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State free file 11. State free file   Casualties, Thefts, and Condemnations Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Casualties and TheftsDeductible losses. State free file Nondeductible losses. State free file Family pet. State free file Progressive deterioration. State free file Decline in market value of stock. State free file Mislaid or lost property. State free file Farming Losses How To Figure a Loss Deduction Limits on Losses of Personal-Use Property When Loss Is Deductible Proof of Loss Figuring a Gain Other Involuntary ConversionsCondemnation Irrigation Project Livestock Losses Tree Seedlings Postponing GainException. State free file Related persons. State free file Replacement Property Replacement Period How To Postpone Gain Disaster Area LossesWho is eligible. State free file Covered disaster area. State free file Reporting Gains and Losses Introduction This chapter explains the tax treatment of casualties, thefts, and condemnations. State free file A casualty occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. State free file A theft occurs when property is stolen. State free file A condemnation occurs when private property is legally taken for public use without the owner's consent. State free file A casualty, theft, or condemnation may result in a deductible loss or taxable gain on your federal income tax return. State free file You may have a deductible loss or a taxable gain even if only a portion of your property was affected by a casualty, theft, or condemnation. State free file An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events discussed in this chapter. State free file If an involuntary conversion results in a gain and you buy qualified replacement property within the specified replacement period, you can postpone reporting the gain on your income tax return. State free file For more information, see Postponing Gain , later. State free file Topics - This chapter discusses: Casualties and thefts How to figure a loss or gain Other involuntary conversions Postponing gain Disaster area losses Reporting gains and losses Drought involving property connected with a trade or business or a transaction entered into for profit Useful Items - You may want to see: Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and Theft Loss Workbook Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 4684 Casualties and Thefts 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. State free file Casualties and Thefts If your property is destroyed, damaged, or stolen, you may have a deductible loss. State free file If the insurance or other reimbursement is more than the adjusted basis of the destroyed, damaged, or stolen property, you may have a taxable gain. State free file Casualty. State free file   A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. State free file A sudden event is one that is swift, not gradual or progressive. State free file An unexpected event is one that is ordinarily unanticipated and unintended. State free file An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. State free file Deductible losses. State free file   Deductible casualty losses can result from a number of different causes, including the following. State free file Airplane crashes. State free file Car, truck, or farm equipment accidents not resulting from your willful act or willful negligence. State free file Earthquakes. State free file Fires (but see Nondeductible losses next for exceptions). State free file Floods. State free file Freezing. State free file Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses, in Publication 547. State free file Lightning. State free file Storms, including hurricanes and tornadoes. State free file Terrorist attacks. State free file Vandalism. State free file Volcanic eruptions. State free file Nondeductible losses. State free file   A casualty loss is not deductible if the damage or destruction is caused by the following. State free file Accidentally breaking articles such as glassware or china under normal conditions. State free file A family pet (explained below). State free file A fire if you willfully set it, or pay someone else to set it. State free file A car, truck, or farm equipment accident if your willful negligence or willful act caused it. State free file The same is true if the willful act or willful negligence of someone acting for you caused the accident. State free file Progressive deterioration (explained below). State free file Family pet. State free file   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed above under Casualty are met. State free file Example. State free file You keep your horse in your yard. State free file The ornamental fruit trees in your yard were damaged when your horse stripped the bark from them. State free file Some of the trees were completely girdled and died. State free file Because the damage was not unexpected or unusual, the loss is not deductible. State free file Progressive deterioration. State free file   Loss of property due to progressive deterioration is not deductible as a casualty loss. State free file This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. State free file Examples of damage due to progressive deterioration include damage from rust, corrosion, or termites. State free file However, weather-related conditions or disease may cause another type of involuntary conversion. State free file See Other Involuntary Conversions , later. State free file Theft. State free file   A theft is the taking and removing of money or property with the intent to deprive the owner of it. State free file The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. State free file You do not need to show a conviction for theft. State free file   Theft includes the taking of money or property by the following means: Blackmail, Burglary, Embezzlement, Extortion, Kidnapping for ransom, Larceny, Robbery, or Threats. State free file The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. State free file Decline in market value of stock. State free file   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. State free file However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. State free file You report a capital loss on Schedule D (Form 1040). State free file For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. State free file Mislaid or lost property. State free file   The simple disappearance of money or property is not a theft. State free file However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. State free file Example. State free file A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. State free file The diamond falls from the ring and is never found. State free file The loss of the diamond is a casualty. State free file Farming Losses You can deduct certain casualty or theft losses that occur in the business of farming. State free file The following is a discussion of some losses you can deduct and some you cannot deduct. State free file Livestock or produce bought for resale. State free file   Casualty or theft losses of livestock or produce bought for resale are deductible if you report your income on the cash method. State free file If you report your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. State free file You cannot take a separate deduction. State free file Livestock, plants, produce, and crops raised for sale. State free file   Losses of livestock, plants, produce, and crops raised for sale are generally not deductible if you report your income on the cash method. State free file You have already deducted the cost of raising these items as farm expenses, so their basis is equal to zero. State free file   For plants with a preproductive period of more than 2 years, you may have a deductible loss if you have a tax basis in the plants. State free file You usually have a tax basis if you capitalized the expenses associated with these plants under the uniform capitalization rules. State free file The uniform capitalization rules are discussed in chapter 6. State free file   If you report your income on an accrual method, casualty or theft losses are deductible only if you included the items in your inventory at the beginning of your tax year. State free file You get the deduction by omitting the item from your inventory at the close of your tax year. State free file You cannot take a separate casualty or theft deduction. State free file Income loss. State free file   A loss of future income is not deductible. State free file Example. State free file A severe flood destroyed your crops. State free file Because you are a cash method taxpayer and already deducted the cost of raising the crops as farm expenses, this loss is not deductible, as explained above under Livestock, plants, produce, and crops raised for sale . State free file You estimate that the crop loss will reduce your farm income by $25,000. State free file This loss of future income is also not deductible. State free file Loss of timber. State free file   If you sell timber downed as a result of a casualty, treat the proceeds from the sale as a reimbursement. State free file If you use the proceeds