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10 40 ez online 10. 10 40 ez online   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. 10 40 ez online Individual retirement arrangements (IRAs). 10 40 ez online Civil service retirement benefits. 10 40 ez online Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. 10 40 ez online How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. 10 40 ez online Exclusion not limited to cost. 10 40 ez online Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. 10 40 ez online Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). 10 40 ez online However, these distributions are taken into account when determining the modified adjusted gross income threshold. 10 40 ez online Distributions from a nonqualified retirement plan are included in net investment income. 10 40 ez online See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. 10 40 ez online Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. 10 40 ez online For more information, see Designated Roth accounts discussed later. 10 40 ez online Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. 10 40 ez online What is not covered in this chapter. 10 40 ez online   The following topics are not discussed in this chapter. 10 40 ez online The General Rule. 10 40 ez online   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). 10 40 ez online For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. 10 40 ez online For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. 10 40 ez online Individual retirement arrangements (IRAs). 10 40 ez online   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. 10 40 ez online Civil service retirement benefits. 10 40 ez online    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. 10 40 ez online S. 10 40 ez online Civil Service Retirement Benefits. 10 40 ez online Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. 10 40 ez online Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. 10 40 ez online S. 10 40 ez online Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 10 40 ez online 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. 10 40 ez online   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. 10 40 ez online Elective deferrals that are designated as Roth contributions are included in your income. 10 40 ez online However, qualified distributions are not included in your income. 10 40 ez online See Publication 575 for more information. 10 40 ez online In-plan rollovers to designated Roth accounts. 10 40 ez online   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. 10 40 ez online The rollover of any untaxed amounts must be included in income. 10 40 ez online See Publication 575 for more information. 10 40 ez online More than one program. 10 40 ez online   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. 10 40 ez online Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. 10 40 ez online Section 457 deferred compensation plans. 10 40 ez online    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. 10 40 ez online If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. 10 40 ez online You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. 10 40 ez online You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. 10 40 ez online   Your 457(b) plan may have a designated Roth account option. 10 40 ez online If so, you may be able to roll over amounts to the designated Roth account or make contributions. 10 40 ez online Elective deferrals to a designated Roth account are included in your income. 10 40 ez online Qualified distributions from a designated Roth account are not subject to tax. 10 40 ez online   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. 10 40 ez online For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. 10 40 ez online   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. 10 40 ez online Disability pensions. 10 40 ez online   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. 10 40 ez online You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. 10 40 ez online Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. 10 40 ez online    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. 10 40 ez online For information on the credit for the elderly or the disabled, see chapter 33. 10 40 ez online   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. 10 40 ez online Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. 10 40 ez online    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. 10 40 ez online For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. 10 40 ez online   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. 10 40 ez online Retired public safety officers. 10 40 ez online   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. 10 40 ez online See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. 10 40 ez online Railroad retirement benefits. 10 40 ez online   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. 10 40 ez online For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. 10 40 ez online For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. 10 40 ez online Withholding and estimated tax. 10 40 ez online   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. 10 40 ez online You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. 10 40 ez online If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. 10 40 ez online   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. 10 40 ez online Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. 10 40 ez online See Direct rollover option under Rollovers, later. 10 40 ez online   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. 10 40 ez online Qualified plans for self-employed individuals. 10 40 ez online   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. 10 40 ez online R. 10 40 ez online 10 plans. 10 40 ez online Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. 10 40 ez online They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. 10 40 ez online    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. 10 40 ez online If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. 10 40 ez online For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. 10 40 ez online Purchased annuities. 10 40 ez online   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. 10 40 ez online For more information about the General Rule, get Publication 939. 10 40 ez online Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. 10 40 ez online Loans. 10 40 ez online   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. 10 40 ez online This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. 10 40 ez online This means that you must include in income all or part of the amount borrowed. 10 40 ez online Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. 10 40 ez online For details, see Loans Treated as Distributions in Publication 575. 10 40 ez online For information on the deductibility of interest, see chapter 23. 10 40 ez online Tax-free exchange. 10 40 ez online   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. 10 40 ez online However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. 10 40 ez online See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. 10 40 ez online How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. 10 40 ez online If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. 10 40 ez online If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. 10 40 ez online If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. 10 40 ez online More than one annuity. 10 40 ez online   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. 10 40 ez online If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. 10 40 ez online Joint return. 10 40 ez online   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. 10 40 ez online Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. 10 40 ez online Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. 10 40 ez online This includes the amounts your employer contributed that were taxable to you when paid. 10 40 ez online Cost does not include any amounts you deducted or were excluded from your income. 10 40 ez online From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. 10 40 ez online Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. 10 40 ez online Designated Roth accounts. 10 40 ez online   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. 