1231 gain. Irs gov efile 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. Irs gov efile Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Irs gov efile Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Irs gov efile 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). Irs gov efile Do not take that gain into account as section 1231 gain. Irs gov efile Section 1231 transactions. Irs gov efile   The following transactions result in gain or loss subject to section 1231 treatment. Irs gov efile Sales or exchanges of real property or depreciable personal property. Irs gov efile This property must be used in a trade or business and held longer than 1 year. Irs gov efile Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Irs gov efile Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Irs gov efile Sales or exchanges of leaseholds. Irs gov efile The leasehold must be used in a trade or business and held longer than 1 year. Irs gov efile Sales or exchanges of cattle and horses. Irs gov efile The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Irs gov efile Sales or exchanges of other livestock. Irs gov efile This livestock does not include poultry. Irs gov efile It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Irs gov efile Sales or exchanges of unharvested crops. Irs gov efile 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. Irs gov efile 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). Irs gov efile Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Irs gov efile Cutting of timber or disposal of timber, coal, or iron ore. Irs gov efile The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Irs gov efile Condemnations. Irs gov efile The condemned property must have been held longer than 1 year. Irs gov efile 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. Irs gov efile It cannot be property held for personal use. Irs gov efile Casualties and thefts. Irs gov efile 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). Irs gov efile You must have held the property longer than 1 year. Irs gov efile 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. Irs gov efile For more information on casualties and thefts, see Publication 547. Irs gov efile Property for sale to customers. Irs gov efile   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Irs gov efile 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. Irs gov efile Example. Irs gov efile You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Irs gov efile Customers make deposits on the reels, which you refund if the reels are returned within a year. Irs gov efile If they are not returned, you keep each deposit as the agreed-upon sales price. Irs gov efile Most reels are returned within the 1-year period. Irs gov efile You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Irs gov efile Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Irs gov efile Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Irs gov efile Copyrights. Irs gov efile    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). Irs gov efile The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Irs gov efile Treatment as ordinary or capital. Irs gov efile   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Irs gov efile If you have a net section 1231 loss, it is ordinary loss. Irs gov efile 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. Irs gov efile The rest, if any, is long-term capital gain. Irs gov efile Nonrecaptured section 1231 losses. Irs gov efile   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. Irs gov efile 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. Irs gov efile These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Irs gov efile Example. Irs gov efile In 2013, Ben has a $2,000 net section 1231 gain. Irs gov efile 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. Irs gov efile From 2008 through 2012 he had the following section 1231 gains and losses. Irs gov efile 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. Irs gov efile 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. Irs gov efile 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. Irs gov efile This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Irs gov efile On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Irs gov efile Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Irs gov efile Whether the adjusted basis was figured using depreciation or amortization another person claimed. Irs gov efile Corporate distributions. Irs gov efile   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Irs gov efile General asset accounts. Irs gov efile   Different rules apply to dispositions of property you depreciated using a general asset account. Irs gov efile For information on these rules, see Publication 946. Irs gov efile 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. Irs gov efile See Gain Treated as Ordinary Income, later. Irs gov efile Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Irs gov efile See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Irs gov efile Section 1245 property defined. Irs gov efile   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. Irs gov efile Personal property (either tangible or intangible). Irs gov efile Other tangible property (except buildings and their structural components) used as any of the following. Irs gov efile See Buildings and structural components below. Irs gov efile An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Irs gov efile A research facility in any of the activities in (a). Irs gov efile A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Irs gov efile That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Irs gov efile Amortization of certified pollution control facilities. Irs gov efile The section 179 expense deduction. Irs gov efile Deduction for clean-fuel vehicles and certain refueling property. Irs gov efile Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Irs gov efile Deduction for certain qualified refinery property. Irs gov efile Deduction for qualified energy efficient commercial building property. Irs gov efile Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Irs gov efile (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Irs gov efile ) 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). Irs gov efile Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Irs gov efile Deduction for qualified tertiary injectant expenses. Irs gov efile Certain reforestation expenditures. Irs gov efile Deduction for election to expense qualified advanced mine safety equipment property. Irs gov efile Single purpose agricultural (livestock) or horticultural structures. Irs gov efile Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Irs gov efile Any railroad grading or tunnel bore. Irs gov efile Buildings and structural components. Irs gov efile   Section 1245 property does not include buildings and structural components. Irs gov efile The term building includes a house, barn, warehouse, or garage. Irs gov efile The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Irs gov efile   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Irs gov efile 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. Irs gov efile   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. Irs gov efile 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. Irs gov efile Facility for bulk storage of fungible commodities. Irs gov efile   This term includes oil or gas storage tanks and grain storage bins. Irs gov efile Bulk storage means the storage of a commodity in a large mass before it is used. Irs gov efile For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Irs