to buy qualified replacement property, you can postpone reporting the gain. State free file See Postponing Gain , later. State free file Property used in farming. State free file   Casualty and theft losses of property used in your farm business usually result in deductible losses. State free file If a fire or storm destroyed your barn, or you lose by casualty or theft an animal you bought for draft, breeding, dairy, or sport, you may have a deductible loss. State free file See How To Figure a Loss , later. State free file Raised draft, breeding, dairy, or sporting animals. State free file   Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. State free file However, you may have a basis in the animal and therefore may be able to claim a deduction if either of the following situations applies to you. State free file You use inventories to determine your income and you included the animals in your inventory. State free file You capitalized the expenses associated with the animals under the uniform capitalization rules and therefore have a tax basis in the animals subject to a casualty or theft. State free file When you include livestock in inventory, its last inventory value is its basis. State free file When you lose an inventoried animal held for draft, breeding, dairy, or sport by casualty or theft during the year, decrease ending inventory by the amount you included in inventory for the animal. State free file You cannot take a separate deduction. State free file How To Figure a Loss How you figure a deductible casualty or theft loss depends on whether the loss was to farm or personal-use property and whether the property was stolen or partly or completely destroyed. State free file Farm property. State free file   Farm property is the property you use in your farming business. State free file If your farm property was completely destroyed or stolen, your loss is figured as follows:      Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive      You can use the schedules in Publication 584-B to list your stolen, damaged, or destroyed business property and to figure your loss. State free file   If your farm property was partially damaged, use the steps shown under Personal-use property next to figure your casualty loss. State free file However, the deduction limits, discussed later, do not apply to farm property. State free file Personal-use property. State free file   Personal-use property is property used by you or your family members for personal purposes and not used in your farm business or for income-producing purposes. State free file The following items are examples of personal-use property: Your main home. State free file Furniture and electronics used in your main home and not used in a home office or for business purposes. State free file Clothing and jewelry. State free file An automobile used for nonbusiness purposes. State free file You figure the casualty or theft loss on this property by taking the following steps. State free file Determine your adjusted basis in the property before the casualty or theft. State free file Determine the decrease in fair market value of the property as a result of the casualty or theft. State free file From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive or expect to receive. State free file You must apply the deduction limits, discussed later, to determine your deductible loss. State free file    You can use Publication 584 to list your stolen or damaged personal-use property and figure your loss. State free file It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. State free file Adjusted basis. State free file   Adjusted basis is your basis (usually cost) increased or decreased by various events, such as improvements and casualty losses. State free file For more information about adjusted basis, see chapter 6. State free file Decrease in fair market value (FMV). State free file   The decrease in FMV is the difference between the property's value immediately before the casualty or theft and its value immediately afterward. State free file FMV is defined in chapter 10 under Payments Received or Considered Received . State free file Appraisal. State free file   To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. State free file But other measures, such as the cost of cleaning up or making repairs (discussed next) can be used to establish decreases in FMV. State free file   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. State free file The appraiser must recognize the effects of any general market decline that may occur along with the casualty. State free file This information is needed to limit any deduction to the actual loss resulting from damage to the property. State free file Cost of cleaning up or making repairs. State free file   The cost of cleaning up after a casualty is not part of a casualty loss. State free file Neither is the cost of repairing damaged property after a casualty. State free file But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. State free file The repairs are actually made. State free file The repairs are necessary to bring the property back to its condition before the casualty. State free file The amount spent for repairs is not excessive. State free file The repairs fix the damage only. State free file The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. State free file Related expenses. State free file   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, temporary housing, or a rental car, are not part of your casualty or theft loss. State free file However, they may be deductible as farm business expenses if the damaged or stolen property is farm property. State free file Separate computations for more than one item of property. State free file   Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for each item of property. State free file Then combine the losses to determine your total loss. State free file    There is an exception to this rule for personal-use real property. State free file See Exception for personal-use real property, later. State free file Example. State free file A fire on your farm damaged a tractor and the barn in which it was stored. State free file The tractor had an adjusted basis of $3,300. State free file Its FMV was $28,000 just before the fire and $10,000 immediately afterward. State free file The barn had an adjusted basis of $28,000. State free file Its FMV was $55,000 just before the fire and $25,000 immediately afterward. State free file You received insurance reimbursements of $2,100 on the tractor and $26,000 on the barn. State free file Figure your deductible casualty loss separately for the two items of property. State free file     Tractor Barn 1) Adjusted basis $3,300 $28,000 2) FMV before fire $28,000 $55,000 3) FMV after fire 10,000 25,000 4) Decrease in FMV  (line 2 − line 3) $18,000 $30,000 5) Loss (lesser of line 1 or line 4) $3,300 $28,000 6) Minus: Insurance 2,100 26,000 7) Deductible casualty loss $1,200 $2,000 8) Total deductible casualty loss $3,200 Exception for personal-use real property. State free file   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. State free file Figure the loss using the smaller of the following. State free file The decrease in FMV of the entire property. State free file The adjusted basis of the entire property. State free file Example. State free file You bought a farm in 1990 for $160,000. State free file The adjusted basis of the residential part is now $128,000. State free file In 2013, a windstorm blew down shade trees and three ornamental trees planted at a cost of $7,500 on the residential part. State free file The adjusted basis of the residential part includes the $7,500. State free file The fair market value (FMV) of the residential part immediately before the storm was $400,000, and $385,000 immediately after the storm. State free file The trees were not covered by insurance. State free file 1) Adjusted basis $128,000 2) FMV before the storm $400,000 3) FMV after the storm 385,000 4) Decrease in FMV (line 2 − line 3) $15,000 5) Loss before insurance (lesser of line 1 or line 4) $15,000 6) Minus: Insurance -0- 7) Amount of loss $15,000 Insurance and other reimbursements. State free file   If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. State free file You do not have a casualty or theft loss to the extent you are reimbursed. State free file   If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. State free file You must reduce your loss even if you do not receive payment until a later tax year. State free file    Do not subtract from your loss any insurance payments you receive for living expenses if you lose the use of your main home or are denied access to it because of a casualty. State free file You may have to include a portion of these payments in your income. State free file See Insurance payments for living expenses in Publication 547 for details. State free file Disaster relief. State free file   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. State free file Excludable cash gifts you receive also do not reduce your casualty loss if there are no limits on how you can use the money. State free file   Generally, disaster