10 40 ez online Your cost will also include any in-plan Roth rollovers you included in income. 10 40 ez online Foreign employment contributions. 10 40 ez online   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. 10 40 ez online See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. 10 40 ez online Taxation of Periodic Payments Fully taxable payments. 10 40 ez online   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. 10 40 ez online You must report them on your income tax return. 10 40 ez online Partly taxable payments. 10 40 ez online   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. 10 40 ez online The rest of the amount you receive is generally taxable. 10 40 ez online You figure the tax-free part of the payment using either the Simplified Method or the General Rule. 10 40 ez online Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. 10 40 ez online   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. 10 40 ez online Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. 10 40 ez online   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. 10 40 ez online   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. 10 40 ez online Exclusion limit. 10 40 ez online   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. 10 40 ez online Once your annuity starting date is determined, it does not change. 10 40 ez online If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. 10 40 ez online That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. 10 40 ez online Exclusion limited to cost. 10 40 ez online   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. 10 40 ez online Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. 10 40 ez online This deduction is not subject to the 2%-of-adjusted-gross-income limit. 10 40 ez online Exclusion not limited to cost. 10 40 ez online   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. 10 40 ez online If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. 10 40 ez online The total exclusion may be more than your cost. 10 40 ez online Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. 10 40 ez online For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. 10 40 ez online For any other annuity, this number is the number of monthly annuity payments under the contract. 10 40 ez online Who must use the Simplified Method. 10 40 ez online   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. 10 40 ez online Guaranteed payments. 10 40 ez online   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. 10 40 ez online If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. 10 40 ez online How to use the Simplified Method. 10 40 ez online    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. 10 40 ez online Single-life annuity. 10 40 ez online    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. 10 40 ez online Enter on line 3 the number shown for your age at the annuity starting date. 10 40 ez online Multiple-lives annuity. 10 40 ez online   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. 10 40 ez online Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. 10 40 ez online   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. 10 40 ez online Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. 10 40 ez online    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. 10 40 ez online Example. 10 40 ez online Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. 10 40 ez online Bill's annuity starting date is January 1, 2013. 10 40 ez online The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. 10 40 ez online Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. 10 40 ez online Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. 10 40 ez online Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. 10 40 ez online Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. 10 40 ez online His completed worksheet is shown in Worksheet 10-A. 10 40 ez online Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. 10 40 ez online Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. 10 40 ez online The full amount of any annuity payments received after 310 payments are paid must be included in gross income. 10 40 ez online If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. 10 40 ez online This deduction is not subject to the 2%-of-adjusted- gross-income limit. 10 40 ez online Worksheet 10-A. 10 40 ez online Simplified Method Worksheet for Bill Smith 1. 10 40 ez online Enter the total pension or annuity payments received this year. 10 40 ez online Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. 10 40 ez online 14,400 2. 10 40 ez online Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. 10 40 ez online See Cost (Investment in the Contract) , earlier 2. 10 40 ez online 31,000       Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). 10 40 ez online Otherwise, go to line 3. 10 40 ez online         3. 10 40 ez online Enter the appropriate number from Table 1 below. 10 40 ez online But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. 10 40 ez online 310     4. 10 40 ez online Divide line 2 by the number on line 3 4. 10 40 ez online 100     5. 10 40 ez online Multiply line 4 by the number of months for which this year's payments were made. 10 40 ez online If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. 10 40 ez online Otherwise, go to line 6 5. 10 40 ez online 1,200     6. 10 40 ez online Enter any amounts previously recovered tax free in years after 1986. 10 40 ez online This is the amount shown on line 10 of your worksheet for last year 6. 10 40 ez online -0-     7. 10 40 ez online Subtract line 6 from line 2 7. 10 40 ez online 31,000     8. 10 40 ez online Enter the smaller of line 5 or line 7 8. 10 40 ez online 1,200 9. 10 40 ez online Taxable amount for year. 10 40 ez online Subtract line 8 from line 1. 10 40 ez online Enter the result, but not less than zero. 10 40 ez online Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. 10 40 ez online 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. 10 40 ez online If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. 10 40 ez online     10. 10 40 ez online Was your annuity starting date before 1987? □ Yes. 10 40 ez online STOP. 10 40 ez online Do not complete the rest of this worksheet. 10 40 ez online  ☑ No. 10 40 ez online Add lines 6 and 8. 10 40 ez online This is the amount you have recovered tax free through 2013. 10 40 ez online You will need this number if you need to fill out this worksheet next year 10. 10 40 ez online 1,200 11. 10 40 ez online Balance of cost to be recovered. 10 40 ez online Subtract line 10 from line 2. 10 40 ez online If zero, you will not have to complete this worksheet next year. 10 40 ez online The payments you receive next year will generally be fully taxable 11. 10 40 ez online 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. 10 40 ez online . 10 40 ez online . 10 40 ez online before November 19, 1996, enter on line 3. 10 40 ez online . 10 40 ez online . 10 40 ez online after November 18, 1996, enter on line 3. 10 40 ez online . 10 40 ez online . 10 40 ez online 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. 10 40 ez online . 10 40 ez online . 10 40 ez online   THEN enter on line 3. 10 40 ez online . 10 40 ez online . 10 40 ez online 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. 10 40 ez online Who must use the General Rule. 10 40 ez online   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. 10 40 ez online Annuity starting before November 19, 1996. 10 40 ez online   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. 10 40 ez online You also had to use it for any fixed-period annuity. 10 40 ez online If you did not have to use the General Rule, you could have chosen to use it. 10 40 ez online If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. 10 40 ez online   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. 10 40 ez online Who cannot use the General Rule. 10 40 ez online   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. 10 40 ez online See Who must use the Simplified Method , earlier. 10 40 ez online More information. 10 40 ez online   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. 10 40 ez online Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. 10 40 ez online They include all payments other than periodic payments and corrective distributions. 