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1040 Forms And Instructions

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1040 Forms And Instructions

1040 forms and instructions 5. 1040 forms and instructions   Additional Rules for Listed Property Table of Contents Introduction Useful Items - You may want to see: What Is Listed Property?Passenger Automobiles Other Property Used for Transportation Computers and Related Peripheral Equipment Can Employees Claim a Deduction? What Is the Business-Use Requirement?How To Allocate Use Qualified Business Use Recapture of Excess Depreciation Lessee's Inclusion Amount Do the Passenger Automobile Limits Apply?Maximum Depreciation Deduction Deductions After the Recovery Period Deductions For Passenger Automobiles Acquired in a Trade-in What Records Must Be Kept?Adequate Records How Is Listed Property Information Reported? Introduction This chapter discusses the deduction limits and other special rules that apply to certain listed property. 1040 forms and instructions Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers. 1040 forms and instructions Deductions for listed property (other than certain leased property) are subject to the following special rules and limits. 1040 forms and instructions Deduction for employees. 1040 forms and instructions If your use of the property is not for your employer's convenience or is not required as a condition of your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee. 1040 forms and instructions Business-use requirement. 1040 forms and instructions If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim the section 179 deduction or a special depreciation allowance. 1040 forms and instructions In addition, you must figure any depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) using the straight line method over the ADS recovery period. 1040 forms and instructions You may also have to recapture (include in income) any excess depreciation claimed in previous years. 1040 forms and instructions A similar inclusion amount applies to certain leased property. 1040 forms and instructions Passenger automobile limits and rules. 1040 forms and instructions Annual limits apply to depreciation deductions (including section 179 deductions and any special depreciation allowance) for certain passenger automobiles. 1040 forms and instructions You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period. 1040 forms and instructions This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion amount rule for leased property. 1040 forms and instructions It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return. 1040 forms and instructions Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. 1040 forms and instructions What Is Listed Property? Listed property is any of the following. 1040 forms and instructions Passenger automobiles (as defined later). 1040 forms and instructions Any other property used for transportation, unless it is an excepted vehicle. 1040 forms and instructions Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment). 1040 forms and instructions Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. 1040 forms and instructions A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as discussed in Publication 587. 1040 forms and instructions Improvements to listed property. 1040 forms and instructions   An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. 1040 forms and instructions The recovery period and method of depreciation that apply to the listed property as a whole also apply to the improvement. 1040 forms and instructions For example, if you must depreciate the listed property using the straight line method, you also must depreciate the improvement using the straight line method. 1040 forms and instructions Passenger Automobiles A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). 1040 forms and instructions It includes any part, component, or other item physically attached to the automobile at the time of purchase or usually included in the purchase price of an automobile. 1040 forms and instructions The following vehicles are not considered passenger automobiles for these purposes. 1040 forms and instructions An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business. 1040 forms and instructions A vehicle used directly in the trade or business of transporting persons or property for pay or hire. 1040 forms and instructions A truck or van that is a qualified nonpersonal use vehicle. 1040 forms and instructions Qualified nonpersonal use vehicles. 1040 forms and instructions   Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. 1040 forms and instructions They include the trucks and vans listed as excepted vehicles under Other Property Used for Transportation , next. 1040 forms and instructions They also include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. 1040 forms and instructions For a detailed discussion of passenger automobiles, including leased passenger automobiles, see  Publication 463. 1040 forms and instructions Other Property Used for Transportation Although vehicles used to transport persons or property for pay or hire and vehicles rated at more than the 6,000-pound threshold are not passenger automobiles, they are still “other property used for transportation” and are subject to the special rules for listed property. 1040 forms and instructions Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or goods. 1040 forms and instructions Excepted vehicles. 1040 forms and instructions   Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger Automobiles ). 1040 forms and instructions Clearly marked police and fire vehicles. 1040 forms and instructions Unmarked vehicles used by law enforcement officers if the use is officially authorized. 1040 forms and instructions Ambulances used as such and hearses used as such. 1040 forms and instructions Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo. 1040 forms and instructions Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks. 1040 forms and instructions Combines, cranes and derricks, and forklifts. 1040 forms and instructions Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat. 1040 forms and instructions Qualified moving vans. 1040 forms and instructions Qualified specialized utility repair trucks. 1040 forms and instructions School buses used in transporting students and employees of schools. 1040 forms and instructions Other buses with a capacity of at least 20 passengers that are used as passenger buses. 