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Taxes 2012 Forms

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Taxes 2012 Forms

Taxes 2012 forms 1. Taxes 2012 forms   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Taxes 2012 forms Amount realized on a recourse debt. Taxes 2012 forms Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Taxes 2012 forms S. Taxes 2012 forms Individual Income Tax Return 1040X Amended U. Taxes 2012 forms S. Taxes 2012 forms Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Taxes 2012 forms However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Taxes 2012 forms See chapter 5 for information about getting publications and forms. Taxes 2012 forms Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Taxes 2012 forms An exchange is a transfer of property for other property or services. Taxes 2012 forms The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Taxes 2012 forms Sale or lease. Taxes 2012 forms    Some agreements that seem to be leases may really be conditional sales contracts. Taxes 2012 forms The intention of the parties to the agreement can help you distinguish between a sale and a lease. Taxes 2012 forms   There is no test or group of tests to prove what the parties intended when they made the agreement. Taxes 2012 forms You should consider each agreement based on its own facts and circumstances. Taxes 2012 forms For more information, see chapter 3 in Publication 535, Business Expenses. Taxes 2012 forms Cancellation of a lease. Taxes 2012 forms    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Taxes 2012 forms Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Taxes 2012 forms Copyright. Taxes 2012 forms    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Taxes 2012 forms It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Taxes 2012 forms Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Taxes 2012 forms   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Taxes 2012 forms For more information, see Section 1231 Gains and Losses in chapter 3. Taxes 2012 forms Easement. Taxes 2012 forms   The amount received for granting an easement is subtracted from the basis of the property. Taxes 2012 forms If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Taxes 2012 forms If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Taxes 2012 forms   Any amount received that is more than the basis to be reduced is a taxable gain. Taxes 2012 forms The transaction is reported as a sale of property. Taxes 2012 forms   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Taxes 2012 forms However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Taxes 2012 forms   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Taxes 2012 forms Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Taxes 2012 forms See Gain or Loss From Condemnations, later. Taxes 2012 forms Property transferred to satisfy debt. Taxes 2012 forms   A transfer of property to satisfy a debt is an exchange. Taxes 2012 forms Note's maturity date extended. Taxes 2012 forms   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Taxes 2012 forms Also, it is not considered a closed and completed transaction that would result in a gain or loss. Taxes 2012 forms However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Taxes 2012 forms Each case must be determined by its own facts. Taxes 2012 forms For more information, see Regulations section 1. Taxes 2012 forms 1001-3. Taxes 2012 forms Transfer on death. Taxes 2012 forms   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Taxes 2012 forms No taxable gain or deductible loss results from the transfer. Taxes 2012 forms Bankruptcy. Taxes 2012 forms   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Taxes 2012 forms Consequently, the transfer generally does not result in gain or loss. Taxes 2012 forms For more information, see Publication 908, Bankruptcy Tax Guide. Taxes 2012 forms Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Taxes 2012 forms A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Taxes 2012 forms A loss is the adjusted basis of the property that is more than the amount you realize. Taxes 2012 forms   Table 1-1. Taxes 2012 forms How To Figure Whether You Have a Gain or Loss IF your. Taxes 2012 forms . Taxes 2012 forms . Taxes 2012 forms THEN you have a. Taxes 2012 forms . Taxes 2012 forms . Taxes 2012 forms Adjusted basis is more than the amount realized, Loss. Taxes 2012 forms Amount realized is more than the adjusted basis, Gain. Taxes 2012 forms Basis. Taxes 2012 forms   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Taxes 2012 forms The basis of property you buy is usually its cost. Taxes 2012 forms However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Taxes 2012 forms See Basis Other Than Cost in Publication 551, Basis of Assets. Taxes 2012 forms Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Taxes 2012 forms See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Taxes 2012 forms Adjusted basis. Taxes 2012 forms   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Taxes 2012 forms Increases include costs of any improvements having a useful life of more than 1 year. Taxes 2012 forms Decreases include depreciation and casualty losses. Taxes 2012 forms For more details and additional examples, see Adjusted Basis in Publication 551. Taxes 2012 forms Amount realized. Taxes 2012 forms   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Taxes 2012 forms The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Taxes 2012 forms Fair market value. Taxes 2012 forms   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Taxes 2012 forms If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Taxes 2012 forms If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Taxes 2012 forms Example. Taxes 2012 forms You used a building in your business that cost you $70,000. Taxes 2012 forms You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Taxes 2012 forms You sold the building for $100,000 plus property having an FMV of $20,000. Taxes 2012 forms The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Taxes 2012 forms The selling expenses were $4,000. Taxes 2012 forms Your gain on the sale is figured as follows. Taxes 2012 forms Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Taxes 2012 forms   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Taxes 2012 forms Recognized gains must be included in gross income. Taxes 2012 forms Recognized losses are deductible from gross income. Taxes 2012 forms However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Taxes 2012 forms See Nontaxable Exchanges, later. Taxes 2012 forms Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Taxes 2012 forms Interest in property. Taxes 2012 forms   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Taxes 2012 forms If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Taxes 2012 forms Your basis in the property is disregarded. Taxes 2012 forms This rule does not apply if all interests in the property are disposed of at the same time. Taxes 2012 forms Example 1. Taxes 2012 forms Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Taxes 2012 forms You decide to sell your life interest in the farm. Taxes 2012 forms The entire amount you receive is a recognized gain. Taxes 2012 forms Your basis in the farm is disregarded. Taxes 2012 forms Example 2. Taxes 2012 forms The facts are the same as in Example 1, except that your brother joins you in selling the farm. Taxes 2012 forms The entire interest in the property is sold, so your basis in the farm is not disregarded. Taxes 2012 forms Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Taxes 2012 forms Canceling a sale of real property. Taxes 2012 forms   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Taxes 2012 forms If the buyer returns the property in the year of sale, no gain or loss is recognized. Taxes 2012 