10 40 ez online Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. 10 40 ez online Corrective distributions of excess plan contributions. 10 40 ez online   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. 10 40 ez online To correct an excess, your plan may distribute it to you (along with any income earned on the excess). 10 40 ez online For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. 10 40 ez online Figuring the taxable amount of nonperiodic payments. 10 40 ez online   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. 10 40 ez online If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. 10 40 ez online If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. 10 40 ez online Annuity starting date. 10 40 ez online   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. 10 40 ez online Distribution on or after annuity starting date. 10 40 ez online   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. 10 40 ez online Distribution before annuity starting date. 10 40 ez online   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. 10 40 ez online You exclude from your gross income the part that you allocate to the cost. 10 40 ez online You include the remainder in your gross income. 10 40 ez online   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). 10 40 ez online This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. 10 40 ez online    Distributions from nonqualified plans are subject to the net investment income tax. 10 40 ez online See the Instructions for Form 8960. 10 40 ez online   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. 10 40 ez online Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. 10 40 ez online If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. 10 40 ez online A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). 10 40 ez online A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. 10 40 ez online The participant's entire balance from a plan does not include certain forfeited amounts. 10 40 ez online It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. 10 40 ez online For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. 10 40 ez online If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. 10 40 ez online The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. 10 40 ez online The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. 10 40 ez online You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. 10 40 ez online Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. 10 40 ez online The tax figured on Form 4972 is added to the regular tax figured on your other income. 10 40 ez online This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. 10 40 ez online How to treat the distribution. 10 40 ez online   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. 10 40 ez online Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. 10 40 ez online Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). 10 40 ez online Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). 10 40 ez online Roll over all or part of the distribution. 10 40 ez online See Rollovers , later. 10 40 ez online No tax is currently due on the part rolled over. 10 40 ez online Report any part not rolled over as ordinary income. 10 40 ez online Report the entire taxable part of the distribution as ordinary income on your tax return. 10 40 ez online   The first three options are explained in the following discussions. 10 40 ez online Electing optional lump-sum treatment. 10 40 ez online   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. 10 40 ez online If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. 10 40 ez online Taxable and tax-free parts of the distribution. 10 40 ez online    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. 10 40 ez online You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. 10 40 ez online Cost. 10 40 ez online   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. 10 40 ez online You must reduce this cost by amounts previously distributed tax free. 10 40 ez online Net unrealized appreciation (NUA). 10 40 ez online   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. 10 40 ez online (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. 10 40 ez online ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. 10 40 ez online The amount treated as capital gain is taxed at a 20% rate. 10 40 ez online You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. 10 40 ez online Complete Part II of Form 4972 to choose the 20% capital gain election. 10 40 ez online For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. 10 40 ez online 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. 10 40 ez online You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. 10 40 ez online You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. 10 40 ez online The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. 10 40 ez online You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. 10 40 ez online Complete Part III of Form 4972 to choose the 10-year tax option. 10 40 ez online You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. 10 40 ez online Publication 575 illustrates how to complete Form 4972 to figure the separate tax. 10 40 ez online Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. 10 40 ez online For this purpose, the following plans are qualified retirement plans. 10 40 ez online A qualified employee plan. 10 40 ez online A qualified employee annuity. 10 40 ez online A tax-sheltered annuity plan (403(b) plan). 10 40 ez online An eligible state or local government section 457 deferred compensation plan. 10 40 ez online Eligible rollover distributions. 10 40 ez online   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. 10 40 ez online For information about exceptions to eligible rollover distributions, see Publication 575. 10 40 ez online Rollover of nontaxable amounts. 10 40 ez online   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. 10 40 ez online The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. 10 40 ez online   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. 10 40 ez online   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. 10 40 ez online To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. 10 40 ez online For more information, see the Form 8606 instructions. 10 40 ez online Direct rollover option. 10 40 ez online   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. 10 40 ez online If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. 10 40 ez online Payment to you option. 10 40 ez online   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. 10 40 ez online However, the full amount is treated as distributed to you even though you actually receive only 80%. 10 40 ez online You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. 10 40 ez online (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. 10 40 ez online )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. 10 40 ez online Time for making rollover. 10 40 ez online   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. 10 40 ez online (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. 10 40 ez online )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. 10 40 ez online   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. 10 40 ez online Qualified domestic relations order (QDRO). 10 40 ez online   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. 10 40 ez online If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. 10 40 ez online You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. 10 40 ez online See Rollovers in Publication 575 for more information on benefits received under a QDRO. 10 40 ez online Rollover by surviving spouse. 10 40 ez online   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. 10 40 ez online The rollover rules apply to you as if you were the employee. 10 40 ez online You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. 10 40 ez online For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. 10 40 ez online    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. 10 40 ez online However, see Rollovers by nonspouse beneficiary next. 10 40 ez online Rollovers by nonspouse beneficiary. 10 40 ez online   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. 10 40 ez online The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. 