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Where To Mail 1040xWhere to mail 1040x 3. Where to mail 1040x Dispositions of Business Property Table of Contents Introduction Useful Items - You may want to see: What Is a Disposition of Property?Like-kind exchanges. Where to mail 1040x How Do I Figure a Gain or Loss?Is My Gain or Loss Ordinary or Capital? Is My Capital Gain or Loss Short Term or Long Term? Where Do I Report Gains and Losses? Introduction If you dispose of business property, you may have a gain or loss that you report on Form 1040. Where to mail 1040x However, in some cases you may have a gain that is not taxable or a loss that is not deductible. Where to mail 1040x This chapter discusses whether you have a disposition, how to figure the gain or loss, and where to report the gain or loss. Where to mail 1040x Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property Sch D (Form 1040) Capital Gains and Losses See chapter 12 for information about getting publications and forms. Where to mail 1040x What Is a Disposition of Property? A disposition of property includes the following transactions. Where to mail 1040x You sell property for cash or other property. Where to mail 1040x You exchange property for other property. Where to mail 1040x You receive money as a tenant for the cancellation of a lease. Where to mail 1040x You receive money for granting the exclusive use of a copyright throughout its life in a particular medium. Where to mail 1040x You transfer property to satisfy a debt. Where to mail 1040x You abandon property. Where to mail 1040x Your bank or other financial institution forecloses on your mortgage or repossesses your property. Where to mail 1040x Your property is damaged, destroyed, or stolen, and you receive property or money in payment. Where to mail 1040x Your property is condemned, or disposed of under the threat of condemnation, and you receive property or money in payment. Where to mail 1040x For details about damaged, destroyed, or stolen property, see Publication 547, Casualties, Disasters, and Thefts. Where to mail 1040x For details about other dispositions, see chapter 1 in Publication 544. Where to mail 1040x Nontaxable exchanges. Where to mail 1040x Certain exchanges of property are not taxable. Where to mail 1040x This means any gain from the exchange is not recognized and you cannot deduct any loss. Where to mail 1040x Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Where to mail 1040x Like-kind exchanges. Where to mail 1040x A like-kind exchange is the exchange of property for the same kind of property. Where to mail 1040x It is the most common type of nontaxable exchange. Where to mail 1040x To be a like-kind exchange, the property traded and the property received must be both of the following. Where to mail 1040x Business or investment property. Where to mail 1040x Like property. Where to mail 1040x Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. Where to mail 1040x For more information about like-kind exchanges, see chapter 1 in Publication 544. Where to mail 1040x Installment sales. Where to mail 1040x An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Where to mail 1040x If you finance the buyer's purchase of your property, instead of having the buyer get a loan or mortgage from a third party, you probably have an installment sale. Where to mail 1040x For more information about installment sales, see Publication 537, Installment Sales. Where to mail 1040x Sale of a business. Where to mail 1040x The sale of a business usually is not a sale of one asset. Where to mail 1040x Instead, all the assets of the business are sold. Where to mail 1040x Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Where to mail 1040x Both the buyer and seller involved in the sale of a business must report to the IRS the allocation of the sales price among the business assets. Where to mail 1040x Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Where to mail 1040x The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Where to mail 1040x For more information about the sale of a business, see chapter 2 of Publication 544. Where to mail 1040x How Do I Figure a Gain or Loss? Table 3-1. Where to mail 1040x How To Figure a Gain or Loss IF your. Where to mail 1040x . Where to mail 1040x . Where to mail 1040x THEN you have a. Where to mail 1040x . Where to mail 1040x . Where to mail 1040x Adjusted basis is more than the amount realized Loss. Where to mail 1040x Amount realized is more than the adjusted basis Gain. Where to mail 1040x Basis, adjusted basis, amount realized, fair market value, and amount recognized are defined next. Where to mail 1040x You need to know these definitions to figure your gain or loss. Where to mail 1040x Basis. Where to mail 1040x The cost or purchase price of property is usually its basis for figuring the gain or loss from its sale or other disposition. Where to mail 1040x However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Where