forms This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Taxes 2012 forms If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Taxes 2012 forms When the property is returned in a later year, you acquire a new basis in the property. Taxes 2012 forms That basis is equal to the amount you pay to the buyer. Taxes 2012 forms Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Taxes 2012 forms You have a gain if the amount realized is more than your adjusted basis in the property. Taxes 2012 forms However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Taxes 2012 forms Bargain sales to charity. Taxes 2012 forms   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Taxes 2012 forms If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Taxes 2012 forms The adjusted basis of the part sold is figured as follows. Taxes 2012 forms Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Taxes 2012 forms This allocation rule does not apply if a charitable contribution deduction is not allowable. Taxes 2012 forms   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Taxes 2012 forms Example. Taxes 2012 forms You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Taxes 2012 forms Your adjusted basis in the property is $4,000. Taxes 2012 forms Your gain on the sale is $1,200, figured as follows. Taxes 2012 forms Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Taxes 2012 forms You must subtract depreciation you took or could have taken from the basis of the business or rental part. Taxes 2012 forms However, see the special rule below for a home used partly for business or rental. Taxes 2012 forms You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Taxes 2012 forms Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Taxes 2012 forms Any gain on the personal part of the property is a capital gain. Taxes 2012 forms You cannot deduct a loss on the personal part. Taxes 2012 forms Home used partly for business or rental. Taxes 2012 forms    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Taxes 2012 forms See Property Used Partly for Business or Rental, in Publication 523. Taxes 2012 forms Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Taxes 2012 forms You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Taxes 2012 forms However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Taxes 2012 forms Figure the loss you can deduct as follows. Taxes 2012 forms Use the lesser of the property's adjusted basis or fair market value at the time of the change. Taxes 2012 forms Add to (1) the cost of any improvements and other increases to basis since the change. Taxes 2012 forms Subtract from (2) depreciation and any other decreases to basis since the change. Taxes 2012 forms Subtract the amount you realized on the sale from the result in (3). Taxes 2012 forms If the amount you realized is more than the result in (3), treat this result as zero. Taxes 2012 forms The result in (4) is the loss you can deduct. Taxes 2012 forms Example. Taxes 2012 forms You changed your main home to rental property 5 years ago. Taxes 2012 forms At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Taxes 2012 forms This year, you sold the property for $55,000. Taxes 2012 forms You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Taxes 2012 forms Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Taxes 2012 forms Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Taxes 2012 forms   If you have a gain on the sale, you generally must recognize the full amount of the gain. Taxes 2012 forms You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Taxes 2012 forms   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Taxes 2012 forms However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Taxes 2012 forms   For more information, see Business Use or Rental of Home in Publication 523. Taxes 2012 forms In addition, special rules apply if the home sold was acquired in a like-kind exchange. Taxes 2012 forms See Special Situations in Publication 523. Taxes 2012 forms Also see Like-Kind Exchanges, later. Taxes 2012 forms Abandonments The abandonment of property is a disposition of property. Taxes 2012 forms You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Taxes 2012 forms Generally, abandonment is not treated as a sale or exchange of the property. Taxes 2012 forms If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Taxes 2012 forms If your adjusted basis is more than the amount you realize (if any), then you have a loss. Taxes 2012 forms Loss from abandonment of business or investment property is deductible as a loss. Taxes 2012 forms A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Taxes 2012 forms This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Taxes 2012 forms If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Taxes 2012 forms The abandonment loss is deducted in the tax year in which the loss is sustained. Taxes 2012 forms If the abandoned property is secured by debt, special rules apply. Taxes 2012 forms The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Taxes 2012 forms For more information, including examples, see chapter 3 of Publication 4681. Taxes 2012 forms You cannot deduct any loss from abandonment of your home or other property held for personal use only. Taxes 2012 forms Cancellation of debt. Taxes 2012 forms   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Taxes 2012 forms This income is separate from any loss realized from abandonment of the property. Taxes 2012 forms   You must report this income on your tax return unless one of the following applies. Taxes 2012 forms The cancellation is intended as a gift. Taxes 2012 forms The debt is qualified farm debt. Taxes 2012 forms The debt is qualified real property business debt. Taxes 2012 forms You are insolvent or bankrupt. Taxes 2012 forms The debt is qualified principal residence indebtedness. Taxes 2012 forms File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Taxes 2012 forms For more information, including other exceptions and exclusion, see Publication 4681. Taxes 2012 forms Forms 1099-A and 1099-C. Taxes 2012 forms   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Taxes 2012 forms However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Taxes 2012 forms The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Taxes 2012 forms For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Taxes 2012 forms Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Taxes 2012 forms The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Taxes 2012 forms This is true even if you voluntarily return the property to the lender. Taxes 2012 forms You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Taxes 2012 forms Buyer's (borrower's) gain or loss. Taxes 2012 forms   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Taxes 2012 forms The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Taxes 2012 forms See Gain or Loss From Sales and Exchanges, earlier. Taxes 2012 forms You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Taxes 2012 forms Amount realized on a nonrecourse debt. Taxes 2012 forms   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Taxes 2012 forms The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Taxes 2012 forms Example 1. Taxes 2012 forms Chris bought a new car for $15,000. Taxes 2012 forms He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Taxes 2012 forms Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Taxes 2012 forms The credit company repossessed the car because he stopped making loan payments. Taxes 2012 forms The balance due after taking into account the payments Chris made was $10,000. Taxes 2012 forms The fair market value of the car when repossessed was $9,000. Taxes 2012 forms The amount Chris realized on the repossession is $10,000. Taxes 2012 forms That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Taxes 2012 