10 40 ez online The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. 10 40 ez online For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). 10 40 ez online Retirement bonds. 10 40 ez online   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. 10 40 ez online Designated Roth accounts. 10 40 ez online   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. 10 40 ez online If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. 10 40 ez online For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. 10 40 ez online In-plan rollovers to designated Roth accounts. 10 40 ez online   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. 10 40 ez online The rollover of any untaxed amounts must be included in income. 10 40 ez online See Designated Roth accounts under Rollovers in Publication 575 for more information. 10 40 ez online Rollovers to Roth IRAs. 10 40 ez online   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. 10 40 ez online   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. 10 40 ez online You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. 10 40 ez online In addition, the 10% tax on early distributions does not apply. 10 40 ez online More information. 10 40 ez online   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. 10 40 ez online Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. 10 40 ez online Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. 10 40 ez online These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). 10 40 ez online These taxes are discussed in the following sections. 10 40 ez online If you must pay either of these taxes, report them on Form 5329. 10 40 ez online However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. 10 40 ez online Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. 10 40 ez online Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. 10 40 ez online This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. 10 40 ez online Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. 10 40 ez online This tax applies to the part of the distribution that you must include in gross income. 10 40 ez online For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). 10 40 ez online 5% rate on certain early distributions from deferred annuity contracts. 10 40 ez online   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. 10 40 ez online A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. 10 40 ez online On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. 10 40 ez online Attach an explanation to your return. 10 40 ez online Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. 10 40 ez online   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. 10 40 ez online You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. 10 40 ez online The additional tax is figured on Form 5329. 10 40 ez online For more information, see Form 5329 and its instructions. 10 40 ez online For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. 10 40 ez online Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. 10 40 ez online   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. 10 40 ez online You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. 10 40 ez online The additional tax is figured on Form 5329. 10 40 ez online For more information, see Form 5329 and its instructions. 10 40 ez online For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. 10 40 ez online Exceptions to tax. 10 40 ez online    Certain early distributions are excepted from the early distribution tax. 10 40 ez online If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. 10 40 ez online If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. 10 40 ez online Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. 10 40 ez online On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. 10 40 ez online    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. 10 40 ez online Enter exception number “12” on line 2. 10 40 ez online General exceptions. 10 40 ez online   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. 10 40 ez online Additional exceptions for qualified retirement plans. 10 40 ez online   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. 10 40 ez online 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. 10 40 ez online See Pub. 10 40 ez online 721 for more information on the phased retirement program. 10 40 ez online Qualified public safety employees. 10 40 ez online   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. 10 40 ez online You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. 10 40 ez online Qualified reservist distributions. 10 40 ez online   A qualified reservist distribution is not subject to the additional tax on early distributions. 10 40 ez online A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. 10 40 ez online You must have been ordered or called to active duty after September 11, 2001. 10 40 ez online For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. 10 40 ez online Additional exceptions for nonqualified annuity contracts. 10 40 ez online   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). 10 40 ez online Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). 10 40 ez online The payments each year cannot be less than the required minimum distribution. 10 40 ez online Required distributions not made. 10 40 ez online   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. 10 40 ez online The tax equals 50% of the part of the required minimum distribution that was not distributed. 10 40 ez online   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). 10 40 ez online Waiver. 10 40 ez online   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. 10 40 ez online See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. 10 40 ez online State insurer delinquency proceedings. 10 40 ez online   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. 10 40 ez online If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. 10 40 ez online Under certain conditions, you will not have to pay the 50% excise tax. 10 40 ez online Required beginning date. 10 40 ez online   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. 10 40 ez online However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. 10 40 ez online   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. 10 40 ez online Your required distribution then must be made for 2014 by December 31, 2014. 10 40 ez online 5% owners. 10 40 ez online   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. 10 40 ez online   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. 10 40 ez online Age 70½. 10 40 ez online   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. 10 40 ez online   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. 10 40 ez online If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. 10 40 ez online Required distributions. 10 40 ez online   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). 10 40 ez online Additional information. 10 40 ez online   For more information on this rule, see Tax on Excess Accumulation in Publication 575. 10 40 ez online Form 5329. 10 40 ez online   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. 10 40 ez online Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. 10 40 ez online However, some special rules apply. 10 40 ez online See Publication 575 for more information. 10 40 ez online Survivors of employees. 10 40 ez online   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. 10 40 ez online You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. 10 40 ez online Survivors of retirees. 10 40 ez online   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. 10 40 ez online If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. 10 40 ez online    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. 10 40 ez online The resulting tax-free amount will then remain fixed. 10 40 ez online Any increases in the survivor annuity are fully taxable. 10 40 ez online    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. 10 40 ez online This amount remains fixed even if the annuity payments are increased or decreased. 10 40 ez online See Simplified Method , earlier. 10 40 ez online   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. 10 40 ez online Estate tax deduction. 10 40 ez online   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. 10 40 ez online You can deduct the part of the total estate tax that was based on the annuity. 10 40 ez online The deceased annuitant must have died after the annuity starting date. 10 40 ez online (For details, see section 1. 10 40 ez online 691(d)-1 of the regulations. 10 40 ez online ) Deduct it in equal amounts over your remaining life expectancy. 10 40 ez online   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. 10 40 ez online   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. 10 40 ez online This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. 10 40 ez online See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. 10 40 ez online Prev  Up  Next   Home   More Online Publications
