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Turbo Tax Filing For 2010

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Turbo Tax Filing For 2010

Turbo tax filing for 2010 2. Turbo tax filing for 2010   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. Turbo tax filing for 2010 ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. Turbo tax filing for 2010 In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. Turbo tax filing for 2010 Those cases are called “abusive tax shelters. Turbo tax filing for 2010 ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. Turbo tax filing for 2010 Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . Turbo tax filing for 2010 Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Turbo tax filing for 2010 Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. Turbo tax filing for 2010 They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. Turbo tax filing for 2010 Despite appearances to the contrary, the taxpayer generally risks little. Turbo tax filing for 2010 Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. Turbo tax filing for 2010 Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. Turbo tax filing for 2010 (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. Turbo tax filing for 2010 ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. Turbo tax filing for 2010 This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. Turbo tax filing for 2010 Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. Turbo tax filing for 2010 However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. Turbo tax filing for 2010 Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. Turbo tax filing for 2010 These provisions include the following. Turbo tax filing for 2010 Disclosure of reportable transactions. Turbo tax filing for 2010   You must disclose information for each reportable transaction in which you participate. Turbo tax filing for 2010 See Reportable Transaction Disclosure Statement , later. Turbo tax filing for 2010   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. Turbo tax filing for 2010 To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. Turbo tax filing for 2010   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. Turbo tax filing for 2010 They must provide this number to all persons to whom they acted as a material advisor. Turbo tax filing for 2010 They must provide the number at the time the transaction is entered into. Turbo tax filing for 2010 If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. Turbo tax filing for 2010 For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. Turbo tax filing for 2010 Requirement to maintain list. Turbo tax filing for 2010   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. Turbo tax filing for 2010 The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. Turbo tax filing for 2010 See Regulations section 301. Turbo tax filing for 2010 6112-1 for more information (including what information is required to be included on the list). Turbo tax filing for 2010 Confidentiality privilege. Turbo tax filing for 2010   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. Turbo tax filing for 2010 Appraisal requirement for donated property. Turbo tax filing for 2010   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. Turbo tax filing for 2010 If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. Turbo tax filing for 2010 If you file electronically, see Form 8453, U. Turbo tax filing for 2010 S. Turbo tax filing for 2010 Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. Turbo tax filing for 2010 For more information about appraisals, including exceptions, see Publication 561. Turbo tax filing for 2010 Passive activity loss and credit limits. Turbo tax filing for 2010   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. Turbo tax filing for 2010 For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. Turbo tax filing for 2010 Interest on penalties. Turbo tax filing for 2010   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. Turbo tax filing for 2010 Accounting method restriction. Turbo tax filing for 2010   Tax shelters generally cannot use the cash method of accounting. Turbo tax filing for 2010 Uniform capitalization rules. Turbo tax filing for 2010   The uniform capitalization rules generally apply to producing property or acquiring it for resale. Turbo tax filing for 2010 Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. Turbo tax filing for 2010 For more information, see Publication 538. Turbo tax filing for 2010 Denial of deduction for interest on an underpayment due to a reportable transaction. Turbo tax filing for 2010   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. Turbo tax filing for 2010 This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. Turbo tax filing for 2010 Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. Turbo tax filing for 2010 The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. Turbo tax filing for 2010 Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. Turbo tax filing for 2010 So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. Turbo tax filing for 2010 In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. Turbo tax filing for 2010 The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. Turbo tax filing for 2010 Investor Reporting You may be required to file a reportable transaction disclosure statement. Turbo tax filing for 2010 Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. Turbo tax filing for 2010 Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. Turbo tax filing for 2010 Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). Turbo tax filing for 2010 In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. Turbo tax filing for 2010  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. Turbo tax filing for 2010 If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. Turbo tax filing for 2010 If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. Turbo tax filing for 2010 See Penalty for failure to disclose a reportable transaction , later under Penalties. Turbo tax filing for 2010 The following discussion briefly describes reportable transactions. Turbo tax filing for 2010 For