gov efile To be fungible, a commodity must be such that one part may be used in place of another. Irs gov efile   Stored materials that vary in composition, size, and weight are not fungible. Irs gov efile 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. Irs gov efile For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Irs gov efile 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. Irs gov efile The depreciation and amortization allowed or allowable on the property. Irs gov efile The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Irs gov efile A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Irs gov efile 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. Irs gov efile See Gifts and Transfers at Death, later. Irs gov efile Use Part III of Form 4797 to figure the ordinary income part of the gain. Irs gov efile Depreciation taken on other property or taken by other taxpayers. Irs gov efile   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Irs gov efile Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Irs gov efile 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). Irs gov efile Depreciation and amortization. Irs gov efile   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Irs gov efile Ordinary depreciation deductions. Irs gov efile Any special depreciation allowance you claimed. Irs gov efile Amortization deductions for all the following costs. Irs gov efile Acquiring a lease. Irs gov efile Lessee improvements. Irs gov efile Certified pollution control facilities. Irs gov efile Certain reforestation expenses. Irs gov efile Section 197 intangibles. Irs gov efile Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Irs gov efile Franchises, trademarks, and trade names acquired before August 11, 1993. Irs gov efile The section 179 deduction. Irs gov efile Deductions for all the following costs. Irs gov efile Removing barriers to the disabled and the elderly. Irs gov efile Tertiary injectant expenses. Irs gov efile Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Irs gov efile Environmental cleanup costs. Irs gov efile Certain reforestation expenses. Irs gov efile Qualified disaster expenses. Irs gov efile Any basis reduction for the investment credit (minus any basis increase for credit recapture). Irs gov efile Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Irs gov efile Example. Irs gov efile You file your returns on a calendar year basis. Irs gov efile 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. Irs gov efile You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Irs gov efile You did not take the section 179 deduction. Irs gov efile You sold the truck in May 2013 for $7,000. Irs gov efile The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Irs gov efile Figure the gain treated as ordinary income as follows. Irs gov efile 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. Irs gov efile   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. Irs gov efile   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. Irs gov efile Depreciation allowed or allowable. Irs gov efile   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. Irs gov efile 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. Irs gov efile 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. Irs gov efile   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Irs gov efile Multiple asset accounts. Irs gov efile   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. Irs gov efile Example. Irs gov efile In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Irs gov efile All of the depreciation was recorded in a single depreciation account. Irs gov efile After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Irs gov efile You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Irs gov efile 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. Irs gov efile Normal retirement. Irs gov efile   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. Irs gov efile 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. Irs gov efile To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Irs gov efile Section 1250 property defined. Irs gov efile   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Irs gov efile It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Irs gov efile A fee simple interest in land is not included because it is not depreciable. Irs gov efile   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Irs gov efile 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. Irs gov efile For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Irs gov efile For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Irs gov efile If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Irs gov efile You will not have additional depreciation if any of the following conditions apply to the property disposed of. Irs gov efile 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. Irs gov efile 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. Irs gov efile The property was residential low-income rental property you held for 162/3 years or longer. Irs gov efile 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. Irs gov efile 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. Irs gov efile 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. Irs gov efile These properties are depreciated using the straight line method. Irs gov efile In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Irs gov efile Depreciation taken by other taxpayers or on other property. Irs gov efile   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Irs gov efile Example. Irs gov efile Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Irs gov efile 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. Irs gov efile 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. Irs gov efile At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Irs gov efile Depreciation allowed or allowable. Irs gov efile   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. Irs gov efile 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. Irs gov efile Retired or demolished property. Irs gov efile   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. Irs gov efile Example. Irs gov efile A wing of your building is totally destroyed by fire. Irs gov efile 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. Irs gov efile Figuring straight line depreciation. Irs gov efile   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. Irs gov efile 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. Irs gov efile   Salvage value and useful life are not used for the ACRS method of depreciation. Irs gov efile Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Irs gov efile   The straight line method is applied without any basis reduction for the investment credit. Irs gov efile Property held by lessee. Irs gov efile   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. Irs gov efile 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. Irs gov efile The same rule applies to the cost of acquiring a lease. Irs gov efile   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Irs gov efile 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. Irs gov efile 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. Irs gov efile The percentages for these types of real property are as follows. Irs gov efile Nonresidential real property. Irs gov efile   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Irs gov efile For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Irs gov efile Residential rental property. Irs gov efile   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%. Irs gov efile The percentage