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Resolving Problems with Air Travel

No matter how well you plan, you might encounter common air travel hassles.

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10 40 ez online 3. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online Its treatment as ordinary or capital is determined under rules for section 1231 transactions. 10 40 ez online 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. 10 40 ez online Any remaining gain is a section 1231 gain. 10 40 ez online 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. 10 40 ez online Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). 10 40 ez online Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. 10 40 ez online 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). 10 40 ez online Do not take that gain into account as section 1231 gain. 10 40 ez online Section 1231 transactions. 10 40 ez online   The following transactions result in gain or loss subject to section 1231 treatment. 10 40 ez online Sales or exchanges of real property or depreciable personal property. 10 40 ez online This property must be used in a trade or business and held longer than 1 year. 10 40 ez online Generally, property held for the production of rents or royalties is considered to be used in a trade or business. 10 40 ez online Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). 10 40 ez online Sales or exchanges of leaseholds. 10 40 ez online The leasehold must be used in a trade or business and held longer than 1 year. 10 40 ez online Sales or exchanges of cattle and horses. 10 40 ez online The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. 10 40 ez online Sales or exchanges of other livestock. 10 40 ez online This livestock does not include poultry. 10 40 ez online It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. 10 40 ez online Sales or exchanges of unharvested crops. 10 40 ez online 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. 10 40 ez online 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). 10 40 ez online Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. 10 40 ez online Cutting of timber or disposal of timber, coal, or iron ore. 10 40 ez online The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. 10 40 ez online Condemnations. 10 40 ez online The condemned property must have been held longer than 1 year. 10 40 ez online 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. 10 40 ez online It cannot be property held for personal use. 10 40 ez online Casualties and thefts. 10 40 ez online 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). 10 40 ez online You must have held the property longer than 1 year. 10 40 ez online 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. 10 40 ez online For more information on casualties and thefts, see Publication 547. 10 40 ez online Property for sale to customers. 10 40 ez online   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. 10 40 ez online 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. 10 40 ez online Example. 10 40 ez online You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. 10 40 ez online Customers make deposits on the reels, which you refund if the reels are returned within a year. 10 40 ez online If they are not returned, you keep each deposit as the agreed-upon sales price. 10 40 ez online Most reels are returned within the 1-year period. 10 40 ez online You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. 10 40 ez online Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. 10 40 ez online Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. 10 40 ez online Copyrights. 10 40 ez online    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). 10 40 ez online The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. 10 40 ez online Treatment as ordinary or capital. 10 40 ez online   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. 10 40 ez online If you have a net section 1231 loss, it is ordinary loss. 10 40 ez online 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. 10 40 ez online The rest, if any, is long-term capital gain. 10 40 ez online Nonrecaptured section 1231 losses. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. 10 40 ez online Example. 10 40 ez online In 2013, Ben has a $2,000 net section 1231 gain. 10 40 ez online 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. 10 40 ez online From 2008 through 2012 he had the following section 1231 gains and losses. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. 10 40 ez online On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. 10 40 ez online Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. 10 40 ez online Whether the adjusted basis was figured using depreciation or amortization another person claimed. 10 40 ez online Corporate distributions. 10 40 ez online   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. 10 40 ez online General asset accounts. 10 40 ez online   Different rules apply to dispositions of property you depreciated using a general asset account. 10 40 ez online For information on these rules, see Publication 946. 10 40 ez online 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. 10 40 ez online See Gain Treated as Ordinary Income, later. 10 40 ez online Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. 10 40 ez online See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. 10 40 ez online Section 1245 property defined. 10 40 ez online   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. 10 40 ez online Personal property (either tangible or intangible). 10 40 ez online Other tangible property (except buildings and their structural components) used as any of the following. 10 40 ez online See Buildings and structural components below. 10 40 ez online An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. 10 40 ez online A research facility in any of the activities in (a). 10 40 ez online A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). 10 40 ez online That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. 10 40 ez online Amortization of certified pollution control facilities. 10 40 ez online The section 179 expense deduction. 10 40 ez online Deduction for clean-fuel vehicles and certain refueling property. 10 40 ez online Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. 10 40 ez online Deduction for certain qualified refinery property. 10 40 ez online Deduction for qualified energy efficient commercial building property. 10 40 ez online Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. 10 40 ez online (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). 10 40 ez online ) 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). 10 40 ez online Expenditures to remove architectural and transportation barriers to the handicapped and elderly. 10 40 ez online Deduction for qualified tertiary injectant expenses. 10 40 ez online Certain reforestation expenditures. 10 40 ez online Deduction for election to expense qualified advanced mine safety equipment property. 10 40 ez online Single purpose agricultural (livestock) or horticultural structures. 10 40 ez online Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. 10 40 ez online Any railroad grading or tunnel bore. 10 40 ez online Buildings and structural components. 10 40 ez online   Section 1245 property does not include buildings and structural components. 10 40 ez online The term building includes a house, barn, warehouse, or garage. 10 40 ez online The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. 10 40 ez online   Do not treat a structure that is essentially machinery or equipment as a building or structural component. 