relief grants received under the Robert T. State free file Stafford Disaster Relief and Emergency Assistance Act are not included in your income. State free file See Federal disaster relief grants , later, under Disaster Area Losses . State free file   Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster are not taxable income to you. State free file See Qualified disaster relief payments , later, under Disaster Area Losses . State free file Reimbursement received after deducting loss. State free file   If you figure your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. State free file Actual reimbursement less than expected. State free file   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. State free file Actual reimbursement more than expected. State free file   If you later receive more reimbursement than you expected after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. State free file However, if any part of your original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. State free file Do not refigure your tax for the year you claimed the deduction. State free file See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. State free file If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. State free file See Figuring a Gain in Publication 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or theft. State free file Actual reimbursement same as expected. State free file   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. State free file Lump-sum reimbursement. State free file   If you have a casualty or theft loss of several assets at the same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to the fair market value of each asset at the time of the loss. State free file Figure the gain or loss separately for each asset that has a separate basis. State free file Adjustments to basis. State free file   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. State free file The result is your adjusted basis in the property. State free file Amounts you spend on repairs to restore your property to its pre-casualty condition increase your adjusted basis. State free file See Adjusted Basis in chapter 6 for more information. State free file Example. State free file You built a new silo for $25,000. State free file This is the basis in your silo because that is the total cost you incurred to build it. State free file During the year, a tornado damaged your silo and your allowable casualty loss deduction was $1,000. State free file In addition, your insurance company reimbursed you $4,000 for the damage and you spent $6,000 to restore the silo to its pre-casualty condition. State free file Your adjusted basis in the silo after the casualty is $26,000 ($25,000 - $1,000 - $4,000 + $6,000). State free file Deduction Limits on Losses of Personal-Use Property Casualty and theft losses of property held for personal use may be deductible if you itemize deductions on Schedule A (Form 1040). State free file There are two limits on the deduction for casualty or theft loss of personal-use property. State free file You figure these limits on Form 4684. State free file $100 rule. State free file   You must reduce each casualty or theft loss on personal-use property by $100. State free file This rule applies after you have subtracted any reimbursement. State free file 10% rule. State free file   You must further reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. State free file Apply this rule after you reduce each loss by $100. State free file Adjusted gross income is on line 38 of Form 1040. State free file Example. State free file In June, you discovered that your house had been burglarized. State free file Your loss after insurance reimbursement was $2,000. State free file Your adjusted gross income for the year you discovered the burglary is $57,000. State free file Figure your theft loss deduction as follows: 1. State free file Loss after insurance $2,000 2. State free file Subtract $100 100 3. State free file Loss after $100 rule $1,900 4. State free file Subtract 10% (. State free file 10) × $57,000 AGI $5,700 5. State free file Theft loss deduction -0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($5,700). State free file    If you have a casualty or theft gain in addition to a loss, you will have to make a special computation before you figure your 10% limit. State free file See 10% Rule in Publication 547. State free file When Loss Is Deductible Generally, you can deduct casualty losses that are not reimbursable only in the tax year in which they occur. State free file You generally can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. State free file However, losses in federally declared disaster areas are subject to different rules. State free file See Disaster Area Losses , later, for an exception. State free file If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. State free file Leased property. State free file   If you lease property from someone else, you can deduct a loss on the property in the year your liability for the loss is fixed. State free file This is true even if the loss occurred or the liability was paid in a different year. State free file You are not entitled to a deduction until your liability under the lease can be determined with reasonable accuracy. State free file Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned. State free file Example. State free file Robert leased a tractor from First Implement, Inc. State free file , for use in his farm business. State free file The tractor was destroyed by a tornado in June 2012. State free file The loss was not insured. State free file First Implement billed Robert for the fair market value of the tractor on the date of the loss. State free file Robert disagreed with the bill and refused to pay it. State free file First Implement later filed suit in court against Robert. State free file In 2013, Robert and First Implement agreed to settle the suit for $20,000, and the court entered a judgment in favor of First Implement. State free file Robert paid $20,000 in June 2013. State free file He can claim the $20,000 as a loss on his 2013 tax return. State free file Net operating loss (NOL). State free file   If your deductions, including casualty or theft loss deductions, are more than your income for the year, you may have an NOL. State free file An NOL can be carried back or carried forward and deducted from income in other years. State free file See Publication 536 for more information on NOLs. State free file Proof of Loss To deduct a casualty or theft loss, you must be able to prove that there was a casualty or theft. State free file You must have records to support the amount you claim for the loss. State free file Casualty loss proof. State free file   For a casualty loss, your records should show all the following information. State free file The type of casualty (car accident, fire, storm, etc. State free file ) and when it occurred. State free file That the loss was a direct result of the casualty. State free file That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. State free file Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. State free file Theft loss proof. State free file   For a theft loss, your records should show all the following information. State free file When you discovered your property was missing. State free file That your property was stolen. State free file That you were the owner of the property. State free file Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. State free file Figuring a Gain A casualty or theft may result in a taxable gain. State free file If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. State free file You generally report your gain as income in the year you receive the reimbursement. State free file However, depending on the type of property you receive, you may not have to report your gain. State free file See Postponing Gain , later. State free file Your gain is figured as follows: The amount you receive, minus Your adjusted basis in the property at the time of the casualty or theft. State free file Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. State free file Amount you receive. State free file   The amount you receive includes any money plus the value of any property you receive, minus any expenses you have in obtaining reimbursement. State free file It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. State free file Example. State free file A tornado severely damaged your barn. State free file The adjusted basis of the barn was $25,000. State free file Your insurance company reimbursed you $40,000 for the damaged barn. State free file However, you had legal expenses of $2,000 to collect that insurance. State free file Your insurance minus your expenses to collect the insurance is more than your adjusted basis in the barn, so you have a gain. State free file 1) Insurance reimbursement $40,000 2) Legal expenses 2,000 3) Amount received  (line 1 − line 2) $38,000 4) Adjusted basis 25,000 5) Gain on casualty (line 3 − line 4) $13,000 Other Involuntary Conversions In addition to casualties and thefts, other events cause involuntary conversions of property. State free