File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

Tax Military

Amend 2010 Tax Return OnlineH&r Block Free Online Tax FilingE File 2011 Taxes LateWww Irs1040ez ComFile An Amended Tax Return For 2012Can You E File An Amended ReturnAmending Tax ReturnTax Form 1040 EzWhere Can You File Your State Taxes For FreeHr Block Free FileFederal Income Tax TableHow To Revise Tax ReturnTurbotax 2011 Free Federal EditionForm 1040s1040ez Free FileFree State Tax File OnlineFile Ez 1040 Free1040ez Instructions 2014Taxslayer Com Main Aspx DestinationFiling State Income TaxHow To File An Amended Tax Return 2013Tax Form 1040x More:label_tax_20form_201040x More:bizfinanceIrs Amendment Form InstructionsFile Free 2012 Tax ReturnHow To File A Amended Return2010 Tax ActFree Online Amended Tax ReturnAmend Income Tax ReturnMyfreetaxes 2013E File Amended 1040xForm 1040vWww 1040ez Com2011 Irs Form 1041Can I Efile 2012 TaxesFile Tax Extension For 2011 FreeHow To File 2010 Taxes Late TurbotaxFiling Amended ReturnsFiling 2006 Taxes OnlineFile 2012 And 2013 TaxesTurbo Tax