forms Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Taxes 2012 forms He has a $5,000 nondeductible loss. Taxes 2012 forms Example 2. Taxes 2012 forms Abena paid $200,000 for her home. Taxes 2012 forms She paid $15,000 down and borrowed the remaining $185,000 from a bank. Taxes 2012 forms Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Taxes 2012 forms The bank foreclosed on the loan because Abena stopped making payments. Taxes 2012 forms When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Taxes 2012 forms The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Taxes 2012 forms She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Taxes 2012 forms She has a $5,000 realized gain. Taxes 2012 forms Amount realized on a recourse debt. Taxes 2012 forms   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Taxes 2012 forms You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Taxes 2012 forms The amount realized does not include the canceled debt that is your income from cancellation of debt. Taxes 2012 forms See Cancellation of debt, below. Taxes 2012 forms Seller's (lender's) gain or loss on repossession. Taxes 2012 forms   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Taxes 2012 forms For more information, see Repossession in Publication 537. Taxes 2012 forms    Table 1-2. Taxes 2012 forms Worksheet for Foreclosures and Repossessions Part 1. Taxes 2012 forms Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Taxes 2012 forms Complete this part only  if you were personally liable for the debt. Taxes 2012 forms Otherwise,  go to Part 2. Taxes 2012 forms   1. Taxes 2012 forms Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Taxes 2012 forms Enter the fair market value of the transferred property   3. Taxes 2012 forms Ordinary income from cancellation of debt upon foreclosure or    repossession. Taxes 2012 forms * Subtract line 2 from line 1. Taxes 2012 forms   If less than zero, enter zero   Part 2. Taxes 2012 forms Figure your gain or loss from foreclosure or repossession. Taxes 2012 forms   4. Taxes 2012 forms If you completed Part 1, enter the smaller of line 1 or line 2. Taxes 2012 forms   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Taxes 2012 forms Enter any proceeds you received from the foreclosure sale   6. Taxes 2012 forms Add lines 4 and 5   7. Taxes 2012 forms Enter the adjusted basis of the transferred property   8. Taxes 2012 forms Gain or loss from foreclosure or repossession. Taxes 2012 forms Subtract line 7  from line 6   * The income may not be taxable. Taxes 2012 forms See Cancellation of debt. Taxes 2012 forms Cancellation of debt. Taxes 2012 forms   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Taxes 2012 forms This income is separate from any gain or loss realized from the foreclosure or repossession. Taxes 2012 forms Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Taxes 2012 forms    You can use Table 1-2 to figure your income from cancellation of debt. Taxes 2012 forms   You must report this income on your tax return unless one of the following applies. Taxes 2012 forms The cancellation is intended as a gift. Taxes 2012 forms The debt is qualified farm debt. Taxes 2012 forms The debt is qualified real property business debt. Taxes 2012 forms You are insolvent or bankrupt. Taxes 2012 forms The debt is qualified principal residence indebtedness. Taxes 2012 forms File Form 982 to report the income exclusion. Taxes 2012 forms Example 1. Taxes 2012 forms Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Taxes 2012 forms In this case, the amount he realizes is $9,000. Taxes 2012 forms This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Taxes 2012 forms Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Taxes 2012 forms He has a $6,000 nondeductible loss. Taxes 2012 forms He also is treated as receiving ordinary income from cancellation of debt. Taxes 2012 forms That income is $1,000 ($10,000 − $9,000). Taxes 2012 forms This is the part of the canceled debt not included in the amount realized. Taxes 2012 forms Example 2. Taxes 2012 forms Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Taxes 2012 forms In this case, the amount she realizes is $170,000. Taxes 2012 forms This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Taxes 2012 forms Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Taxes 2012 forms She has a $5,000 nondeductible loss. Taxes 2012 forms She also is treated as receiving ordinary income from cancellation of debt. Taxes 2012 forms (The debt is not exempt from tax as discussed under Cancellation of debt, above. Taxes 2012 forms ) That income is $10,000 ($180,000 − $170,000). Taxes 2012 forms This is the part of the canceled debt not included in the amount realized. Taxes 2012 forms Forms 1099-A and 1099-C. Taxes 2012 forms   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Taxes 2012 forms However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Taxes 2012 forms The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Taxes 2012 forms For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Taxes 2012 forms Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Taxes 2012 forms Involuntary conversions are also called involuntary exchanges. Taxes 2012 forms Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Taxes 2012 forms You report the gain or deduct the loss on your tax return for the year you realize it. Taxes 2012 forms You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Taxes 2012 forms However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Taxes 2012 forms Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Taxes 2012 forms Your basis for the new property is the same as your basis for the converted property. Taxes 2012 forms This means that the gain is deferred until a taxable sale or exchange occurs. Taxes 2012 forms If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Taxes 2012 forms This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Taxes 2012 forms If you have a gain or loss from the destruction or theft of property, see Publication 547. Taxes 2012 forms Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Taxes 2012 forms The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Taxes 2012 forms The owner receives a condemnation award (money or property) in exchange for the property taken. Taxes 2012 forms A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Taxes 2012 forms Example. Taxes 2012 forms A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Taxes 2012 forms After the local government took action to condemn your property, you went to court to keep it. Taxes 2012 forms But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Taxes 2012 forms This is a condemnation of private property for public use. Taxes 2012 forms Threat of condemnation. Taxes 2012 forms   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Taxes 2012 forms You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Taxes 2012 forms   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Taxes 2012 forms If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Taxes 2012 forms Reports of condemnation. Taxes 2012 forms   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Taxes 2012 forms You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Taxes 2012 forms If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Taxes 2012 forms Example. Taxes 2012 forms Your property lies along public utility lines. Taxes 2012 forms The utility company has the authority to condemn your property. Taxes 2012 forms The company informs you that it intends to acquire your property by negotiation or condemnation. Taxes 2012 forms A threat of condemnation exists when you receive the notice. Taxes 2012 forms Related property voluntarily sold. Taxes 2012 forms   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Taxes 2012 forms A substantial economic relationship exists if together the properties were one