file Some of these are discussed in the following paragraphs. State free file Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes. State free file You report the gain or deduct the loss on your tax return for the year you realize it. State free file However, depending on the type of property you receive, you may not have to report your gain on the involuntary conversion. State free file See Postponing Gain , later. State free file Condemnation Condemnation is the process by which private property is legally taken for public use without the owner's consent. State free file The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take property. State free file The owner receives a condemnation award (money or property) in exchange for the property taken. State free file A condemnation is a forced sale, the owner being the seller and the condemning authority being the buyer. State free file Threat of condemnation. State free file   Treat the sale of your property under threat of condemnation as a condemnation, provided you have reasonable grounds to believe that your property will be condemned. State free file Main home condemned. State free file   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. State free file For information on this exclusion, see Publication 523. State free file If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. State free file See Postponing Gain , later. State free file (You cannot deduct a loss from the condemnation of your main home. State free file ) More information. State free file   For information on how to figure the gain or loss on condemned property, see chapter 1 in Publication 544. State free file Also see Postponing Gain , later, to find out if you can postpone reporting the gain. State free file Irrigation Project The sale or other disposition of property located within an irrigation project to conform to the acreage limits of federal reclamation laws is an involuntary conversion. State free file Livestock Losses Diseased livestock. State free file   If your livestock die from disease, or are destroyed, sold, or exchanged because of disease, even though the disease is not of epidemic proportions, treat these occurrences as involuntary conversions. State free file If the livestock were raised or purchased for resale, follow the rules for livestock discussed earlier under Farming Losses . State free file Otherwise, figure the gain or loss from these conversions using the rules discussed under Determining Gain or Loss in chapter 8. State free file If you replace the livestock, you may be able to postpone reporting the gain. State free file See Postponing Gain below. State free file Reporting dispositions of diseased livestock. State free file   If you choose to postpone reporting gain on the disposition of diseased livestock, you must attach a statement to your return explaining that the livestock were disposed of because of disease. State free file You must also include other information on this statement. State free file See How To Postpone Gain , later, under Postponing Gain . State free file Weather-related sales of livestock. State free file   If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes solely because of drought, flood, or other weather-related conditions, treat the sale or exchange as an involuntary conversion. State free file Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. State free file Figure the gain or loss using the rules discussed under Determining Gain or Loss in chapter 8. State free file If you replace the livestock, you may be able to postpone reporting the gain. State free file See Postponing Gain below. State free file Example. State free file It is your usual business practice to sell five of your dairy animals during the year. State free file This year you sold 20 dairy animals because of drought. State free file The sale of 15 animals is treated as an involuntary conversion. State free file    If you do not replace the livestock, you may be able to report the gain in the following year's income. State free file This rule also applies to other livestock (including poultry). State free file See Sales Caused by Weather-Related Conditions in chapter 3. State free file Tree Seedlings If, because of an abnormal drought, the failure of planted tree seedlings is greater than normally anticipated, you may have a deductible loss. State free file Treat the loss as a loss from an involuntary conversion. State free file The loss equals the previously capitalized reforestation costs you had to duplicate on replanting. State free file You deduct the loss on the return for the year the seedlings died. State free file Postponing Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed, stolen, or other involuntarily converted property. State free file Your basis in the new property is generally the same as your adjusted basis in the property it replaces. State free file You must ordinarily report the gain on your stolen, destroyed, or other involuntarily converted property if you receive money or unlike property as reimbursement. State free file However, you can choose to postpone reporting the gain if you purchase replacement property similar or related in service or use to your destroyed, stolen, or other involuntarily converted property within a specific replacement period. State free file If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. State free file To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. State free file If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. State free file Example 1. State free file In 1985, you constructed a barn to store farm equipment at a cost of $20,000. State free file In 1987, you added a silo to the barn at a cost of $15,000 to store grain. State free file In May of this year, the property was worth $100,000. State free file In June the barn and silo were destroyed by a tornado. State free file At the time of the tornado, you had an adjusted basis of $0 in the property. State free file You received $85,000 from the insurance company. State free file You had a gain of $85,000 ($85,000 – $0). State free file You spent $80,000 to rebuild the barn and silo. State free file Since this is less than the insurance proceeds received, you must include $5,000 ($85,000 – $80,000) in your income. State free file Example 2. State free file In 1970, you bought a cabin in the mountains for your personal use at a cost of $18,000. State free file You made no further improvements or additions to it. State free file When a storm destroyed the cabin this January, the cabin was worth $250,000. State free file You received $146,000 from the insurance company in March. State free file You had a gain of $128,000 ($146,000 − $18,000). State free file You spent $144,000 to rebuild the cabin. State free file Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. State free file Buying replacement property from a related person. State free file   You cannot postpone reporting a gain from a casualty, theft, or other involuntary conversion if you buy the replacement property from a related person (discussed later). State free file This rule applies to the following taxpayers. State free file C corporations. State free file Partnerships in which more than 50% of the capital or profits interest is owned by C corporations. State free file Individuals, partnerships (other than those in (2) above), and S corporations if the total realized gain for the tax year on all involuntarily converted properties on which there are realized gains is more than $100,000. State free file For involuntary conversions described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. State free file If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. State free file If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. State free file Exception. State free file   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the involuntarily converted property. State free file Related persons. State free file   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. State free file For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. State free file Death of a taxpayer. State free file   If a taxpayer dies after having a gain, but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. State free file The executor of the estate or the person succeeding to the funds from the involuntary conversion cannot postpone reporting the gain by buying replacement property. State free file Replacement Property You must buy replacement property for the specific purpose of replacing your property. State free file Your replacement property must be similar or related in service or use to the property it replaces. State free file You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. State free file If you spend the money you receive for other purposes, and borrow money to buy replacement property, you can still choose to postpone reporting the gain if you meet the other requirements. State free file Property you acquire by gift or inheritance does not qualify as replacement property. State free file Owner-user. State free file   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. State free file Examples of