Tax Military

Tax military Publication 597 - Main Content Table of Contents Application of Treaty Personal Services Pensions, Annuities, Social Security, and AlimonyRoth IRAs. Tax military Tax-deferred plans. Tax military Investment Income From Canadian Sources Other Income Charitable ContributionsQualified charities. Tax military Income Tax Credits Competent Authority Assistance How To Get Tax HelpText of Treaty U. Tax military S. Tax military Taxation Canadian Taxation Application of Treaty The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. Tax military That is, a person who is recognized as a resident of the United States who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. Tax military Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for applying the treaty in cases where a taxpayer is considered by both countries to be a resident. Tax military Saving clause. Tax military   In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U. Tax military S. Tax military citizens) or of the United States to tax its residents or citizens (including U. Tax military S. Tax military citizens who are residents of the foreign country). Tax military This provision is known as the “saving clause. Tax military ”   For example, an individual who is a U. Tax military S. Tax military citizen and a resident of Canada may have dividend income from a U. Tax military S. Tax military corporation. Tax military The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. Tax military Even though a resident of Canada, the individual is a U. Tax military S. Tax military citizen and the saving clause overrides the treaty article that limits the U. Tax military S. Tax military tax to 15%. Tax military    Exceptions to the saving clause can be found in Article XXIX, paragraph 3. Tax military Treaty-based position. Tax military   If you take the position that any U. Tax military S. Tax military tax is overruled or otherwise reduced by a U. Tax military S. Tax military treaty (a treaty-based position), you generally must disclose that position on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attach it to your return. Tax military Personal Services A U. Tax military S. Tax military citizen or resident who is temporarily present in Canada during the tax year is exempt from Canadian income taxes on pay for services performed, or remittances received from the United States, if the citizen or resident qualifies under one of the treaty exemption provisions set out below. Tax military Income from employment (Article XV). Tax military   Income U. Tax military S. Tax military residents receive for the performance of dependent personal services in Canada (except as public entertainers) is exempt from Canadian tax if it is not more than $10,000 in Canadian currency for the year. Tax military If it is more than $10,000 for the year, it is exempt only if: The residents are present in Canada for no more than 183 days in any 12-month period beginning or ending in the year concerned, and The income is not paid by, or on behalf of, a Canadian resident and is not borne by a permanent establishment in Canada. Tax military    Whether there is a permanent establishment in Canada is determined by the rules set forth in Article V. Tax military Example. Tax military You are a U. Tax military S. Tax military resident employed under an 8-month contract with a Canadian firm to install equipment in their Montreal plant. Tax military During the calendar year you were physically present in Canada for 179 days and were paid $16,500 (Canadian) for your services. Tax military Although you were in Canada for not more than 183 days during the year, your income is not exempt from Canadian income tax because it was paid by a Canadian resident and was more than $10,000 (Canadian) for the year. Tax military Pay received by a U. Tax military S. Tax military resident for work regularly done in more than one country as an employee on a ship, aircraft, motor vehicle, or train operated by a U. Tax military S. Tax military resident is exempt from Canadian tax. Tax military Income from self-employment (Article VII). Tax military   Income from services performed (other than those performed as an employee) are taxed in Canada if they are attributable to a permanent establishment in Canada. Tax military This income is treated as business profits, and deductions similar to those allowed under U. Tax military S. Tax military law are allowable. Tax military   If you carry on (or have carried on) business in both Canada and the United States, the business profits are attributable to each country based on the profits that the permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities. Tax military The business profits attributable to the permanent establishment include only those profits derived from assets used, risks assumed, and activities performed by the permanent establishment. Tax military   You may be considered to have a permanent establishment if you meet certain conditions. Tax military For more information, see Article V (Permanent Establishment) and Article VII (Business Profits). Tax military Public entertainers (Article XVI). Tax military   The provisions under income from employment or income from self-employment do not apply to public entertainers (such as theater, motion picture, radio, or television artistes, musicians, or athletes) from the United States who receive more than $15,000 in gross receipts in Canadian currency, including reimbursed expenses, from their entertainment activities in Canada during the calendar year. Tax military However, this provision for public entertainers does not apply (and the other provisions will apply) to athletes participating in team sports in leagues with regularly scheduled games in both the United States and Canada. Tax military Compensation paid by the U. Tax military S. Tax military Government (Article XIX). Tax military   Wages, salaries, and similar income (other than pensions) paid to a U. Tax military S. Tax military citizen by the United States or any of its agencies, instrumentalities, or political subdivisions for discharging governmental functions are exempt from Canadian income tax. Tax military   The exemption does not apply to pay for services performed in connection with any trade or business carried on for profit by the United States, or any of its agencies, instrumentalities, or political subdivisions. Tax military Students and apprentices (Article XX). Tax military   A full-time student, apprentice, or business trainee who is in Canada to study or acquire business experience is exempt from Canadian income tax on remittances received from any source outside Canada for maintenance, education, or training. Tax military The recipient must be or must have been a U. Tax military S. Tax military resident immediately before visiting Canada. Tax military   An apprentice or business trainee can claim this exemption only for a period of one year from the date the individual first arrived in Canada for the purpose of