1040 forms and instructions Tractors and other special purpose farm vehicles. 1040 forms and instructions Clearly marked police and fire vehicle. 1040 forms and instructions   A clearly marked police or fire vehicle is a vehicle that meets all the following requirements. 1040 forms and instructions It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit. 1040 forms and instructions It is required to be used for commuting by a police officer or fire fighter who, when not on a regular shift, is on call at all times. 1040 forms and instructions It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer's arrest powers or the fire fighter's obligation to respond to an emergency. 1040 forms and instructions It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. 1040 forms and instructions A marking on a license plate is not a clear marking for these purposes. 1040 forms and instructions Qualified moving van. 1040 forms and instructions   A qualified moving van is any truck or van used by a professional moving company for moving household or business goods if the following requirements are met. 1040 forms and instructions No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on the way from one move site to another. 1040 forms and instructions Personal use for travel to and from a move site happens no more than five times a month on average. 1040 forms and instructions Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location. 1040 forms and instructions Qualified specialized utility repair truck. 1040 forms and instructions   A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply. 1040 forms and instructions The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts. 1040 forms and instructions Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make it unlikely that the truck would be used, other than minimally, for personal purposes. 1040 forms and instructions The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services. 1040 forms and instructions Computers and Related Peripheral Equipment A computer is a programmable, electronically activated device capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention. 1040 forms and instructions It consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. 1040 forms and instructions Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. 1040 forms and instructions The following are neither computers nor related peripheral equipment. 1040 forms and instructions Any equipment that is an integral part of other property that is not a computer. 1040 forms and instructions Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment. 1040 forms and instructions Equipment of a kind used primarily for the user's amusement or entertainment, such as video games. 1040 forms and instructions Can Employees Claim a Deduction? If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. 1040 forms and instructions The use of your property in performing services as an employee is a business use only if both the following requirements are met. 1040 forms and instructions The use is for your employer's convenience. 1040 forms and instructions The use is required as a condition of your employment. 1040 forms and instructions If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the property as an employee. 1040 forms and instructions Employer's convenience. 1040 forms and instructions   Whether the use of listed property is for your employer's convenience must be determined from all the facts. 1040 forms and instructions The use is for your employer's convenience if it is for a substantial business reason of the employer. 1040 forms and instructions The use of listed property during your regular working hours to carry on your employer's business generally is for the employer's convenience. 1040 forms and instructions Condition of employment. 1040 forms and instructions   Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. 1040 forms and instructions The use of property must be required for you to perform your duties properly. 1040 forms and instructions Your employer does not have to require explicitly that you use the property. 1040 forms and instructions However, a mere statement by the employer that the use of the property is a condition of your employment is not sufficient. 1040 forms and instructions Example 1. 1040 forms and instructions Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. 1040 forms and instructions She owns and uses a motorcycle to deliver packages to downtown offices. 1040 forms and instructions We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. 1040 forms and instructions Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. 1040 forms and instructions Example 2. 1040 forms and instructions Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. 1040 forms and instructions He must travel to these sites on a regular basis. 1040 forms and instructions Uplift does not furnish an automobile or explicitly require him to use his own automobile. 1040 forms and instructions However, it pays him for any costs he incurs in traveling to the various sites. 1040 forms and instructions The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. 1040 forms and instructions Example 3. 1040 forms and instructions Assume the same facts as in Example 2 except that Uplift furnishes a car to Bill, who chooses to use his own car and receive payment for using it. 1040 forms and instructions The use of his own car is neither for the convenience of Uplift nor required as a condition of employment. 1040 forms and instructions Example 4. 1040 forms and instructions Marilyn Lee is a pilot for Y Company, a small charter airline. 1040 forms and instructions Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. 1040 forms and instructions Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. 1040 forms and instructions Marilyn owns her own airplane. 1040 forms and instructions The use of her airplane to obtain the required flight hours is neither for the convenience of the employer nor required as a condition of employment. 1040 forms and instructions Example 5. 1040 forms and instructions David Rule is employed as an engineer with Zip, an engineering contracting firm. 1040 forms and instructions He occasionally takes work home at night rather than work late in the office. 1040 forms and instructions He owns and uses a home computer which is virtually identical to the office model. 