for periods before 1976 is zero. Irs gov efile Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Irs gov efile Low-income housing. Irs gov efile    Low-income housing includes all the following types of residential rental property. Irs gov efile 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. Irs gov efile Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Irs gov efile 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. Irs gov efile Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Irs gov efile   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Irs gov efile 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. Irs gov efile Foreclosure. Irs gov efile   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. Irs gov efile Example. Irs gov efile On June 1, 2001, you acquired low-income housing property. Irs gov efile 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. Irs gov efile The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Irs gov efile 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. Irs gov efile Therefore, 70% of the additional depreciation is treated as ordinary income. Irs gov efile Holding period. Irs gov efile   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Irs gov efile For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Irs gov efile If you sold it on January 2, 2013, the holding period is exactly 192 full months. Irs gov efile The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Irs gov efile Holding period for constructed, reconstructed, or erected property. Irs gov efile   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. Irs gov efile Property acquired by gift or received in a tax-free transfer. Irs gov efile   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. Irs gov efile   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. Irs gov efile See Low-Income Housing With Two or More Elements, next. Irs gov efile 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. Irs gov efile The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Irs gov efile The following are the types of separate elements. Irs gov efile A separate improvement (defined below). Irs gov efile The basic section 1250 property plus improvements not qualifying as separate improvements. Irs gov efile The units placed in service at different times before all the section 1250 property is finished. Irs gov efile 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. Irs gov efile As a result, the apartment house consists of three separate elements. Irs gov efile The 36-month test for separate improvements. Irs gov efile   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. Irs gov efile 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. Irs gov efile 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). Irs gov efile $5,000. Irs gov efile The 1-year test. Irs gov efile   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. Irs gov efile The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Irs gov efile 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. Irs gov efile Example. Irs gov efile The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Irs gov efile During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Irs gov efile 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. Irs gov efile However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Irs gov efile Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Irs gov efile Addition to the capital account. Irs gov efile   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. Irs gov efile   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Irs gov efile 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. Irs gov efile The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Irs gov efile 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. Irs gov efile   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Irs gov efile 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. Irs gov efile Unadjusted basis. Irs gov efile   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. Irs gov efile However, the cost of components retired before that date is not included in the unadjusted basis. Irs gov efile Holding period. Irs gov efile   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Irs gov efile 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. Irs gov efile 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. Irs gov efile The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Irs gov efile   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. Irs gov efile Use the first day of a calendar month that is closest to the middle of the tax year. Irs gov efile If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Irs gov efile Figuring ordinary income attributable to each separate element. Irs gov efile   Figure ordinary income attributable to each separate element as follows. Irs gov efile   Step 1. Irs gov efile 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. Irs gov efile   Step 2. Irs gov efile 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). Irs gov efile   Step 3. Irs gov efile Multiply the result in Step 2 by the applicable percentage for the element. Irs gov efile Example. Irs gov efile You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Irs gov efile The property consisted of four elements (W, X, Y, and Z). Irs gov efile Step 1. Irs gov efile The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Irs gov efile The sum of the additional depreciation for all the elements is $24,000. Irs gov efile Step 2. Irs gov efile The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Irs gov efile Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Irs gov efile $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Irs gov efile Step 3. Irs gov efile The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Irs gov efile From these facts, the sum of the ordinary income for each element is figured as follows. Irs gov efile   Step 1 Step 2 Step 3 Ordinary Income W . Irs gov efile 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Irs gov efile 25 5,000 92% 4,600 Z . Irs gov efile 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. Irs gov efile In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Irs gov efile In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Irs gov efile Figure the additional depreciation for the periods after 1975. Irs gov efile Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Irs gov efile Stop here if this is residential rental property or if (2) is equal to or more than (1). Irs gov efile This is the gain treated as ordinary income because of additional depreciation. Irs gov efile Subtract (2) from (1). Irs gov efile Figure the additional depreciation for periods after 1969 but before 1976. Irs gov efile Add the lesser of (4) or (5) to the result in (3). Irs gov efile This is the gain treated as ordinary income because of additional depreciation. Irs gov efile A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Irs gov efile Use Form 4797, Part III, to figure the ordinary income part of the gain. Irs gov efile Corporations. Irs gov efile   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Irs gov efile 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. Irs gov efile Report this additional ordinary income on Form 4797, Part III, line 26 (f). Irs gov efile 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. Irs gov efile This applies even if no payments are received in that year. Irs gov efile If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Irs gov efile For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Irs gov efile 