property that functions in the same way as the property it replaces are a home that replaces another home, a dairy cow that replaces another dairy cow, and farm land that replaces other farm land. State free file A grinding mill that replaces a tractor does not qualify. State free file Neither does a breeding or draft animal that replaces a dairy cow. State free file Soil or other environmental contamination. State free file   If, because of soil or other environmental contamination, it is not feasible for you to reinvest your insurance money or other proceeds from destroyed or damaged livestock in property similar or related in service or use to the livestock, you can treat other property (including real property) used for farming purposes, as property similar or related in service or use to the destroyed or damaged livestock. State free file Weather-related conditions. State free file   If, because of drought, flood, or other weather-related conditions, it is not feasible for you to reinvest the insurance money or other proceeds in property similar or related in service or use to the livestock, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the livestock you disposed of. State free file Example. State free file Each year you normally sell 25 cows from your beef herd. State free file However, this year you had to sell 50 cows. State free file This is because a severe drought significantly reduced the amount of hay and pasture yield needed to feed your herd for the rest of the year. State free file Because, as a result of the severe drought, it is not feasible for you to use the proceeds from selling the extra cows to buy new cows, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the cows you sold. State free file Standing crop destroyed by casualty. State free file   If a storm or other casualty destroyed your standing crop and you use the insurance money to acquire either another standing crop or a harvested crop, this purchase qualifies as replacement property. State free file The costs of planting and raising a new crop qualify as replacement costs for the destroyed crop only if you use the crop method of accounting (discussed in chapter 2). State free file In that case, the costs of bringing the new crop to the same level of maturity as the destroyed crop qualify as replacement costs to the extent they are incurred during the replacement period. State free file Timber loss. State free file   Standing timber you bought with the proceeds from the sale of timber downed as a result of a casualty, such as high winds, earthquakes, or volcanic eruptions, qualifies as replacement property. State free file If you bought the standing timber within the replacement period, you can postpone reporting the gain. State free file Business or income-producing property located in a federally declared disaster area. State free file   If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. State free file For more information, see Disaster Area Losses in Publication 547. State free file Substituting replacement property. State free file   Once you have acquired qualified replacement property that you designate as replacement property in a statement attached to your tax return, you cannot substitute other qualified replacement property. State free file This is true even if you acquire the other property within the replacement period. State free file However, if you discover that the original replacement property was not qualified replacement property, you can, within the replacement period, substitute the new qualified replacement property. State free file Basis of replacement property. State free file   You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. State free file In this way, tax on the gain is postponed until you dispose of the replacement property. State free file Replacement Period To postpone reporting your gain, you must buy replacement property within a specified period of time. State free file This is the replacement period. State free file The replacement period begins on the date your property was damaged, destroyed, stolen, sold, or exchanged. State free file The replacement period generally ends 2 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. State free file Example. State free file You are a calendar year taxpayer. State free file While you were on vacation, farm equipment that cost $2,200 was stolen from your farm. State free file You discovered the theft when you returned to your farm on November 11, 2012. State free file Your insurance company investigated the theft and did not settle your claim until January 5, 2013, when they paid you $3,000. State free file You first realized a gain from the reimbursement for the theft during 2013, so you have until December 31, 2015, to replace the property. State free file Main home in disaster area. State free file   For your main home (or its contents) located in a federally declared disaster area, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. State free file See Disaster Area Losses , later. State free file Property in the Midwestern disaster areas. State free file   For property located in the Midwestern disaster areas (defined in Table 4 in the 2008 Publication 547) that was destroyed, damaged, stolen, or condemned, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. State free file This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Midwestern disaster areas. State free file Property in the Kansas disaster area. State free file   For property located in the Kansas disaster area that was destroyed, damaged, stolen, or condemned after May 3, 2007, as a result of the Kansas storms and tornadoes, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. State free file This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Kansas disaster area. State free file Property in the Hurricane Katrina disaster area. State free file   For property located in the Hurricane Katrina disaster area that was destroyed, damaged, stolen, or condemned after August 24, 2005, as a result of Hurricane Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. State free file This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. State free file Weather-related sales of livestock in an area eligible for federal assistance. State free file   For the sale or exchange of livestock due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. State free file The IRS may extend the replacement period on a regional basis if the weather-related conditions continue for longer than 3 years. State free file   For information on extensions of the replacement period because of persistent drought, see Notice 2006-82, 2006-39 I. State free file R. State free file B. State free file 529, available at  www. State free file irs. State free file gov/irb/2006-39_IRB/ar11. State free file html. State free file For a list of counties for which exceptional, extreme, or severe drought was reported during the 12 months ending August 31, 2013, see Notice 2013-62, available at IRS. State free file gov. State free file Condemnation. State free file   The replacement period for a condemnation begins on the earlier of the following dates. State free file The date on which you disposed of the condemned property. State free file The date on which the threat of condemnation began. State free file The replacement period generally ends 2 years after the close of the first tax year in which any part of the gain on the condemnation is realized. State free file But see Main home in disaster area , Property in the Midwestern disaster areas , Property in the Kansas disaster area , and Property in the Hurricane Katrina disaster area , earlier, for exceptions. State free file Business or investment real property. State free file   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the close of the first tax year in which any part of the gain on the condemnation is realized. State free file Extension. State free file   You can apply for an extension of the replacement period. State free file Send your written application to the Internal Revenue Service Center where you file your tax return. State free file See your tax return instructions for the address. State free file Include all the details about your need for an extension. State free file Make your application before the end of the replacement period. State free file However, you can file an application within a reasonable time after the replacement period ends if you can show a good reason for the delay. State free file You will get an extension of the replacement period if you can show reasonable cause for not making the replacement within the regular period. State free file How To Postpone Gain You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. State free file You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain. State free file Required statement. State free file   You should attach a statement to your return for the year you have the gain. State free file This statement should include all the following information. State free file The date and details of the casualty, theft, or other involuntary conversion. State free file The insurance or other reimbursement you received. State