more details, see the Instructions for Form 8886. Turbo tax filing for 2010 Reportable transaction. Turbo tax filing for 2010   A reportable transaction is any of the following. Turbo tax filing for 2010 A listed transaction. Turbo tax filing for 2010 A confidential transaction. Turbo tax filing for 2010 A transaction with contractual protection. Turbo tax filing for 2010 A loss transaction. Turbo tax filing for 2010 A transaction of interest entered into after November 1, 2006. Turbo tax filing for 2010 Note. Turbo tax filing for 2010 Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. Turbo tax filing for 2010 Listed transaction. Turbo tax filing for 2010   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. Turbo tax filing for 2010 These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. Turbo tax filing for 2010 For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/irb/2009-31_IRB/ar07. Turbo tax filing for 2010 html. Turbo tax filing for 2010 Confidential transaction. Turbo tax filing for 2010   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. Turbo tax filing for 2010 A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. Turbo tax filing for 2010 The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. Turbo tax filing for 2010 Transaction with contractual protection. Turbo tax filing for 2010   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. Turbo tax filing for 2010 For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/irb/2007-07_IRB/ar15. Turbo tax filing for 2010 html. Turbo tax filing for 2010 Loss transaction. Turbo tax filing for 2010   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. Turbo tax filing for 2010 A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. Turbo tax filing for 2010   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. Turbo tax filing for 2010 For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/irb/2004-50_IRB/ar11. Turbo tax filing for 2010 html. Turbo tax filing for 2010 Transaction of interest. Turbo tax filing for 2010   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. Turbo tax filing for 2010 The IRS has identified the following transactions of interest. Turbo tax filing for 2010 “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. Turbo tax filing for 2010 R. Turbo tax filing for 2010 B. Turbo tax filing for 2010 545, available at www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/irb/2007-36_IRB/ar20. Turbo tax filing for 2010 html. Turbo tax filing for 2010 Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. Turbo tax filing for 2010 R. Turbo tax filing for 2010 B. Turbo tax filing for 2010 544, available at www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/irb/2007-36_IRB/ar19. Turbo tax filing for 2010 html. Turbo tax filing for 2010 Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. Turbo tax filing for 2010 R. Turbo tax filing for 2010 B. Turbo tax filing for 2010 1194, available at www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/irb/2008-47_IRB/ar11. Turbo tax filing for 2010 html. Turbo tax filing for 2010 Certain transactions involving a U. Turbo tax filing for 2010 S. Turbo tax filing for 2010 taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. Turbo tax filing for 2010 R. Turbo tax filing for 2010 B. Turbo tax filing for 2010 312, available at www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/irb/2009-03_IRB/ar10. Turbo tax filing for 2010 html. Turbo tax filing for 2010   For updates to this list, go to www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. Turbo tax filing for 2010 Penalties Investing in an abusive tax shelter may lead to substantial expenses. Turbo tax filing for 2010 First, the promoter generally charges a substantial fee. Turbo tax filing for 2010 If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. Turbo tax filing for 2010 You may also be subject to the penalty for failure to pay tax. Turbo tax filing for 2010 These penalties are explained in the following paragraphs. Turbo tax filing for 2010 Accuracy-related penalties. Turbo tax filing for 2010   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). Turbo tax filing for 2010 Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. Turbo tax filing for 2010 Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. Turbo tax filing for 2010   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. Turbo tax filing for 2010   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). Turbo tax filing for 2010 Negligence or disregard of rules or regulations. Turbo tax filing for 2010   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. Turbo tax filing for 2010 The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. Turbo tax filing for 2010    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. Turbo tax filing for 2010 It also includes any failure to keep adequate books and records. Turbo tax filing for 2010 A return position that has a reasonable basis is not negligence. Turbo tax filing for 2010   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. Turbo tax filing for 2010   The penalty for disregard of rules and regulations can be avoided if all the following are true. Turbo tax filing for 2010 You keep adequate books and records. Turbo tax filing for 2010 You have a reasonable basis for your position on the tax issue. Turbo tax filing for 2010 You make an adequate disclosure of your position. Turbo tax filing for 2010 Use Form 8275 to make your disclosure and attach it to your return. Turbo tax filing for 2010 To disclose a position contrary to a regulation, use Form 8275-R. Turbo tax filing for 2010 Use Form 8886 to disclose a reportable transaction (discussed earlier). Turbo tax filing for 2010 Substantial understatement of tax. Turbo tax filing for 2010   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. Turbo tax filing for 2010 An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. Turbo tax filing for 2010 The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. Turbo tax filing for 2010   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. Turbo tax filing for 2010 In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. Turbo tax filing for 2010 Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. Turbo