to mail 1040x For more information about basis, see Publication 551, Basis of Assets. Where to mail 1040x Adjusted basis. Where to mail 1040x The adjusted basis of property is your original cost or other basis plus certain additions, and minus certain deductions such as depreciation and casualty losses. Where to mail 1040x In determining gain or loss, the costs of transferring property to a new owner, such as selling expenses, are added to the adjusted basis of the property. Where to mail 1040x Amount realized. Where to mail 1040x The amount you realize from a disposition is the total of all money you receive plus the fair market value of all property or services you receive. Where to mail 1040x The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Where to mail 1040x Fair market value. Where to mail 1040x Fair market value is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Where to mail 1040x Amount recognized. Where to mail 1040x Your gain or loss realized from a disposition of property is usually a recognized gain or loss for tax purposes. Where to mail 1040x Recognized gains must be included in gross income. Where to mail 1040x Recognized losses are deductible from gross income. Where to mail 1040x However, a gain or loss realized from certain exchanges of property is not recognized. Where to mail 1040x See Nontaxable exchanges, earlier. Where to mail 1040x Also, you cannot deduct a loss from the disposition of property held for personal use. Where to mail 1040x Is My Gain or Loss Ordinary or Capital? You must classify your gains and losses as either ordinary or capital gains or losses. Where to mail 1040x You must do this to figure your net capital gain or loss. Where to mail 1040x Generally, you will have a capital gain or loss if you dispose of a capital asset. Where to mail 1040x For the most part, everything you own and use for personal purposes or investment is a capital asset. Where to mail 1040x Certain property you use in your business is not a capital asset. Where to mail 1040x A gain or loss from a disposition of this property is an ordinary gain or loss. Where to mail 1040x However, if you held the property longer than 1 year, you may be able to treat the gain or loss as a capital gain or loss. Where to mail 1040x These gains and losses are called section 1231 gains and losses. Where to mail 1040x For more information about ordinary and capital gains and losses, see chapters 2 and 3 in Publication 544. Where to mail 1040x Is My Capital Gain or Loss Short Term or Long Term? If you have a capital gain or loss, you must determine whether it is long term or short term. Where to mail 1040x Whether a gain or loss is long or short term depends on how long you own the property before you dispose of it. Where to mail 1040x The time you own property before disposing of it is called the holding period. Where to mail 1040x Table 3-2. Where to mail 1040x Do I Have a Short-Term or Long-Term Gain or Loss? IF you hold the property. Where to mail 1040x . Where to mail 1040x . Where to mail 1040x THEN you have a. Where to mail 1040x . Where to mail 1040x . Where to mail 1040x 1 year or less Short-term capital gain or loss. Where to mail 1040x More than 1 year Long-term capital gain or loss. Where to mail 1040x For more information about short-term and long-term capital gains and losses, see chapter 4 of Publication 544. Where to mail 1040x Where Do I Report Gains and Losses? Report gains and losses from the following dispositions on the forms indicated. Where to mail 1040x The instructions for the forms explain how to fill them out. Where to mail 1040x Dispositions of business property and depreciable property. Where to mail 1040x Use Form 4797. Where to mail 1040x If you have taxable gain, you may also have to use Schedule D (Form 1040). Where to mail 1040x Like-kind exchanges. Where to mail 1040x Use Form 8824, Like-Kind Exchanges. Where to mail 1040x You may also have to use Form 4797 and Schedule D (Form 1040). Where to mail 1040x Installment sales. Where to mail 1040x Use Form 6252, Installment Sale Income. Where to mail 1040x You may also have to use Form 4797 and Schedule D (Form 1040). Where to mail 1040x Casualties and thefts. Where to mail 1040x Use Form 4684, Casualties and Thefts. Where to mail 1040x You may also have to use Form 4797. Where to mail 1040x Condemned property. Where to mail 1040x Use Form 4797. Where to mail 1040x You may also have to use Schedule D (Form 1040). 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It is a common misconception that trusts, or trust funds as they are commonly called, are only useful for wealthy people. When set up properly, trusts can be appropriate for people with minor children or those who want to avoid having their estate go through probate upon death. These are basic facts about trusts – but, be sure to consult a licensed attorney experienced with estate planning and trust matters before making any final decisions about if one is right for you.