1040 forms and instructions His use of the computer is neither for the convenience of his employer nor required as a condition of employment. 1040 forms and instructions What Is the Business-Use Requirement? You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. 1040 forms and instructions To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. 1040 forms and instructions If this requirement is not met, the following rules apply. 1040 forms and instructions Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction. 1040 forms and instructions Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance. 1040 forms and instructions Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. 1040 forms and instructions This rule applies each year of the recovery period. 1040 forms and instructions Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use. 1040 forms and instructions A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use. 1040 forms and instructions Being required to use the straight line method for an item of listed property not used predominantly for qualified business use is not the same as electing the straight line method. 1040 forms and instructions It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. 1040 forms and instructions Exception for leased property. 1040 forms and instructions   The business-use requirement generally does not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. 1040 forms and instructions   You are considered regularly engaged in the business of leasing listed property only if you enter into contracts for the leasing of listed property with some frequency over a continuous period of time. 1040 forms and instructions This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of your business in its entirety. 1040 forms and instructions Occasional or incidental leasing activity is insufficient. 1040 forms and instructions For example, if you lease only one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. 1040 forms and instructions An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. 1040 forms and instructions How To Allocate Use To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose during the year among its various uses. 1040 forms and instructions For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. 1040 forms and instructions You determine the percentage of qualified business use by dividing the number of miles you drove the vehicle for business purposes during the year by the total number of miles you drove the vehicle for all purposes (including business miles) during the year. 1040 forms and instructions For other listed property, allocate the property's use on the basis of the most appropriate unit of time the property is actually used (rather than merely being available for use). 1040 forms and instructions For example, you can determine the percentage of business use of a computer by dividing the number of hours you used the computer for business purposes during the year by the total number of hours you used the computer for all purposes (including business use) during the year. 1040 forms and instructions Entertainment use. 1040 forms and instructions   Treat the use of listed property for entertainment, recreation, or amusement purposes as a business use only to the extent you can deduct expenses (other than interest and property tax expenses) due to its use as an ordinary and necessary business expense. 1040 forms and instructions Commuting use. 1040 forms and instructions   The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. 1040 forms and instructions For example, a business telephone call made on a car telephone while commuting to work does not change the character of the trip from commuting to business. 1040 forms and instructions This is also true for a business meeting held in a car while commuting to work. 1040 forms and instructions Similarly, a business call made on an otherwise personal trip does not change the character of a trip from personal to business. 1040 forms and instructions The fact that an automobile is used to display material that advertises the owner's or user's trade or business does not convert an otherwise personal use into business use. 1040 forms and instructions Use of your automobile by another person. 1040 forms and instructions   If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies. 1040 forms and instructions That use is directly connected with your business. 1040 forms and instructions You properly report the value of the use as income to the other person and withhold tax on the income where required. 1040 forms and instructions You are paid a fair market rent. 1040 forms and instructions Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3). 1040 forms and instructions Employee deductions. 1040 forms and instructions   If you are an employee, do not treat your use of listed property as business use unless it is for your employer's convenience and is required as a condition of your employment. 1040 forms and instructions See Can Employees Claim a Deduction , earlier. 1040 forms and instructions Qualified Business Use Qualified business use of listed property is any use of the property in your trade or business. 1040 forms and instructions However, it does not include the following uses. 1040 forms and instructions The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner or lessee of the property). 1040 forms and instructions The use of property as pay for the services of a 5% owner or related person. 1040 forms and instructions The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in that person's gross income and income tax is withheld on that amount where required. 1040 forms and instructions Property does not stop being used predominantly for qualified business use because of a transfer at death. 1040 forms and instructions Exception for leasing or compensatory use of aircraft. 1040 forms and instructions   Treat the leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, as a qualified business use if at least 25% of the total use of the aircraft during the year is for a qualified business use. 1040 forms and instructions 5% owner. 1040 forms and instructions   For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business. 1040 forms and instructions   For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following. 1040 forms and instructions More than 5% of the outstanding stock of the corporation. 