free file How you figured the gain. State free file Replacement property acquired before return filed. State free file   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items. State free file The replacement property. State free file The postponed gain. State free file The basis adjustment that reflects the postponed gain. State free file Any gain you are reporting as income. State free file Replacement property acquired after return filed. State free file   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period. State free file   You should then attach another statement to your return for the year in which you buy the replacement property. State free file This statement should contain detailed information on the replacement property. State free file If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. State free file Include in the statement detailed information on the replacement property bought in that year. State free file Reporting weather-related sales of livestock. State free file   If you choose to postpone reporting the gain on weather-related sales or exchanges of livestock, show all the following information on a statement attached to your return for the tax year in which you first realize any of the gain. State free file Evidence of the weather-related conditions that forced the sale or exchange of the livestock. State free file The gain realized on the sale or exchange. State free file The number and kind of livestock sold or exchanged. State free file The number of livestock of each kind you would have sold or exchanged under your usual business practice. State free file   Show all the following information and the preceding information on the return for the year in which you replace the livestock. State free file The dates you bought the replacement property. State free file The cost of the replacement property. State free file Description of the replacement property (for example, the number and kind of the replacement livestock). State free file Amended return. State free file   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations. State free file You do not acquire replacement property within the replacement period, plus extensions. State free file On this amended return, you must report the gain and pay any additional tax due. State free file You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. State free file On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due. State free file Disaster Area Losses Special rules apply to federally declared disaster area losses. State free file A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. State free file Stafford Disaster Relief and Emergency Assistance Act. State free file It includes a major disaster or emergency declaration under the act. State free file A list of the areas warranting public or individual assistance (or both) under the Act is available at the Federal Emergency Management Agency (FEMA) web site at www. State free file fema. State free file gov. State free file This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. State free file For other special rules, see Disaster Area Losses in Publication 547. State free file When to deduct the loss. State free file   You generally must deduct a casualty loss in the year it occurred. State free file However, if you have a deductible loss from a disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. State free file If you make this choice, the loss is treated as having occurred in the preceding year. State free file    Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund. State free file   You must make the choice to take your casualty loss for the disaster in the preceding year by the later of the following dates. State free file The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred. State free file The due date (with extensions) for the return for the preceding tax year. State free file Federal disaster relief grants. State free file   Do not include post-disaster relief grants received under the Robert T. State free file Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. State free file Do not deduct casualty losses or medical expenses to the extent they are specifically reimbursed by these disaster relief grants. State free file If the casualty loss was specifically reimbursed by the grant and you received the grant after the year in which you deducted the casualty loss, see Reimbursement received after deducting loss , earlier. State free file Unemployment assistance payments under the Act are taxable unemployment compensation. State free file Qualified disaster relief payments. State free file   Qualified disaster relief payments are not included in the income of individuals to the extent any expenses compensated by these payments are not otherwise compensated for by insurance or other reimbursement. State free file These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). State free file No withholding applies to these payments. State free file   Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses. State free file Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster. State free file Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. State free file (A personal residence can be a rented residence or one you own. State free file ) Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster. State free file   Qualified disaster relief payments include amounts paid by a federal, state, or local government in connection with a federally declared disaster to individuals affected by the disaster. State free file    Qualified disaster relief payments do not include: Payments for expenses otherwise paid for by insurance or other reimbursements, or Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation. State free file Qualified disaster mitigation payments. State free file   Qualified disaster mitigation payments made under the Robert T. State free file Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not included in income. State free file These are payments you, as a property owner, receive to reduce the risk of future damage to your property. State free file You cannot increase your basis in property, or take a deduction or credit, for expenditures made with respect to those payments. State free file Sale of property under hazard mitigation program. State free file   Generally, if you sell or otherwise transfer property, you must recognize any gain or loss for tax purposes unless the property is your main home. State free file You report the gain or deduct the loss on your tax return for the year you realize it. State free file (You cannot deduct a loss on personal-use property unless the loss resulted from a casualty, as discussed earlier. State free file ) However, if you sell or otherwise transfer property to the Federal Government, a state or local government, or an Indian tribal government under a hazard mitigation program, you can choose to postpone reporting the gain if you buy qualifying replacement property within a certain period of time. State free file See Postponing Gain , earlier, for the rules that apply. State free file Other federal assistance programs. State free file    For more information about other federal assistance programs, see Crop Insurance and Crop Disaster Payments and Feed Assistance and Payments in chapter 3 earlier. State free file Postponed tax deadlines. State free file   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. State free file The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA. State free file   If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). State free file Go to http://www. State free file irs. State free file gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. State free file Who is eligible. State free file   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. State free file Any individual whose main home is located in a covered disaster area (defined next). State free file Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. State free file Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area. State free file Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. State free file The main home or principal place of business does not have to be located in the covered disaster area. State free file Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. State free file The spouse on a joint return with a taxpayer who is eligible for postponements. State free file Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose necessary records to meet a postponed tax deadline are located in the covered disaster area. State free file Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. State free file Any other person determined by the IRS to be affected by a federally declared disaster. State free file Covered disaster area. State free file   This is an area of a federally declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year. State free file Abatement of interest and penalties. State free file   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines. State free file Reporting Gains and Losses You will have to file one or more of the following forms to report your gains or losses from involuntary