economic unit. Taxes 2012 forms You also must show that the condemned property could not reasonably or adequately be replaced. Taxes 2012 forms You can elect to postpone reporting the gain by buying replacement property. Taxes 2012 forms See Postponement of Gain, later. Taxes 2012 forms Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Taxes 2012 forms If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Taxes 2012 forms You can postpone reporting gain from a condemnation if you buy replacement property. Taxes 2012 forms If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Taxes 2012 forms See Postponement of Gain, later. Taxes 2012 forms If your net condemnation award is less than your adjusted basis, you have a loss. Taxes 2012 forms If your loss is from property you held for personal use, you cannot deduct it. Taxes 2012 forms You must report any deductible loss in the tax year it happened. Taxes 2012 forms You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Taxes 2012 forms Main home condemned. Taxes 2012 forms   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Taxes 2012 forms You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Taxes 2012 forms For information on this exclusion, see Publication 523. Taxes 2012 forms If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Taxes 2012 forms See Postponement of Gain, later. Taxes 2012 forms Table 1-3. Taxes 2012 forms Worksheet for Condemnations Part 1. Taxes 2012 forms Gain from severance damages. Taxes 2012 forms  If you did not receive severance damages, skip Part 1 and go to Part 2. Taxes 2012 forms   1. Taxes 2012 forms Enter gross severance damages received   2. Taxes 2012 forms Enter your expenses in getting severance damages   3. Taxes 2012 forms Subtract line 2 from line 1. Taxes 2012 forms If less than zero, enter -0-   4. Taxes 2012 forms Enter any special assessment on remaining property taken out of your award   5. Taxes 2012 forms Net severance damages. Taxes 2012 forms Subtract line 4 from line 3. Taxes 2012 forms If less than zero, enter -0-   6. Taxes 2012 forms Enter the adjusted basis of the remaining property   7. Taxes 2012 forms Gain from severance damages. Taxes 2012 forms Subtract line 6 from line 5. Taxes 2012 forms If less than zero, enter -0-   8. Taxes 2012 forms Refigured adjusted basis of the remaining property. Taxes 2012 forms Subtract line 5 from line 6. Taxes 2012 forms If less than zero, enter -0-   Part 2. Taxes 2012 forms Gain or loss from condemnation award. Taxes 2012 forms   9. Taxes 2012 forms Enter the gross condemnation award received   10. Taxes 2012 forms Enter your expenses in getting the condemnation award   11. Taxes 2012 forms If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Taxes 2012 forms If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Taxes 2012 forms Otherwise, enter -0-   12. Taxes 2012 forms Add lines 10 and 11   13. Taxes 2012 forms Net condemnation award. Taxes 2012 forms Subtract line 12 from line 9   14. Taxes 2012 forms Enter the adjusted basis of the condemned property   15. Taxes 2012 forms Gain from condemnation award. Taxes 2012 forms If line 14 is more than line 13, enter -0-. Taxes 2012 forms Otherwise, subtract line 14 from  line 13 and skip line 16   16. Taxes 2012 forms Loss from condemnation award. Taxes 2012 forms Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Taxes 2012 forms )   Part 3. Taxes 2012 forms Postponed gain from condemnation. Taxes 2012 forms  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Taxes 2012 forms )   17. Taxes 2012 forms If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Taxes 2012 forms Otherwise, enter -0-   18. Taxes 2012 forms If line 15 is more than zero, enter the amount from line 13. Taxes 2012 forms Otherwise, enter -0-   19. Taxes 2012 forms Add lines 17 and 18. Taxes 2012 forms If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Taxes 2012 forms Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Taxes 2012 forms Subtract line 20 from line 19. Taxes 2012 forms If less than zero, enter -0-   22. Taxes 2012 forms If you completed Part 1, add lines 7 and 15. Taxes 2012 forms Otherwise, enter the amount from line 15. Taxes 2012 forms If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Taxes 2012 forms Recognized gain. Taxes 2012 forms Enter the smaller of line 21 or line 22. Taxes 2012 forms   24. Taxes 2012 forms Postponed gain. Taxes 2012 forms Subtract line 23 from line 22. Taxes 2012 forms If less than zero, enter -0-   Condemnation award. Taxes 2012 forms   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Taxes 2012 forms The award is also the amount you are paid for the sale of your property under threat of condemnation. Taxes 2012 forms Payment of your debts. Taxes 2012 forms   Amounts taken out of the award to pay your debts are considered paid to you. Taxes 2012 forms Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Taxes 2012 forms Example. Taxes 2012 forms The state condemned your property for public use. Taxes 2012 forms The award was set at $200,000. Taxes 2012 forms The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Taxes 2012 forms You are considered to have received the entire $200,000 as a condemnation award. Taxes 2012 forms Interest on award. Taxes 2012 forms   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Taxes 2012 forms You must report the interest separately as ordinary income. Taxes 2012 forms Payments to relocate. Taxes 2012 forms   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Taxes 2012 forms Do not include them in your income. Taxes 2012 forms Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Taxes 2012 forms Net condemnation award. Taxes 2012 forms   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Taxes 2012 forms If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Taxes 2012 forms This is discussed later under Special assessment taken out of award. Taxes 2012 forms Severance damages. Taxes 2012 forms    Severance damages are not part of the award paid for the property condemned. Taxes 2012 forms They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Taxes 2012 forms   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Taxes 2012 forms Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Taxes 2012 forms   The contracting parties should agree on the specific amount of severance damages in writing. Taxes 2012 forms If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Taxes 2012 forms   You cannot make a completely new allocation of the total award after the transaction is completed. Taxes 2012 forms However, you can show how much of the award both parties intended for severance damages. Taxes 2012 forms The severance damages part of the award is determined from all the facts and circumstances. Taxes 2012 forms Example. Taxes 2012 forms You sold part of your property to the state under threat of condemnation. Taxes 2012 forms The contract you and the condemning authority signed showed only the total purchase price. Taxes 2012 forms It did not specify a fixed sum for severance damages. Taxes 2012 forms However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Taxes 2012 forms You may treat this part as severance damages. Taxes 2012 forms Treatment of severance damages. Taxes 2012 forms   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Taxes 2012 forms Use them to reduce the basis of the remaining property. Taxes 2012 forms If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Taxes 2012 forms   If your net severance damages are more than the basis of your retained property, you have a gain. Taxes 2012 forms You may be able to postpone reporting the gain. Taxes 2012 forms See Postponement of Gain, later. Taxes 2012 forms    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Taxes 2012 forms Net severance damages. Taxes 2012 forms   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Taxes 