1040 forms and instructions Stock possessing more than 5% of the total combined voting power of all stock in the corporation. 1040 forms and instructions Related persons. 1040 forms and instructions   For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 . 1040 forms and instructions For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. 1040 forms and instructions Examples. 1040 forms and instructions   The following examples illustrate whether the use of business property is qualified business use. 1040 forms and instructions Example 1. 1040 forms and instructions John Maple is the sole proprietor of a plumbing contracting business. 1040 forms and instructions John employs his brother, Richard, in the business. 1040 forms and instructions As part of Richard's pay, he is allowed to use one of the company automobiles for personal use. 1040 forms and instructions The company includes the value of the personal use of the automobile in Richard's gross income and properly withholds tax on it. 1040 forms and instructions The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use. 1040 forms and instructions Example 2. 1040 forms and instructions John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. 1040 forms and instructions He does not include the value of the personal use of the company automobiles as part of their compensation and he does not withhold tax on the value of the use of the automobiles. 1040 forms and instructions This use of company automobiles by employees is not a qualified business use. 1040 forms and instructions Example 3. 1040 forms and instructions James Company Inc. 1040 forms and instructions owns several automobiles that its employees use for business purposes. 1040 forms and instructions The employees also are allowed to take the automobiles home at night. 1040 forms and instructions The fair market value of each employee's use of an automobile for any personal purpose, such as commuting to and from work, is reported as income to the employee and James Company withholds tax on it. 1040 forms and instructions This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company. 1040 forms and instructions Investment Use The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. 1040 forms and instructions However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year. 1040 forms and instructions Example 1. 1040 forms and instructions Sarah Bradley uses a home computer 50% of the time to manage her investments. 1040 forms and instructions She also uses the computer 40% of the time in her part-time consumer research business. 1040 forms and instructions Sarah's home computer is listed property because it is not used at a regular business establishment. 1040 forms and instructions She does not use the computer predominantly for qualified business use. 1040 forms and instructions Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the computer. 1040 forms and instructions She must depreciate it using the straight line method over the ADS recovery period. 1040 forms and instructions Her combined business/investment use for determining her depreciation deduction is 90%. 1040 forms and instructions Example 2. 1040 forms and instructions If Sarah uses her computer 30% of the time to manage her investments and 60% of the time in her consumer research business, it is used predominantly for qualified business use. 1040 forms and instructions She can elect a section 179 deduction and, if she does not deduct all the computer's cost, she can claim a special depreciation allowance and depreciate the computer using the 200% declining balance method over the GDS recovery period. 1040 forms and instructions Her combined business/investment use for determining her depreciation deduction is 90%. 1040 forms and instructions Recapture of Excess Depreciation If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less. 1040 forms and instructions You also increase the adjusted basis of your property by the same amount. 1040 forms and instructions Excess depreciation is: The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years before the first year you do not use the property predominantly for qualified business use, minus The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in the year you placed it in service. 1040 forms and instructions To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period. 1040 forms and instructions Example. 1040 forms and instructions In June 2009, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. 1040 forms and instructions She used it only for qualified business use for 2009 through 2012. 1040 forms and instructions Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. 1040 forms and instructions She began depreciating it using the 200% DB method over a 5-year GDS recovery period. 1040 forms and instructions The pickup truck's gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile limits discussed later under Do the Passenger Automobile Limits Apply. 1040 forms and instructions During 2013, she used the truck 50% for business and 50% for personal purposes. 1040 forms and instructions She includes $4,018 excess depreciation in her gross income for 2013. 1040 forms and instructions The excess depreciation is determined as follows. 1040 forms and instructions Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2009 through 2012. 1040 forms and instructions (Depreciation is from Table A-1. 1040 forms and instructions ) $16,618 Minus: Depreciation allowable (Table A-8):     2009 – 10% of $18,000 $1,800   2010 – 20% of $18,000 3,600   2011 – 20% of $18,000 3,600   2012 – 20% of $18,000 3,600 12,600 Excess depreciation $4,018 If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2015, there will be no excess depreciation. 1040 forms and instructions The total depreciation allowable using Table A-8 through 2015 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed. 1040 forms and instructions Where to figure and report recapture. 1040 forms and instructions   Use Form 4797, Part IV, to figure the recapture amount. 1040 forms and instructions Report the recapture amount as other income on the same form or schedule on which you took the depreciation deduction. 1040 forms and instructions For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction on Schedule C. 1040 forms and instructions If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Form 1040, line 21. 1040 forms and instructions Lessee's Inclusion Amount If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. 