10 40 ez online 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. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online Facility for bulk storage of fungible commodities. 10 40 ez online   This term includes oil or gas storage tanks and grain storage bins. 10 40 ez online Bulk storage means the storage of a commodity in a large mass before it is used. 10 40 ez online For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. 10 40 ez online To be fungible, a commodity must be such that one part may be used in place of another. 10 40 ez online   Stored materials that vary in composition, size, and weight are not fungible. 10 40 ez online 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. 10 40 ez online For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. 10 40 ez online 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. 10 40 ez online The depreciation and amortization allowed or allowable on the property. 10 40 ez online The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). 10 40 ez online A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. 10 40 ez online 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. 10 40 ez online See Gifts and Transfers at Death, later. 10 40 ez online Use Part III of Form 4797 to figure the ordinary income part of the gain. 10 40 ez online Depreciation taken on other property or taken by other taxpayers. 10 40 ez online   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. 10 40 ez online Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. 10 40 ez online 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). 10 40 ez online Depreciation and amortization. 10 40 ez online   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. 10 40 ez online Ordinary depreciation deductions. 10 40 ez online Any special depreciation allowance you claimed. 10 40 ez online Amortization deductions for all the following costs. 10 40 ez online Acquiring a lease. 10 40 ez online Lessee improvements. 10 40 ez online Certified pollution control facilities. 10 40 ez online Certain reforestation expenses. 10 40 ez online Section 197 intangibles. 10 40 ez online Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. 10 40 ez online Franchises, trademarks, and trade names acquired before August 11, 1993. 10 40 ez online The section 179 deduction. 10 40 ez online Deductions for all the following costs. 10 40 ez online Removing barriers to the disabled and the elderly. 10 40 ez online Tertiary injectant expenses. 10 40 ez online Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). 10 40 ez online Environmental cleanup costs. 10 40 ez online Certain reforestation expenses. 10 40 ez online Qualified disaster expenses. 10 40 ez online Any basis reduction for the investment credit (minus any basis increase for credit recapture). 10 40 ez online Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). 10 40 ez online Example. 10 40 ez online You file your returns on a calendar year basis. 10 40 ez online 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. 10 40 ez online You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. 10 40 ez online You did not take the section 179 deduction. 10 40 ez online You sold the truck in May 2013 for $7,000. 10 40 ez online The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). 10 40 ez online Figure the gain treated as ordinary income as follows. 10 40 ez online 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. 10 40 ez online   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. 10 40 ez online   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. 10 40 ez online Depreciation allowed or allowable. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. 10 40 ez online Multiple asset accounts. 10 40 ez online   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. 10 40 ez online Example. 10 40 ez online In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. 10 40 ez online All of the depreciation was recorded in a single depreciation account. 10 40 ez online After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. 10 40 ez online You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. 10 40 ez online 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. 10 40 ez online Normal retirement. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. 10 40 ez online Section 1250 property defined. 10 40 ez online   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. 10 40 ez online It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. 10 40 ez online A fee simple interest in land is not included because it is not depreciable. 10 40 ez online   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. 10 40 ez online 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. 10 40 ez online For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. 10 40 ez online For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. 10 40 ez online If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. 10 40 ez online You will not have additional depreciation if any of the following conditions apply to the property disposed of. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online The property was residential low-income rental property you held for 162/3 years or longer. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online These properties are depreciated using the straight line method. 10 40 ez online In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. 10 40 ez online Depreciation taken by other taxpayers or on other property. 10 40 ez online   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). 10 40 ez online Example. 10 40 ez online Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). 10 40 ez online Depreciation allowed or allowable. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online Retired or demolished property. 10 40 ez online   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. 10 40 ez online Example. 10 40 ez online A wing of your building is totally destroyed by fire. 10 40 ez online 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. 10 40 ez online Figuring straight line depreciation. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online   Salvage value and useful life are not used for the ACRS method of depreciation. 10 40 ez online Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. 10 40 ez online   The straight line method is applied without any basis reduction for the investment credit. 10 40 ez online Property held by lessee. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online The same rule applies to the cost of acquiring a lease. 10 40 ez online   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online The percentages for these types of real property are as follows. 10 40 ez online Nonresidential real property. 10 40 ez online   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. 10 40 ez online For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. 10 40 ez online Residential rental property. 10 40 ez online   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%. 10 40 ez online The percentage for periods before 1976 is zero. 10 40 ez online Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. 10 40 ez online Low-income housing. 10 40 ez online    Low-income housing includes all the following types of residential rental property. 10 40 ez online 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. 10 40 ez online Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. 10 40 ez online 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. 10 40 ez online Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. 10 40 ez online   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. 10 40 ez online 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. 10 40 ez online Foreclosure. 10 40 ez online   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. 10 40 ez online Example. 10 40 ez online On June 1, 2001, you acquired low-income housing property. 10 40 ez online 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. 10 40 ez online The property qualifies for a reduced applicable percentage because it was held more than 100 full months. 10 40 ez online 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. 10 40 ez online Therefore, 70% of the additional depreciation is treated as ordinary income. 10 40 ez online Holding period. 10 40 ez online   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. 