tax filing for 2010   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. Turbo tax filing for 2010 An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. Turbo tax filing for 2010 Substantial valuation misstatement. Turbo tax filing for 2010   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. Turbo tax filing for 2010 The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. Turbo tax filing for 2010 You underpaid your tax by more than $5,000 because of the misstatement. Turbo tax filing for 2010 You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. Turbo tax filing for 2010   You may be assessed a penalty of 40% for a gross valuation misstatement. Turbo tax filing for 2010 If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. Turbo tax filing for 2010 The penalty rate is also 40% if the property's correct value or adjusted basis is zero. Turbo tax filing for 2010 Transaction lacking economic substance. Turbo tax filing for 2010   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. Turbo tax filing for 2010 For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. Turbo tax filing for 2010   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. Turbo tax filing for 2010   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. Turbo tax filing for 2010   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. Turbo tax filing for 2010 Relevant facts include any facts affecting the tax treatment of the transaction. Turbo tax filing for 2010    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. Turbo tax filing for 2010 Undisclosed foreign financial asset understatement. Turbo tax filing for 2010   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. Turbo tax filing for 2010 An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. Turbo tax filing for 2010 The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. Turbo tax filing for 2010 Any foreign business you control, reportable on Form 5471, Information Return of U. Turbo tax filing for 2010 S. Turbo tax filing for 2010 Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. Turbo tax filing for 2010 S. Turbo tax filing for 2010 Persons With Respect to Certain Foreign Partnerships. Turbo tax filing for 2010 Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. Turbo tax filing for 2010 S. Turbo tax filing for 2010 Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. Turbo tax filing for 2010 Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. Turbo tax filing for 2010    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. Turbo tax filing for 2010 See the Instructions for Form 8938 for details. Turbo tax filing for 2010    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. Turbo tax filing for 2010 Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Turbo tax filing for 2010 Penalty for incorrect appraisals. Turbo tax filing for 2010   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. Turbo tax filing for 2010 For details on the penalty amount and exceptions, see Publication 561. Turbo tax filing for 2010 Penalty for failure to disclose a reportable transaction. Turbo tax filing for 2010   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). Turbo tax filing for 2010 For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). Turbo tax filing for 2010 This penalty is in addition to any other penalty that may be imposed. Turbo tax filing for 2010   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. Turbo tax filing for 2010 For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. Turbo tax filing for 2010 irs. Turbo tax filing for 2010 gov/irb/2007-09_IRB/ar12. Turbo tax filing for 2010 html. Turbo tax filing for 2010 Accuracy-related penalty for a reportable transaction understatement. Turbo tax filing for 2010   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. Turbo tax filing for 2010 This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. Turbo tax filing for 2010 The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. Turbo tax filing for 2010 You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. Turbo tax filing for 2010 The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. Turbo tax filing for 2010   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. Turbo tax filing for 2010 Civil fraud penalty. Turbo tax filing for 2010   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. Turbo tax filing for 2010 Joint return. Turbo tax filing for 2010   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. Turbo tax filing for 2010 Failure to pay tax. Turbo tax filing for 2010   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. Turbo tax filing for 2010 Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. Turbo tax filing for 2010 Prev  Up  Next   Home   More Online Publications
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Understanding Your CP169 Notice

You received this notice because we couldn't locate the return you said was previously filed.


What you need to do

  • Read the notice carefully to determine the required form needed.
  • If you have a copy of the original return, please re-sign and send it to us.
  • If you don't have a copy of the return, visit www.irs.gov/Forms-&-Pubs to get the required form or call 1-800-829-3676.
  • Fill out the Contact Information section of the notice, detach, and send it to us with your re-signed copy or completed form so we receive it by the date indicated on the notice.

You may want to

  • Review your records and ensure the original return wasn't sent back because of missing signatures or missing information.

Answers to Common Questions

Q. What happens if I don't respond by the due date?

A. If you don't respond by the due date of this notice, we may consider your return delinquent and begin collection enforcement to secure the return.

Q. Who do I call for assistance?

A. For assistance with your business return, call 1-800-829-0115 or, for assistance with Form 990-T, call 1-877-829-5500.

 

Page Last Reviewed or Updated: 11-Feb-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
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The Turbo Tax Filing For 2010

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