2012 forms You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Taxes 2012 forms The balance is your net severance damages. Taxes 2012 forms Expenses of obtaining a condemnation award and severance damages. Taxes 2012 forms   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Taxes 2012 forms Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Taxes 2012 forms If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Taxes 2012 forms Example. Taxes 2012 forms You receive a condemnation award and severance damages. Taxes 2012 forms One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Taxes 2012 forms You had legal expenses for the entire condemnation proceeding. Taxes 2012 forms You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Taxes 2012 forms You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Taxes 2012 forms Special assessment retained out of award. Taxes 2012 forms   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Taxes 2012 forms An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Taxes 2012 forms Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Taxes 2012 forms   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Taxes 2012 forms Example. Taxes 2012 forms To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Taxes 2012 forms You were awarded $5,000 for this and spent $300 to get the award. Taxes 2012 forms Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Taxes 2012 forms The city then paid you only $4,300. Taxes 2012 forms Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Taxes 2012 forms If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Taxes 2012 forms The net award would not change, even if you later paid the assessment from the amount you received. Taxes 2012 forms Severance damages received. Taxes 2012 forms   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Taxes 2012 forms Any balance of the special assessment is used to reduce the condemnation award. Taxes 2012 forms Example. Taxes 2012 forms You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Taxes 2012 forms You spent $300 to obtain the severance damages. Taxes 2012 forms A special assessment of $800 was retained out of the award. Taxes 2012 forms The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Taxes 2012 forms Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Taxes 2012 forms Part business or rental. Taxes 2012 forms   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Taxes 2012 forms Figure your gain or loss separately because gain or loss on each part may be treated differently. Taxes 2012 forms   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Taxes 2012 forms Example. Taxes 2012 forms You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Taxes 2012 forms You rented half the building and lived in the other half. Taxes 2012 forms You paid $25,000 for the building and spent an additional $1,000 for a new roof. Taxes 2012 forms You claimed allowable depreciation of $4,600 on the rental half. Taxes 2012 forms You spent $200 in legal expenses to obtain the condemnation award. Taxes 2012 forms Figure your gain or loss as follows. Taxes 2012 forms     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Taxes 2012 forms Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Taxes 2012 forms Your basis for the new property is the same as your basis for the old. Taxes 2012 forms Money or unlike property received. Taxes 2012 forms   You ordinarily must report the gain if you receive money or unlike property. Taxes 2012 forms You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Taxes 2012 forms You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Taxes 2012 forms See Controlling interest in a corporation, later. Taxes 2012 forms   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Taxes 2012 forms If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Taxes 2012 forms   The basis of the replacement property is its cost, reduced by the postponed gain. Taxes 2012 forms Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Taxes 2012 forms See Controlling interest in a corporation, later. Taxes 2012 forms You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Taxes 2012 forms Postponing gain on severance damages. Taxes 2012 forms   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Taxes 2012 forms See Treatment of severance damages, earlier. Taxes 2012 forms You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Taxes 2012 forms   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Taxes 2012 forms If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Taxes 2012 forms   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Taxes 2012 forms Postponing gain on the sale of related property. Taxes 2012 forms   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Taxes 2012 forms You must meet the requirements explained earlier under Related property voluntarily sold. Taxes 2012 forms You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Taxes 2012 forms Buying replacement property from a related person. Taxes 2012 forms   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Taxes 2012 forms For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Taxes 2012 forms   This rule applies to the following taxpayers. Taxes 2012 forms C corporations. Taxes 2012 forms Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Taxes 2012 forms All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Taxes 2012 forms   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Taxes 2012 forms If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Taxes 2012 forms If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Taxes 2012 forms Exception. Taxes 2012 forms   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Taxes 2012 forms Advance payment. Taxes 2012 forms   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Taxes 2012 forms Replacement property. Taxes 2012 forms   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Taxes 2012 forms You do not have to use the actual funds from the condemnation award to acquire the replacement property. Taxes 2012 forms Property you acquire by gift or inheritance does not qualify as replacement property. Taxes 2012 forms Similar or related in service or use. Taxes 2012 forms   Your replacement property must be similar or related in service or use to the property it replaces. Taxes 2012 forms   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Taxes 2012 forms For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Taxes 2012 forms Owner-user. Taxes 2012 forms   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Taxes 2012 forms Example. Taxes 2012 forms Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Taxes 2012 forms Your replacement property is not similar or related in service or use to the condemned property. Taxes 2012 forms To be similar or related in service or use, your replacement property must also be used by you as your home. Taxes 2012 forms Owner-investor. Taxes 2012 forms   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Taxes 2012 forms You decide this by determining all the following information. Taxes 2012 forms Whether the properties are of similar service to you. Taxes 2012 forms The nature of the business risks connected with the properties. Taxes 2012 forms What the properties demand of you in the way of management, service, and relations to your tenants. Taxes 2012 forms Example. Taxes 2012 forms You owned land and a building you rented to a manufacturing company. Taxes 2012 forms The building was condemned. Taxes 2012 forms During the replacement period, you had a new building built on other land you already owned. Taxes 2012 forms You rented out the new building for use as a wholesale grocery warehouse. Taxes 2012 forms The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Taxes 2012 forms Your management activities. Taxes 2012 forms The amount and kind of services you