conversions. State free file Form 4684. State free file   Use this form to report your gains and losses from casualties and thefts. State free file Form 4797. State free file   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. State free file Also use this form if you have a gain from a casualty or theft on trade, business or income-producing property held for more than 1 year and you have to recapture some or all of your gain as ordinary income. State free file Form 8949. State free file   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. State free file Schedule A (Form 1040). State free file   Use this form to deduct your losses from casualties and thefts of personal-use property and income-producing property, that you reported on Form 4684. State free file Schedule D (Form 1040). State free file   Use this form to carry over the following gains. State free file Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year. State free file Net gain shown on Form 4684 from the casualty or theft of personal-use property. State free file    Also use this form to figure the overall gain or loss from transactions reported on Form 8949. State free file Schedule F (Form 1040). State free file   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 32, if you use the cash method of accounting and have not otherwise deducted these losses. State free file Prev  Up  Next   Home   More Online Publications
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Affordable Care Act Tax Provisions for Other Organizations

The Affordable Care Act contains some tax provisions that are currently in effect and more that will be implemented going forward. 

Information specifically for insurers, including self-insured organizations, certain business types and tax exempt and government organizations is listed below.  More information will be added to this page as it becomes available. For information regarding your role as an employer, visit the Affordable Care Act Tax Provisions for Employers.

Tax Provisions for Insurers             

Tax Provisions for Miscellaneous Business Types

Tax Provisions for Tax Exempt and Government Organizations

e-file for ACA Report Filers

 

Page Last Reviewed or Updated: 14-Mar-2014

The State Free File

State free file Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. State free file Property not disposed of or abandoned. State free file Special rule for normal retirements from item accounts. State free file Abandoned property. State free file Single item accounts. State free file Multiple property account. State free file Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. State free file If your property qualified for MACRS, you must depreciate it under MACRS. State free file See Publication 946. State free file However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. State free file Also, you can elect to exclude certain property from being depreciated under MACRS. State free file Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. State free file Intangible property. State free file   You cannot depreciate intangible property under ACRS or MACRS. State free file You depreciate intangible property using any other reasonable method, usually, the straight line method. State free file Note. State free file The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. State free file For more information, see chapter 12 of Publication 535. State free file Public utility property. State free file   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. State free file This type of property is subject to depreciation under a special rule. State free file Videocassettes. State free file   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. State free file You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. State free file The straight line method, salvage value, and useful life are discussed later under Methods To Use. State free file You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. State free file How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. State free file These methods are straight line and declining balance. State free file To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. State free file They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. State free file The amount of the deduction in any year also depends on which method of depreciation you choose. State free file Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. State free file The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. State free file Your original basis is usually the purchase price. State free file However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. State free file Adjusted basis. State free file   Events will often change the basis of property. State free file When this occurs, the changed basis is called the adjusted basis. State free file Some events, such as improvements you make, increase basis. State free file Events such as deducting casualty losses and depreciation decrease basis. State free file If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. State free file   Publication 551 explains how to figure basis for property acquired in different ways. State free file It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. State free file Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. State free file It is the length of time over which you will make yearly depreciation deductions of your basis in the property. State free file It is how long it will continue to be useful to you, not how long the property will last. State free file Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. State free file The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. State free file Consider all these factors before you arrive at a useful life for your property. State free file The useful life of the same type of property varies from user to user. State free file When you determine the useful life of your property, keep in mind your own experience with similar property. State free file You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. State free file Change in useful life. State free file   You base your estimate of useful life on certain facts. State free file If these facts change significantly, you can adjust your estimate of the remaining useful life. State free file However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. State free file Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. State free file You generally cannot depreciate property below a reasonable salvage value. State free file Determining salvage value. State free file   Salvage value is the estimated value of property at the end of its useful life. State free file It is what you expect to get for the property if you sell it after you can no longer use it productively. State free file You must estimate the salvage value of a piece of property when you first acquire it. State free file   Salvage value is affected both by how you use the property and how long you use it. State free file If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. State free file However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. State free file Changing salvage value. State free file   Once you determine the salvage value for property, you should not change it merely because prices have changed. State free file However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. State free file When you redetermine the salvage value, take into account the facts that exist at the time. State free file Net salvage. State free file   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. State free file You can choose either salvage value or net salvage when you figure depreciation. State free file You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. State free file However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. State free file Your salvage value can never be less than zero. State free file Ten percent rule. State free file   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. State free file You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. State free file If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. State free file Methods To Use Two methods of depreciation are the straight line and declining balance methods. State free file If ACRS or MACRS does not apply, you can use one of these methods. State free file The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. State free file Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. State free file One of these methods was the straight line method. State free file This method was also used for intangible property. State free file It lets you deduct the same amount of depreciation each year. State free file To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. State free file Subtract the salvage value, if any, from the adjusted basis. State free file The balance is the total amount of depreciation you can take over the useful life of the property. State free file Divide the balance by the number of years remaining in the useful life. State free file This gives you the amount of your yearly depreciation deduction. State free file Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. State free file If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. State free file Example. State free file In April 1994, Frank bought a franchise for $5,600. State free file It expires in 10 years. State free file This property is intangible property that cannot be depreciated under MACRS. State free file Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. State free file He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). State free file He must prorate the $560 for his 9 months of use in 1994. State free file This gives him a deduction of $420 ($560 ÷ 9/12). State free file In 1995, Frank can deduct $560 for the full year. State free file Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. State free file The rate cannot be more than twice the straight line rate. State free file Rate of depreciation. State free file   Under this method, you must determine your declining balance rate of depreciation. State free file The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. State free file (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. State free file ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. State free file Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. State free file Depreciation deductions. State free file   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. State free file This gives you the amount of your deduction. State free file For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). State free file To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. State free file Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). State free file Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). State free file Your depreciation deduction for the second year is $1,600. State free file   As you can see from this example, your adjusted basis in the property gets smaller each year. State free file Also, under this method, deductions are larger in the earlier years and smaller in the later years. State free file You can make a change to the straight line method without consent. State free file Salvage value. State free file   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. State free file However, you cannot depreciate the property below its reasonable salvage value. State free file Determine salvage value using the rules discussed earlier, including the special 10% rule. State free file Example. State free file If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. State free file But if your estimate of salvage value was $900, you can only deduct $100. State free file This is because $100 is the amount that would lower your adjusted basis to equal salvage value. State free file Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. State free file You can group the videocassettes by title for making this projection. State free file You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. State free file The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. State free file For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. State free file How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. State free file If you change your method of depreciation, it is generally a change in your method of accounting. State free file You must get IRS consent before making the change. State free file However, you do not need permission for certain changes in your method of depreciation. State free file The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. State free file For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. State free file Change to the straight line method. State free file   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. State free file However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. State free file When the change is made, figure depreciation based on your adjusted basis in the property at that time. State free file Your adjusted basis takes into account all previous depreciation deductions. State free file Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. State free file   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. State free file You cannot make the change on an amended return filed after the due date of the original return (including extensions). State free file   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. State free file   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. State free file Changes that require permission. State free file   For most other changes in method of depreciation, you must get permission from the IRS. State free file To request a change in method of depreciation, file Form 3115. State free file File the application within the first 180 days of the tax year the change is to become effective. State free file In most cases, there is a user fee that must accompany Form 3115. State free file See the instructions for Form 3115 to determine if a fee is required. State free file Changes granted automatically. State free file   The IRS automatically approves certain changes of a method of depreciation. State free file But, you must file Form 3115 for these automatic changes. State free file   However, IRS can deny permission if Form 3115 is not filed on time. State free file For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. State free file B. State free file 420. State free file Changes for which approval is not automatic. State free file   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. State free file   You must request and receive permission for these changes. State free file To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. State free file Change from an improper method. State free file   If the IRS disallows the method you are using, you do not need permission to change to a proper method. State free file You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. State free file If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. State free file However, you must file the amended return before the filing date for the next tax year. State free file Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. State free file You can do this by selling, exchanging, or abandoning the item of property. State free file You can also withdraw it from use without disposing of it. State free file For example, you could place it in a supplies or scrap account. State free file Retirements can be either normal or abnormal depending on all facts and circumstances. State free file The rules discussed next do not apply to MACRS and ACRS property. State free file Normal retirement. State free file   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. State free file A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. State free file Abnormal retirement. State free file   A retirement can be abnormal if you withdraw the property early or under other circumstances. State free file For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. State free file Gain or loss on retirement. State free file   There are special rules for figuring the gain or loss on retirement of property. State free file The gain or loss will depend on several factors. State free file These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. State free file A single property account contains only one item of property. State free file A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. State free file Sale or exchange. State free file   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. State free file See Publication 544. State free file Property not disposed of or abandoned. State free file   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. State free file You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. State free file However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. State free file   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. State free file Special rule for normal retirements from item accounts. State free file   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. State free file However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. State free file   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. State free file Abandoned property. State free file   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. State free file However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. State free file Basis of property retired. State free file   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. State free file Single item accounts. State free file   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. State free file This is generally the cost or other basis of the item of property less depreciation. State free file See Publication 551. State free file Multiple property account. State free file   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. State free file If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. State free file   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. State free file The method of depreciation used for the multiple property account is used. State free file You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. State free file Prev  Up  Next   Home   More Online Publications