training. Tax military Pensions, Annuities, Social Security, and Alimony Under Article XVIII, pensions and annuities from Canadian sources paid to U. Tax military S. Tax military residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). Tax military Canadian pensions and annuities paid to U. Tax military S. Tax military residents may be taxed by the United States, but the amount of any pension included in income for U. Tax military S. Tax military tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. Tax military Pensions. Tax military   A pension includes any payment under a pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances, and payments under a sickness, accident, or disability plan. Tax military It includes pensions paid by private employers and the government for services rendered. Tax military   Pensions also include payments from individual retirement arrangements (IRAs) in the United States, registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) in Canada. Tax military   Pensions do not include social security benefits. Tax military Roth IRAs. Tax military   A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U. Tax military S. Tax military tax if paid to a U. Tax military S. Tax military resident. Tax military In addition, you may elect to defer any tax in Canada on income accrued within the Roth IRA but not distributed by the Roth IRA. Tax military However, you cannot defer tax on any accruals due to contributions made after you become a Canadian resident. Tax military Tax-deferred plans. Tax military   Generally, income that accrues in a Canadian RRSP or RRIF is subject to U. Tax military S. Tax military tax, even if it is not distributed. Tax military However, a U. Tax military S. Tax military citizen or resident can elect to defer U. Tax military S. Tax military tax on income from the plan until the income is distributed. Tax military Form 8891 is used to make the election. Tax military Annuities. Tax military    An annuity is a stated sum payable periodically at stated times, during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). Tax military Annuities do not include: Non-periodic payments, or An annuity the cost of which was deductible for tax purposes. Tax military Special rules. Tax military    Special rules apply to pensions and annuities with respect to: Short-term assignments, Cross-border commuters, and Individuals who participate in a Canadian qualifying plan. Tax military Generally, distributions in such cases are deemed to be earned in the country in which the plan is established, without regard to where the services were rendered. Tax military Social security benefits. Tax military   U. Tax military S. Tax military social security benefits paid to a resident of Canada are taxed in Canada as if they were benefits under the Canada Pension Plan, except that 15% of the amount of the benefit is exempt from Canadian tax. Tax military Alimony. Tax military   Alimony and similar amounts (including child support payments) from Canadian sources paid to U. Tax military S. Tax military residents are exempt from Canadian tax. Tax military For purposes of U. Tax military S. Tax military tax, these amounts are excluded from income to the same extent they would be excluded from income in Canada if the recipient was a Canadian resident. Tax military Investment Income From Canadian Sources The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital. Tax military Dividends (Article X). Tax military   For Canadian source dividends received by U. Tax military S. Tax military residents, the Canadian income tax generally may not be more than 15%. Tax military   A 5% rate applies to intercorporate dividends paid from a subsidiary to a parent corporation owning at least 10% of the subsidiary's voting stock. Tax military However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation. Tax military   These rates do not apply if the owner of the dividends carries on, or has carried on, a business in Canada through a permanent establishment and the holding on which the income is paid is effectively connected with that permanent establishment. Tax military Interest (Article XI). Tax military   Generally, Canadian source interest received by U. Tax military S. Tax military residents is exempt from Canadian income tax. Tax military   The exemption does not apply if the owner of the interest carries on, or has carried on, a business in Canada through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. Tax military Gains from the sale of property (Article XIII). Tax military   Generally, gains from the sale of personal property by a U. Tax military S. Tax military resident having no permanent establishment in Canada are exempt from Canadian income tax. Tax military However, the exemption from Canadian tax does not apply to gains realized by U. Tax military S. Tax military residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada. Tax military   If the property subject to Canadian tax is a capital asset and was owned by the U. Tax military S. Tax military resident on September 26, 1980, not as part of the business property of a permanent establishment in Canada, generally the taxable gain is limited to the appreciation after 1984. Tax military Royalties (Article XII). Tax military   The following are exempt from Canadian tax: Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television, which may be taxed at 10%), Payments for the use of, or the right to use, computer software, Payments for the use of, or the right to use, any patent or any information concerning industrial, commercial, or scientific experience (but not within a rental or franchise agreement), and Payments for broadcasting as agreed to in an exchange of notes between the countries. Tax military   This rate or exemption does not apply if the owner of the royalties carries on, or has carried on, a business in Canada through a permanent establishment and the right or property on which the income is paid is effectively connected with that permanent establishment. Tax military   This exemption (or lower rate) does not apply to royalties to explore for or to exploit mineral deposits, timber, and other natural resources. Tax military Other Income Generally, Canadian source income that is not specifically mentioned in the treaty, may be taxed by Canada. Tax military Gambling losses. Tax military   Canadian residents may deduct gambling losses in the U. Tax military S. Tax military against gambling winnings in the U. Tax military S. Tax military in the same manner as a U. Tax military S. Tax military resident. Tax military Charitable Contributions United States income tax return. Tax military   Under Article XXI, you may deduct contributions to certain qualified Canadian charitable organizations on your United States income tax return. Tax military Besides being subject to the overall limits applicable to all your charitable contributions under U. Tax military S. Tax military tax law, your charitable contributions to Canadian organizations (other than contributions to a college or university at which you or a member of your family is or was enrolled) are subject to the U. Tax military S. Tax military percentage limits on charitable contributions, applied to your Canadian source income. Tax military If your return does not include gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible. Tax military Example. Tax military You are a U. Tax military S. Tax military citizen living in Canada. Tax military You have both U. Tax military S. Tax military and Canadian source income. Tax military During your tax year, you contribute to Canadian organizations that would qualify as charitable organizations under U. Tax military S. Tax military tax law if they were U. Tax military S. Tax military organizations. Tax military To figure the maximum amount of the contribution to Canadian organizations that you can deduct on your U. Tax military S. Tax military income tax return, multiply your adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U. Tax military S. Tax military income tax law. Tax military Then include this amount on your return along with all your domestic charitable contributions, subject to the appropriate percentage limit required for contributions under U. Tax military S. Tax military income tax law. Tax military The appropriate percentage limit for U. Tax military S. Tax military tax purposes is applied to your total adjusted gross income from all sources. Tax military Qualified charities. Tax military   These Canadian organizations must meet the qualifications that a U. Tax military S. Tax military charitable organization must meet under U. Tax military S. Tax military tax law. Tax military Usually an organization will notify you if it qualifies. Tax military For further information on charitable contributions and the U. Tax military S. Tax military percentage limits, see Publication 526, Charitable Contributions. Tax military Canadian income tax return. Tax military   Under certain conditions, contributions to qualified U. Tax military S. Tax military charitable organizations may also be claimed on your Canadian income tax return if you are a Canadian resident. Tax military Income Tax Credits The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. Tax military In general, the United States and Canada both allow a credit against their income tax for the income tax paid to the other country on income from sources in that other country. Tax military For detailed discussions of the U. Tax military S. Tax military income tax treatment of tax paid to foreign countries, see Publication 514, Foreign Tax Credit for Individuals. Tax military See paragraphs (4) and (5) of Article XXIV for certain provisions that affect the computation of the credit allowed by the United States for Canadian income taxes paid by U. Tax military S. Tax military citizens residing in Canada. Tax military Competent Authority Assistance Under Article XXVI, a U. Tax military S. Tax military citizen or resident may request assistance from the U. Tax military S. Tax military competent authority when the actions of Canada, the United States, or both, potentially result in double taxation or taxation contrary to the treaty. Tax military The U. Tax military S. Tax military competent authority may then consult with the Canadian competent authority to determine if the double taxation or denial of treaty benefits in question can be avoided. Tax military If the competent authorities are not able to reach agreement in a case, binding arbitration proceedings may apply. Tax military It is important that your request for competent authority assistance be made as soon as you have been notified by either Canada or the United States of proposed adjustments that would result in denial of treaty benefits or in double taxation. Tax military This is so that implementation of any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Tax military For information that you should include with your request for competent authority assistance, see Revenue Procedure 2006-54, 2006-49 IRB 1035, available at www. Tax military irs. Tax military gov/irb/2006-49_IRB/ar13. Tax military html. Tax military The request should be addressed to:  Deputy Commissioner (International) Large Business and International Division Attn: Office of Tax Treaty  Internal Revenue Service 1111 Constitution Ave. Tax military , NW Routing: MA3-322A Washington, D. Tax military C. Tax military 20024 In addition to a timely request for assistance, you should take the following measures: File a timely protective claim for credit or refund of U. Tax military S. Tax military taxes on Form 1040X, Form 1120X, or amended Form 1041, whichever is appropriate. Tax military This will, among other things, give you the benefit of a foreign tax credit in case you do not qualify for the treaty benefit in question. Tax military For figuring this credit, attach either Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or Form 1118, Foreign Tax Credit — Corporations, as appropriate. Tax military Attach your protective claim to your request for competent authority assistance. Tax military Take appropriate action under Canadian procedures to avoid the lapse or termination of your right of appeal under Canadian income tax law. Tax military How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS and the Canada Revenue Agency in several ways. Tax military Text of Treaty You can get the text of the U. Tax military S. Tax military —Canada income tax treaty from: Superintendent of Documents U. Tax military S. Tax military Government Printing Office P. Tax military O. Tax military Box 371954 Pittsburgh, PA 15250-7954 The treaty can also be found on the Internet at IRS. Tax military gov. Tax military U. Tax military S. Tax military Taxation During the filing season, the IRS conducts a taxpayer assistance program in Canada. Tax military To find out if IRS personnel will be in your area, you should contact the consular office at the nearest U. Tax military S. Tax military Embassy or consulate. Tax military Mail. Tax military For answers to technical or account questions, you can write to:   Internal Revenue Service International Section Philadelphia, PA 19255-0525 Phone. Tax military You can call the IRS for help at (267) 941-1000 (not a toll-free call). Tax military Canadian Taxation You can get information on Canadian taxation from the Canada Revenue Agency. Tax military The International Tax Services Office can be contacted on 1-800-267-5177 (from anywhere in Canada and the U. Tax military S. Tax military ) or on the Internet at www. Tax military cra-arc. Tax military gc. Tax military ca. Tax military Prev  Up  Next   Home   More Online Publications
Español

Office of Special Education and Rehabilitative Services (OSERS)

OSERS provides a wide array of supports to parents and individuals, school districts and states in three main areas: special education, vocational rehabilitation and research.

The Tax Military

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