provide to your tenants. Taxes 2012 forms The nature of your business risks connected with the properties. Taxes 2012 forms Leasehold replaced with fee simple property. Taxes 2012 forms   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Taxes 2012 forms   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Taxes 2012 forms A leasehold is property held under a lease, usually for a term of years. Taxes 2012 forms Outdoor advertising display replaced with real property. Taxes 2012 forms   You can elect to treat an outdoor advertising display as real property. Taxes 2012 forms If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Taxes 2012 forms For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Taxes 2012 forms   You can make this election only if you did not claim a section 179 deduction for the display. Taxes 2012 forms You cannot cancel this election unless you get the consent of the IRS. Taxes 2012 forms   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Taxes 2012 forms Substituting replacement property. Taxes 2012 forms   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Taxes 2012 forms But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Taxes 2012 forms Controlling interest in a corporation. Taxes 2012 forms   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Taxes 2012 forms You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Taxes 2012 forms Basis adjustment to corporation's property. Taxes 2012 forms   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Taxes 2012 forms You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Taxes 2012 forms   Allocate this reduction to the following classes of property in the order shown below. Taxes 2012 forms Property that is similar or related in service or use to the condemned property. Taxes 2012 forms Depreciable property not reduced in (1). Taxes 2012 forms All other property. Taxes 2012 forms If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Taxes 2012 forms The reduced basis of any single property cannot be less than zero. Taxes 2012 forms Main home replaced. Taxes 2012 forms   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Taxes 2012 forms The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Taxes 2012 forms   You must reduce the basis of your replacement property by the postponed gain. Taxes 2012 forms Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Taxes 2012 forms Example. Taxes 2012 forms City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Taxes 2012 forms The city paid you a condemnation award of $400,000. Taxes 2012 forms Your adjusted basis in the property was $80,000. Taxes 2012 forms You realize a gain of $320,000 ($400,000 − $80,000). Taxes 2012 forms You purchased a new home for $100,000. Taxes 2012 forms You can exclude $250,000 of the realized gain from your gross income. Taxes 2012 forms The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Taxes 2012 forms You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Taxes 2012 forms The remaining $20,000 of realized gain is postponed. Taxes 2012 forms Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Taxes 2012 forms Replacement period. Taxes 2012 forms   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Taxes 2012 forms This is the replacement period. Taxes 2012 forms   The replacement period for a condemnation begins on the earlier of the following dates. Taxes 2012 forms The date on which you disposed of the condemned property. Taxes 2012 forms The date on which the threat of condemnation began. Taxes 2012 forms   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Taxes 2012 forms However, see the exceptions below. Taxes 2012 forms Three-year replacement period for certain property. Taxes 2012 forms   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Taxes 2012 forms However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Taxes 2012 forms Five-year replacement period for certain property. Taxes 2012 forms   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Taxes 2012 forms Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Taxes 2012 forms Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Taxes 2012 forms Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Taxes 2012 forms Extended replacement period for taxpayers affected by other federally declared disasters. Taxes 2012 forms    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Taxes 2012 forms For more information visit www. Taxes 2012 forms irs. Taxes 2012 forms gov/uac/Tax-Relief-in-Disaster-Situations. Taxes 2012 forms Weather-related sales of livestock in an area eligible for federal assistance. Taxes 2012 forms   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Taxes 2012 forms    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Taxes 2012 forms See Notice 2006-82. Taxes 2012 forms You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Taxes 2012 forms irs. Taxes 2012 forms gov/irb/2006-39_IRB/ar13. Taxes 2012 forms html. Taxes 2012 forms    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Taxes 2012 forms If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Taxes 2012 forms You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Taxes 2012 forms irs. Taxes 2012 forms gov/irb/2013-45_IRB/ar04. Taxes 2012 forms html. Taxes 2012 forms The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Taxes 2012 forms Determining when gain is realized. Taxes 2012 forms   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Taxes 2012 forms If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Taxes 2012 forms   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Taxes 2012 forms A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Taxes 2012 forms   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Taxes 2012 forms All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Taxes 2012 forms All or part of the award is actually or constructively received. Taxes 2012 forms For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Taxes 2012 forms Replacement property bought before the condemnation. Taxes 2012 forms   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Taxes 2012 forms Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Taxes 2012 forms Example. Taxes 2012 forms On April 3, 2012, city authorities notified you that your property would be condemned. Taxes 2012 forms On June 5, 2012, you acquired property to replace the property to be condemned. Taxes 2012 forms You still had the new property when the city took possession of your old property on September 4, 2013. Taxes 2012 forms You have made a replacement within the replacement period. Taxes 2012 forms Extension. Taxes 2012 forms   You can request an extension of the replacement period from the IRS director for your area. Taxes 2012 forms You should apply before the end of the replacement period. Taxes 2012 forms Your request should explain in detail why you need an extension. Taxes 2012 forms The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Taxes 2012 forms An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Taxes 2012 forms   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Taxes 2012 forms Extensions are usually limited to a period of 1 year or less. Taxes 2012 forms The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Taxes 2012 forms If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri
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The Taxes 2012 Forms