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. Irs gov efile To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Irs gov efile Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Irs gov efile For a detailed discussion of installment sales, see Publication 537. Irs gov efile Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Irs gov efile 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. Irs gov efile For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Irs gov efile See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Irs gov efile Part gift and part sale or exchange. Irs gov efile   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. Irs gov efile 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. Irs gov efile However, see Bargain sale to charity, later. Irs gov efile Example. Irs gov efile You transferred depreciable personal property to your son for $20,000. Irs gov efile When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Irs gov efile You took depreciation of $30,000. Irs gov efile 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. Irs gov efile 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. Irs gov efile 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. Irs gov efile Gift to charitable organization. Irs gov efile   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. Irs gov efile Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Irs gov efile   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. Irs gov efile For more information, see Giving Property That Has Increased in Value in Publication 526. Irs gov efile Bargain sale to charity. Irs gov efile   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. Irs gov efile First, figure the ordinary income as if you had sold the property at its fair market value. Irs gov efile 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. Irs gov efile See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Irs gov efile Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Irs gov efile Example. Irs gov efile You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Irs gov efile Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Irs gov efile If you had sold the property at its fair market value, your ordinary income would have been $5,000. Irs gov efile Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Irs gov efile 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. Irs gov efile For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Irs gov efile 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. Irs gov efile 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. Irs gov efile Example 1. Irs gov efile Janet Smith owned depreciable property that, upon her death, was inherited by her son. Irs gov efile 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. Irs gov efile 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. Irs gov efile Example 2. Irs gov efile The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Irs gov efile 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. Irs gov efile Ordinary income from depreciation must be reported by the trust on the transfer. Irs gov efile 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. Irs gov efile For information on like-kind exchanges and involuntary conversions, see chapter 1. Irs gov efile Depreciable personal property. Irs gov efile   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. Irs gov efile The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Irs gov efile The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Irs gov efile Example 1. Irs gov efile You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Irs gov efile The old machine cost you $5,000 two years ago. Irs gov efile You took depreciation deductions of $3,950. Irs gov efile 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. Irs gov efile Example 2. Irs gov efile You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Irs gov efile 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). Irs gov efile You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Irs gov efile Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Irs gov efile All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Irs gov efile Example 3. Irs gov efile A fire destroyed office machinery you bought for $116,000. Irs gov efile The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Irs gov efile You received a $117,000 insurance payment, realizing a gain of $92,640. Irs gov efile 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. Irs gov efile $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. Irs gov efile 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. Irs gov efile The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Irs gov efile 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. Irs gov efile Depreciable real property. Irs gov efile   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. Irs gov efile 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. Irs gov efile 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. Irs gov efile   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. Irs gov efile Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Irs gov efile Example. Irs gov efile The state paid you $116,000 when it condemned your depreciable real property for public use. Irs gov efile 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). Irs gov efile You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Irs gov efile You choose to postpone reporting the gain. Irs gov efile 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. Irs gov efile The ordinary income to be reported is $6,000, which is the greater of the following amounts. Irs gov efile 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. Irs gov efile 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. Irs gov efile   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Irs gov efile Basis of property acquired. Irs gov efile   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. Irs gov efile   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). Irs gov efile However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Irs gov efile 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. Irs gov efile Add the fair market value (or cost) of the other property acquired to the result in (1). Irs gov efile Divide the result in (1) by the result in (2). Irs gov efile Multiply the total basis by the result in (3). Irs gov efile This is the basis of the depreciable real property acquired. Irs gov efile 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). Irs gov efile Subtract the result in (4) from the total basis. Irs gov efile This is the basis of the other property acquired. Irs gov efile 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). Irs gov efile Example 1. Irs gov efile 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. Irs gov efile The property's adjusted basis was $38,400, with additional depreciation of $14,932. Irs gov efile On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Irs gov efile Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Irs gov efile You chose to postpone reporting the gain under the involuntary conversion rules. Irs gov efile 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. Irs gov efile The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Irs gov efile The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Irs gov efile 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. Irs gov efile Example 2. Irs gov efile John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Irs gov efile He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Irs gov