How Trusts Work
Creating a trust (or trust fund) establishes a legal entity that holds property or assets for the person who created it. The person who creates the trust can be called a grantor, donor, or settlor. When the grantor creates the trust he or she appoints a person or entity (like the trust department of a bank) to manage the trust. This person or entity is called a trustee. The grantor also chooses someone who will ultimately benefit from the trust, this person is the beneficiary. In some situations the grantor, trustee, and beneficiary are all the same person. In this case, the grantor should also appoint a successor trustee and beneficiary in case he or she dies or becomes incapacitated. A trust is a helpful estate planning tool because after death a trust doesn’t go through the probate process like a will does.
Reasons To Set Up A Trust
Some common reasons for setting up a trust include:
- Providing for minor children or family members who are inexperienced or unable to handle financial matters
- Providing for management of personal assets should one become unable to handle them oneself
- Avoiding probate and immediately transferring assets to beneficiaries upon death
- Reducing estate taxes and providing liquid assets to help pay for them
- The terms of a will are public while the terms of a trust are not so privacy makes a trust an attractive option
Types of Trusts
Trusts can be living (inter vivos) or after-death (testamentary). A living trust is one that a grantor sets up while still alive and an after-death trust is usually established by a will after one’s death. Living trusts can be irrevocable (can’t be changed) or revocable (can be changed) although revocable trusts don’t receive the same tax shelter benefits as irrevocable ones do. The most popular type is the revocable living trust. If there’s a specific purpose in mind for the trust, dozens of different options exist. Some examples include charitable trusts, bypass trusts, spendthrift trusts, and life insurance trusts. New laws have even established a trust that will care for a pet after one’s death.
Setting Up A Trust
Once you’ve decided to set up a trust it is important to remember that a trust, by design, can be very flexible and a grantor has the right – and should take advantage of this right - within the law, to tailor it to meet the anticipated the needs of the beneficiary. Working with an experienced attorney that specializes in estate and trust issues and knows the specific state regulations can help get the maximum benefit from the trust.
Some things to consider when setting up the trust include:
- The grantor has the right to specify exactly how the money in the trust is invested. The grantor and the trustee might have very different ideas about investment strategies, so make sure this gets clearly defined.
- The grantor has the right to specify exactly how the assets should be divvied up down to details like including an annual cost of living adjustment for the beneficiary or paying for travel expenses for others to visit the beneficiary in the case of illness.
- Always be sure to include a “trustee removal clause” – trusts that don’t have this clause take away the beneficiary’s right to fire the trustee if unsatisfied with the service being provided. Remember that the grantor can always add a provision that requires the beneficiary to select a new trustee from legitimate bank trust departments. Contact your state Department of Financial Institutions to get a list of licensed trust departments.
- If the grantor wants to ensure that upon death any assets that remain outside of the trust are transferred to it, he or she should consider having a “pour-over” will to accomplish this.
Upon establishment of the trust the grantor must complete the process of setting up the trust by transferring his or her assets into the trust. Failure to do this properly makes the trust null and void. This means that upon the grantor’s death the state will decide who gets the assets and cares for minor children.
Protect Yourself From Trust Scams and Fraud
If someone approaches you to set up a trust be very cautious. Before signing any papers to create a living trust, will or other kind of trust make sure to explore all options and shop around for this service just as you would for any other. Also:
- Avoid high-pressure sales tactics and high speed sales pitches.
- Avoid salespeople who give the impression that AARP is backing or selling the product – AARP does not endorse living trust products.
- Do your homework and get information about local probate laws from the Clerk or Register of Wills.
- If someone tries to sell a living trust to you ask if they are an attorney. Some states restrict sales of living trusts by licensed attorneys.
- If you buy a trust in your home or another location that is not the seller’s permanent place of business remember you are entitled to take advantage of the Cooling Off Rule and cancel the transaction within 3 business days.