Taxes 2012 forms 9. Taxes 2012 forms   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Taxes 2012 forms Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. Taxes 2012 forms Amount to report as ordinary income. Taxes 2012 forms Applicable percentage. Taxes 2012 forms Amount to report as ordinary income. Taxes 2012 forms Applicable percentage. Taxes 2012 forms Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. Taxes 2012 forms 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. Taxes 2012 forms Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. Taxes 2012 forms Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. Taxes 2012 forms Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. Taxes 2012 forms Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Taxes 2012 forms Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). Taxes 2012 forms Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. Taxes 2012 forms Table 9-1. Taxes 2012 forms Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. Taxes 2012 forms Held 24 mos. Taxes 2012 forms  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. Taxes 2012 forms Held 12 mos. Taxes 2012 forms   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I 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). Taxes 2012 forms Do not take that gain into account as section 1231 gain. Taxes 2012 forms Section 1231 transactions. Taxes 2012 forms   Gain or loss on the following transactions is subject to section 1231 treatment. Taxes 2012 forms Sale or exchange of cattle and horses. Taxes 2012 forms The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. Taxes 2012 forms Sale or exchange of other livestock. Taxes 2012 forms This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. Taxes 2012 forms Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. Taxes 2012 forms Other livestock does not include poultry. Taxes 2012 forms Sale or exchange of depreciable personal property. Taxes 2012 forms This property must be used in your business and held longer than 1 year. Taxes 2012 forms Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Taxes 2012 forms Examples of depreciable personal property include farm machinery and trucks. Taxes 2012 forms It also includes amortizable section 197 intangibles. Taxes 2012 forms Sale or exchange of real estate. Taxes 2012 forms This property must be used in your business and held longer than 1 year. Taxes 2012 forms Examples are your farm or ranch (including barns and sheds). Taxes 2012 forms Sale or exchange of unharvested crops. Taxes 2012 forms The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. Taxes 2012 forms You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). Taxes 2012 forms Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. Taxes 2012 forms Distributive share of partnership gains and losses. Taxes 2012 forms Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). Taxes 2012 forms Cutting or disposal of timber. Taxes 2012 forms Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . Taxes 2012 forms Condemnation. Taxes 2012 forms The condemned property (defined in chapter 11) must have been held longer than 1 year. Taxes 2012 forms 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. Taxes 2012 forms It cannot be property held for personal use. Taxes 2012 forms Casualty or theft. Taxes 2012 forms The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). Taxes 2012 forms You must have held the property longer than 1 year. Taxes 2012 forms 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. Taxes 2012 forms Section 1231 does not apply to personal casualty gains and losses. Taxes 2012 forms See chapter 11 for information on how to treat those gains and losses. Taxes 2012 forms If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. Taxes 2012 forms See Table 9-1. Taxes 2012 forms Property for sale to customers. Taxes 2012 forms   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Taxes 2012 forms 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. Taxes 2012 forms Treatment as ordinary or capital. Taxes 2012 forms   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. Taxes 2012 forms If you have a net section 1231 loss, it is an ordinary loss. Taxes 2012 forms If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. Taxes 2012 forms The rest, if any, is long-term capital gain. Taxes 2012 forms Nonrecaptured section 1231 losses. Taxes 2012 forms   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 by treating the gain as ordinary income. Taxes 2012 forms These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Taxes 2012 forms Example. Taxes 2012 forms In 2013, Ben has a $2,000 net section 1231 gain. Taxes 2012 forms 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. Taxes 2012 forms From 2008 through 2012 he had the following section 1231 gains and losses. Taxes 2012 forms 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. Taxes 2012 forms 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 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. Taxes 2012 forms 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 it is otherwise nontaxable) as ordinary income. Taxes 2012 forms 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. Taxes 2012 forms For more information, see chapter 3 of Publication 544. Taxes 2012 forms 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. Taxes 2012 forms Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. Taxes 2012 forms See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. Taxes 2012 forms 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. Taxes 2012 forms Personal property (either tangible or intangible). Taxes 2012 forms Other tangible property (except buildings and their structural components) used as any of the following. Taxes 2012 forms See Buildings and structural components below. Taxes 2012 forms An integral part of manufacturing, production, or extraction, or of furnishing certain services. Taxes 2012 forms A research facility in any of the activities in (a). Taxes 2012 forms A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). Taxes 2012 forms That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Taxes 2012 forms Amortization of certified pollution control facilities. Taxes 2012 forms The section 179 expense deduction. Taxes 2012 forms Deduction for clean-fuel vehicles and certain refueling property. Taxes 2012 forms Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Taxes 2012 forms Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. Taxes 2012 forms Single purpose agricultural (livestock) or horticultural structures. Taxes 2012 forms Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Taxes 2012 forms Buildings and structural components. Taxes 2012 forms   Section 1245 property does not include buildings and structural components. Taxes 2012 forms The term building includes a house, barn, warehouse, or garage. Taxes 2012 forms The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Taxes 2012 forms   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Taxes 2012 forms 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. Taxes 2012 forms   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. Taxes 2012 forms Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. Taxes 2012 forms Facility for bulk storage of fungible commodities. Taxes 2012 forms   This is a facility used mainly for the bulk storage of fungible commodities. Taxes 2012 forms Bulk storage means storage of a commodity in a large mass before it is used. Taxes 2012 forms For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Taxes 2012 forms To be fungible, a commodity must be such that one part may be used in place of another. Taxes 2012 forms 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. Taxes 2012 forms The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. Taxes 2012 forms The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Taxes 2012 forms For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. Taxes 2012 forms For details, see chapter 3 of Publication 544. Taxes 2012 forms Use Part III of Form 4797 to figure the ordinary income part of the gain. Taxes 2012 forms Depreciation claimed on other property or claimed by other taxpayers. Taxes 2012 forms   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Taxes 2012 