10 40 ez online For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. 10 40 ez online If you sold it on January 2, 2013, the holding period is exactly 192 full months. 10 40 ez online The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. 10 40 ez online Holding period for constructed, reconstructed, or erected property. 10 40 ez online   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. 10 40 ez online Property acquired by gift or received in a tax-free transfer. 10 40 ez online   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. 10 40 ez online   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. 10 40 ez online See Low-Income Housing With Two or More Elements, next. 10 40 ez online 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. 10 40 ez online The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. 10 40 ez online The following are the types of separate elements. 10 40 ez online A separate improvement (defined below). 10 40 ez online The basic section 1250 property plus improvements not qualifying as separate improvements. 10 40 ez online The units placed in service at different times before all the section 1250 property is finished. 10 40 ez online 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. 10 40 ez online As a result, the apartment house consists of three separate elements. 10 40 ez online The 36-month test for separate improvements. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online 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). 10 40 ez online $5,000. 10 40 ez online The 1-year test. 10 40 ez online   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. 10 40 ez online The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. 10 40 ez online 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. 10 40 ez online Example. 10 40 ez online The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. 10 40 ez online During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. 10 40 ez online 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. 10 40 ez online However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. 10 40 ez online Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. 10 40 ez online Addition to the capital account. 10 40 ez online   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. 10 40 ez online   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. 10 40 ez online 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. 10 40 ez online The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. 10 40 ez online 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. 10 40 ez online   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. 10 40 ez online 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. 10 40 ez online Unadjusted basis. 10 40 ez online   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. 10 40 ez online However, the cost of components retired before that date is not included in the unadjusted basis. 10 40 ez online Holding period. 10 40 ez online   Use the following guidelines for figuring the applicable percentage for property with two or more elements. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. 10 40 ez online   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. 10 40 ez online Use the first day of a calendar month that is closest to the middle of the tax year. 10 40 ez online If there are two first days of a month that are equally close to the middle of the year, use the earlier date. 10 40 ez online Figuring ordinary income attributable to each separate element. 10 40 ez online   Figure ordinary income attributable to each separate element as follows. 10 40 ez online   Step 1. 10 40 ez online 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. 10 40 ez online   Step 2. 10 40 ez online 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). 10 40 ez online   Step 3. 10 40 ez online Multiply the result in Step 2 by the applicable percentage for the element. 10 40 ez online Example. 10 40 ez online You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. 10 40 ez online The property consisted of four elements (W, X, Y, and Z). 10 40 ez online Step 1. 10 40 ez online The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. 10 40 ez online The sum of the additional depreciation for all the elements is $24,000. 10 40 ez online Step 2. 10 40 ez online The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. 10 40 ez online Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). 10 40 ez online $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. 10 40 ez online Step 3. 10 40 ez online The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. 10 40 ez online From these facts, the sum of the ordinary income for each element is figured as follows. 10 40 ez online   Step 1 Step 2 Step 3 Ordinary Income W . 10 40 ez online 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . 10 40 ez online 25 5,000 92% 4,600 Z . 10 40 ez online 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. 10 40 ez online In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. 10 40 ez online In any other disposition of the property, figure the fair market value that is more than the adjusted basis. 10 40 ez online Figure the additional depreciation for the periods after 1975. 10 40 ez online Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. 10 40 ez online Stop here if this is residential rental property or if (2) is equal to or more than (1). 10 40 ez online This is the gain treated as ordinary income because of additional depreciation. 10 40 ez online Subtract (2) from (1). 10 40 ez online Figure the additional depreciation for periods after 1969 but before 1976. 10 40 ez online Add the lesser of (4) or (5) to the result in (3). 10 40 ez online This is the gain treated as ordinary income because of additional depreciation. 10 40 ez online A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. 10 40 ez online Use Form 4797, Part III, to figure the ordinary income part of the gain. 10 40 ez online Corporations. 10 40 ez online   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. 10 40 ez online 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. 10 40 ez online Report this additional ordinary income on Form 4797, Part III, line 26 (f). 10 40 ez online 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. 10 40 ez online This applies even if no payments are received in that year. 10 40 ez online If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. 10 40 ez online For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. 10 40 ez online 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. 10 40 ez online To do this, allocate the selling price and the payments you receive in the year of sale to each asset. 10 40 ez online Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. 10 40 ez online For a detailed discussion of installment sales, see Publication 537. 10 40 ez online Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. 10 40 ez online 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. 10 40 ez online For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. 10 40 ez online See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. 10 40 ez online Part gift and part sale or exchange. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online However, see Bargain sale to charity, later. 10 40 ez online Example. 10 40 ez online You transferred depreciable personal property to your son for $20,000. 10 40 ez online When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. 10 40 ez online You took depreciation of $30,000. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online Gift to charitable organization. 10 40 ez online   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. 10 40 ez online Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. 10 40 ez online   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. 10 40 ez online For more information, see Giving Property That Has Increased in Value in Publication 526. 10 40 ez online Bargain sale to charity. 10 40 ez online   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. 10 40 ez online First, figure the ordinary income as if you had sold the property at its fair market value. 10 40 ez online 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. 10 40 ez online See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. 