efile He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Irs gov efile 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. Irs gov efile The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Irs gov efile The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Irs gov efile The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Irs gov efile The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Irs gov efile 4. Irs gov efile The basis of the depreciable real property is $12,000. Irs gov efile This is the $30,000 total basis multiplied by the 0. Irs gov efile 4 figured in (3). Irs gov efile The basis of the other property (land) is $18,000. Irs gov efile This is the $30,000 total basis minus the $12,000 figured in (4). Irs gov efile 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. Irs gov efile 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. Irs gov efile Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Irs gov efile See chapter 2. Irs gov efile 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. Irs gov efile In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Irs gov efile These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Irs gov efile The comparison should take into account all the following facts and circumstances. Irs gov efile The original cost and reproduction cost of construction, erection, or production. Irs gov efile The remaining economic useful life. Irs gov efile The state of obsolescence. Irs gov efile The anticipated expenditures required to maintain, renovate, or modernize the properties. Irs gov efile Like-kind exchanges and involuntary conversions. Irs gov efile   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. Irs gov efile 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. Irs gov efile 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. Irs gov efile   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. Irs gov efile 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. Irs gov efile 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. Irs gov efile Example. Irs gov efile A fire destroyed your property with a total fair market value of $50,000. Irs gov efile It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Irs gov efile 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. Irs gov efile The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Irs gov efile You choose to postpone reporting your gain from the involuntary conversion. Irs gov efile You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Irs gov efile 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. Irs gov efile The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Irs gov efile The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Irs gov efile Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Irs gov efile 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. Irs gov efile 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. Irs gov efile Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Irs gov efile 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. Irs gov efile Prev  Up  Next   Home   More Online Publications
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The Irs Gov Efile

Irs gov efile Publication 541 - Introductory Material Table of Contents Reminder IntroductionTax questions. Irs gov efile Ordering forms and publications. Irs gov efile Useful Items - You may want to see: Reminder Photographs of missing children. Irs gov efile  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Irs gov efile Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Irs gov efile You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Irs gov efile Introduction This publication provides supplemental federal income tax information for partnerships and partners. Irs gov efile It supplements the information provided in the Instructions for Form 1065, U. Irs gov efile S. Irs gov efile Return of Partnership Income, and the Partner's Instructions for Schedule K-1 (Form 1065). Irs gov efile Generally, a partnership does not pay tax on its income but “passes through” any profits or losses to its partners. Irs gov efile Partners must include partnership items on their tax returns. Irs gov efile For a discussion of business expenses a partnership can deduct, see Publication 535, Business Expenses. Irs gov efile Members of oil and gas partnerships should read about the deduction for depletion in chapter 9 of that publication. Irs gov efile Certain partnerships must have a tax matters partner (TMP) who is also a general partner. Irs gov efile For information on the rules for designating a TMP, see Designation of Tax Matters Partner (TMP) in the Form 1065 instructions and section 301. Irs gov efile 6231(a)(7)-1 of the regulations. Irs gov efile Many rules in this publication do not apply to partnerships that file Form 1065-B, U. Irs gov efile S. Irs gov efile Return of Income for Electing Large Partnerships. Irs gov efile For the rules that apply to these partnerships, see the instructions for Form 1065-B. Irs gov efile However, the partners of electing large partnerships can use the rules in this publication except as otherwise noted. Irs gov efile Withholding on foreign partner or firm. Irs gov efile   If a partnership acquires a U. Irs gov efile S. Irs gov efile real property interest from a foreign person or firm, the partnership may have to withhold tax on the amount it pays for the property (including cash, the fair market value of other property, and any assumed liability). Irs gov efile If a partnership has income effectively connected with a trade or business in the United States, it must withhold on the income allocable to its foreign partners. Irs gov efile A partnership may have to withhold tax on a foreign partner's distributive share of fixed or determinable income not effectively connected with a U. Irs gov efile S. Irs gov efile trade or business. Irs gov efile A partnership that fails to withhold may be held liable for the tax, applicable penalties, and interest. Irs gov efile   For more information, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Irs gov efile Comments and suggestions. Irs gov efile   We welcome your comments about this publication and your suggestions for future editions. Irs gov efile   You can write to: Internal Revenue Service Tax Forms and Publications  SE:W:CAR:MP:TFP 1111 Constitution Ave. Irs gov efile NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Irs gov efile Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Irs gov efile    You can send us comments from www. Irs gov efile irs. Irs gov efile gov/formspubs. Irs gov efile Click on “More Information” and then on “Comment on Tax Forms and Publications. Irs gov efile ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Irs gov efile Tax questions. Irs gov efile   If you have a tax question, check the information available at IRS. Irs gov efile gov or call 1-800-829-4933. Irs gov efile We cannot answer tax questions at the address listed above. Irs gov efile Ordering forms and publications. Irs gov efile    Visit www. Irs gov efile irs. Irs gov efile gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the addresses shown under How To Get Tax Help in the back of this publication. Irs gov efile Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 505 Tax Withholding and Estimated Tax 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 551 Basis of Assets 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property See How To Get Tax Help near the end of this publication for information about getting publications and forms. Irs gov efile Prev  Up  Next   Home   More Online Publications