forms Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Taxes 2012 forms For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. Taxes 2012 forms 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 and part of the transfer is a sale or exchange). Taxes 2012 forms Example. Taxes 2012 forms Jeff Free paid $120,000 for a tractor in 2012. Taxes 2012 forms On February 23, 2013, he traded it for a chopper and paid an additional $30,000. Taxes 2012 forms To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. Taxes 2012 forms Jeff can also depreciate the additional $30,000 for the chopper. Taxes 2012 forms Depreciation and amortization. Taxes 2012 forms   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. Taxes 2012 forms See Depreciation Recapture in chapter 3 of Publication 544 for more details. Taxes 2012 forms Ordinary depreciation deductions. Taxes 2012 forms Section 179 deduction (see chapter 7). Taxes 2012 forms Any special depreciation allowance. Taxes 2012 forms Amortization deductions for all the following costs. Taxes 2012 forms Acquiring a lease. Taxes 2012 forms Lessee improvements. Taxes 2012 forms Pollution control facilities. Taxes 2012 forms Reforestation expenses. Taxes 2012 forms Section 197 intangibles. Taxes 2012 forms Qualified disaster expenses. Taxes 2012 forms Franchises, trademarks, and trade names acquired before August 11, 1993. Taxes 2012 forms Example. Taxes 2012 forms You file your returns on a calendar year basis. Taxes 2012 forms In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. Taxes 2012 forms You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. Taxes 2012 forms You did not claim the section 179 expense deduction for the truck. Taxes 2012 forms You sold it in May 2013 for $7,000. Taxes 2012 forms The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). Taxes 2012 forms Figure the gain treated as ordinary income as follows. Taxes 2012 forms 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. Taxes 2012 forms   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. Taxes 2012 forms 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. Taxes 2012 forms 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. Taxes 2012 forms This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Taxes 2012 forms Disposition of plants and animals. Taxes 2012 forms   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. Taxes 2012 forms If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. Taxes 2012 forms For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. Taxes 2012 forms For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. Taxes 2012 forms You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. Taxes 2012 forms Example. Taxes 2012 forms Janet Maple sold her apple orchard in 2013 for $80,000. Taxes 2012 forms Her adjusted basis at the time of sale was $60,000. Taxes 2012 forms She bought the orchard in 2006, but the trees did not produce a crop until 2009. Taxes 2012 forms Her pre-productive expenses were $6,000. Taxes 2012 forms She elected not to use the uniform capitalization rules. Taxes 2012 forms Janet must treat $6,000 of the gain as ordinary income. Taxes 2012 forms Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. Taxes 2012 forms It includes buildings and structural components that are not section 1245 property (discussed earlier). Taxes 2012 forms It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Taxes 2012 forms A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. Taxes 2012 forms Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. Taxes 2012 forms To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. Taxes 2012 forms You will not have additional depreciation if any of the following apply to the property disposed of. Taxes 2012 forms 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 and you have held the property longer than 1 year. Taxes 2012 forms You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Taxes 2012 forms The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. Taxes 2012 forms These properties are depreciated using the straight line method. Taxes 2012 forms Installment Sale 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. Taxes 2012 forms This applies even if no payments are received in that year. Taxes 2012 forms If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Taxes 2012 forms For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Taxes 2012 forms If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. Taxes 2012 forms To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Taxes 2012 forms Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Taxes 2012 forms For more information on installment sales, see chapter 10. Taxes 2012 forms Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. Taxes 2012 forms By gift. Taxes 2012 forms At death. Taxes 2012 forms In like-kind exchanges. Taxes 2012 forms In involuntary conversions. Taxes 2012 forms Publication 544 also explains how to handle a single transaction involving multiple properties. Taxes 2012 forms Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. Taxes 2012 forms Deductions for soil and water conservation expenditures (section 1252 property). Taxes 2012 forms Exclusions from income for certain cost sharing payments (section 1255 property). Taxes 2012 forms Section 1252 property. Taxes 2012 forms   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. Taxes 2012 forms Exceptions. Taxes 2012 forms   Do not treat gain on the following transactions as gain on section 1252 property. Taxes 2012 forms Disposition of farmland by gift. Taxes 2012 forms Transfer of farm property at death (except for income in respect of a decedent). Taxes 2012 forms For more information, see Regulations section 1. Taxes 2012 forms 1252-2. Taxes 2012 forms Amount to report as ordinary income. Taxes 2012 forms   You report as ordinary income the lesser of the following amounts. Taxes 2012 forms Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). Taxes 2012 forms The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. Taxes 2012 forms Applicable percentage. Taxes 2012 forms   The applicable percentage is based on the length of time you held the land. Taxes 2012 forms If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. Taxes 2012 forms If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. Taxes 2012 forms If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. Taxes 2012 forms Example. Taxes 2012 forms You acquired farmland on January 19, 2005. Taxes 2012 forms On October 3, 2013, you sold the land at a $30,000 gain. Taxes 2012 forms Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. Taxes 2012 forms The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. Taxes 2012 forms You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. Taxes 2012 forms Section 1255 property. Taxes 2012 forms   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. Taxes 2012 forms If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. Taxes 2012 forms Amount to report as ordinary income. Taxes 2012 forms   You report as ordinary income the lesser of the following amounts. Taxes 2012 forms The applicable percentage of the total excluded cost-sharing payments. Taxes 2012 forms The gain on the disposition of the property. Taxes 2012 forms You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. Taxes 2012 forms However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. Taxes 2012 forms Applicable percentage. Taxes 2012 forms   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. Taxes 2012 forms If the property is held less than 10 years after you receive the payments, the percentage is 100%. Taxes 2012 forms After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. Taxes 2012 forms Form 4797, Part III. Taxes 2012 forms   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. Taxes 2012 forms Prev  Up  Next   Home   More Online Publications