10 40 ez online Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. 10 40 ez online Example. 10 40 ez online You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. 10 40 ez online Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. 10 40 ez online If you had sold the property at its fair market value, your ordinary income would have been $5,000. 10 40 ez online Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). 10 40 ez online 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. 10 40 ez online For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online Example 1. 10 40 ez online Janet Smith owned depreciable property that, upon her death, was inherited by her son. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online Example 2. 10 40 ez online The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. 10 40 ez online 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. 10 40 ez online Ordinary income from depreciation must be reported by the trust on the transfer. 10 40 ez online 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. 10 40 ez online For information on like-kind exchanges and involuntary conversions, see chapter 1. 10 40 ez online Depreciable personal property. 10 40 ez online   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. 10 40 ez online The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. 10 40 ez online The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. 10 40 ez online Example 1. 10 40 ez online You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. 10 40 ez online The old machine cost you $5,000 two years ago. 10 40 ez online You took depreciation deductions of $3,950. 10 40 ez online 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. 10 40 ez online Example 2. 10 40 ez online You bought office machinery for $1,500 two years ago and deducted $780 depreciation. 10 40 ez online 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). 10 40 ez online You choose to postpone reporting gain, but replacement machinery cost you only $1,000. 10 40 ez online Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. 10 40 ez online All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. 10 40 ez online Example 3. 10 40 ez online A fire destroyed office machinery you bought for $116,000. 10 40 ez online The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. 10 40 ez online You received a $117,000 insurance payment, realizing a gain of $92,640. 10 40 ez online 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. 10 40 ez online $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. 10 40 ez online 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. 10 40 ez online The amount you must report as ordinary income on the transaction is $12,000, figured as follows. 10 40 ez online 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. 10 40 ez online Depreciable real property. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online   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. 10 40 ez online Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. 10 40 ez online Example. 10 40 ez online The state paid you $116,000 when it condemned your depreciable real property for public use. 10 40 ez online 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). 10 40 ez online You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. 10 40 ez online You choose to postpone reporting the gain. 10 40 ez online 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. 10 40 ez online The ordinary income to be reported is $6,000, which is the greater of the following amounts. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. 10 40 ez online Basis of property acquired. 10 40 ez online   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. 10 40 ez online   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). 10 40 ez online However, if you acquired both depreciable real property and other property, allocate the total basis as follows. 10 40 ez online 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. 10 40 ez online Add the fair market value (or cost) of the other property acquired to the result in (1). 10 40 ez online Divide the result in (1) by the result in (2). 10 40 ez online Multiply the total basis by the result in (3). 10 40 ez online This is the basis of the depreciable real property acquired. 10 40 ez online 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). 10 40 ez online Subtract the result in (4) from the total basis. 10 40 ez online This is the basis of the other property acquired. 10 40 ez online 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). 10 40 ez online Example 1. 10 40 ez online 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. 10 40 ez online The property's adjusted basis was $38,400, with additional depreciation of $14,932. 10 40 ez online On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. 10 40 ez online Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). 10 40 ez online You chose to postpone reporting the gain under the involuntary conversion rules. 10 40 ez online 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. 10 40 ez online The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. 10 40 ez online The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. 10 40 ez online 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. 10 40 ez online Example 2. 10 40 ez online John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. 10 40 ez online He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. 10 40 ez online He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. 10 40 ez online 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. 10 40 ez online The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. 10 40 ez online The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. 10 40 ez online The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. 10 40 ez online The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. 10 40 ez online 4. 10 40 ez online The basis of the depreciable real property is $12,000. 10 40 ez online This is the $30,000 total basis multiplied by the 0. 10 40 ez online 4 figured in (3). 10 40 ez online The basis of the other property (land) is $18,000. 10 40 ez online This is the $30,000 total basis minus the $12,000 figured in (4). 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. 10 40 ez online See chapter 2. 10 40 ez online 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. 10 40 ez online In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. 10 40 ez online These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. 10 40 ez online The comparison should take into account all the following facts and circumstances. 10 40 ez online The original cost and reproduction cost of construction, erection, or production. 10 40 ez online The remaining economic useful life. 10 40 ez online The state of obsolescence. 10 40 ez online The anticipated expenditures required to maintain, renovate, or modernize the properties. 10 40 ez online Like-kind exchanges and involuntary conversions. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online   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. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online Example. 10 40 ez online A fire destroyed your property with a total fair market value of $50,000. 10 40 ez online It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. 10 40 ez online 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. 10 40 ez online The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. 10 40 ez online You choose to postpone reporting your gain from the involuntary conversion. 10 40 ez online You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. 10 40 ez online 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. 10 40 ez online The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. 10 40 ez online The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. 10 40 ez online Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. 10 40 ez online 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. 10 40 ez online 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. 10 40 ez online Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. 10 40 ez online 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. 10 40 ez online Prev  Up  Next   Home   More Online Publications