1040 forms and instructions Your qualified business-use percentage is the part of the property's total use that is qualified business use (defined earlier). 1040 forms and instructions For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Publication 463. 1040 forms and instructions The inclusion amount is the sum of Amount A and Amount B, described next. 1040 forms and instructions However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than one year. 1040 forms and instructions Amount A. 1040 forms and instructions   Amount A is: The fair market value of the property, multiplied by The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A-19 in Appendix A . 1040 forms and instructions   The fair market value of the property is the value on the first day of the lease term. 1040 forms and instructions If the capitalized cost of an item of listed property is specified in the lease agreement, you must treat that amount as the fair market value. 1040 forms and instructions Amount B. 1040 forms and instructions   Amount B is: The fair market value of the property, multiplied by The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A–20 in Appendix A . 1040 forms and instructions Maximum inclusion amount. 1040 forms and instructions   The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in gross income. 1040 forms and instructions Inclusion amount worksheet. 1040 forms and instructions   The following worksheet is provided to help you figure the inclusion amount for leased listed property. 1040 forms and instructions Inclusion Amount Worksheet for Leased Listed Property 1. 1040 forms and instructions Fair market value   2. 1040 forms and instructions Business/investment use for first year business use is 50% or less   3. 1040 forms and instructions Multiply line 1 by line 2. 1040 forms and instructions   4. 1040 forms and instructions Rate (%) from Table A-19   5. 1040 forms and instructions Multiply line 3 by line 4. 1040 forms and instructions This is Amount A. 1040 forms and instructions   6. 1040 forms and instructions Fair market value   7. 1040 forms and instructions Average business/investment use for years property leased before the first year business use is 50% or less . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions . 1040 forms and instructions   8. 1040 forms and instructions Multiply line 6 by line 7   9. 1040 forms and instructions Rate (%) from Table A-20   10. 1040 forms and instructions Multiply line 8 by line 9. 1040 forms and instructions This is Amount B. 1040 forms and instructions   11. 1040 forms and instructions Add line 5 and line 10. 1040 forms and instructions This is your inclusion amount. 1040 forms and instructions Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. 1040 forms and instructions )         Example. 1040 forms and instructions On February 1, 2011, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. 1040 forms and instructions The lease is for a period of 5 years. 1040 forms and instructions Larry does not use the computer at a regular business establishment, so it is listed property. 1040 forms and instructions His business use of the property (all of which is qualified business use) is 80% in 2011, 60% in 2012, and 40% in 2013. 1040 forms and instructions He must add an inclusion amount to gross income for 2013, the first tax year his qualified business-use percentage is 50% or less. 1040 forms and instructions The computer has a 5-year recovery period under both GDS and ADS. 1040 forms and instructions 2013 is the third tax year of the lease, so the applicable percentage from Table A-19 is −19. 1040 forms and instructions 8%. 1040 forms and instructions The applicable percentage from Table A-20 is 22. 1040 forms and instructions 0%. 1040 forms and instructions Larry's deductible rent for the computer for 2013 is $800. 1040 forms and instructions Larry uses the Inclusion amount worksheet. 1040 forms and instructions to figure the amount he must include in income for 2013. 1040 forms and instructions His inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B). 1040 forms and instructions Inclusion Amount Worksheet for Leased Listed Property 1. 1040 forms and instructions Fair market value $3,000   2. 1040 forms and instructions Business/investment use for first year business use is 50% or less 40 % 3. 1040 forms and instructions Multiply line 1 by line 2. 1040 forms and instructions 1,200   4. 1040 forms and instructions Rate (%) from Table A-19 −19. 1040 forms and instructions 8 % 5. 1040 forms and instructions Multiply line 3 by line 4. 1040 forms and instructions This is Amount A. 1040 forms and instructions −238   6. 1040 forms and instructions Fair market value 3,000   7. 1040 forms and instructions Average business/investment use for years property leased before the first year business use is 50% or less 70 % 8. 1040 forms and instructions Multiply line 6 by line 7 2,100   9. 1040 forms and instructions Rate (%) from Table A-20 22. 1040 forms and instructions 0 % 10. 1040 forms and instructions Multiply line 8 by line 9. 1040 forms and instructions This is Amount B. 1040 forms and instructions 462   11. 1040 forms and instructions Add line 5 and line 10. 1040 forms and instructions This is your inclusion amount. 1040 forms and instructions Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. 1040 forms and instructions ) $224           Lease beginning in the last 9 months of your tax year. 1040 forms and instructions    The inclusion amount is subject to a special rule if all the following apply. 1040 forms and instructions The lease term begins within 9 months before the close of your tax year. 1040 forms and instructions You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year. 1040 forms and instructions The lease term continues into your next tax year. 1040 forms and instructions Under this special rule, add the inclusion amount to income in the next tax year. 1040 forms and instructions Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. 1040 forms and instructions Skip lines 6 through 9 of the worksheet and enter zero on line 10. 1040 forms and instructions Example 1. 1040 forms and instructions On August 1, 2012, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. 1040 forms and instructions The property is 5-year property with a fair market value of $10,000. 1040 forms and instructions Her property has a recovery period of 5 years under ADS. 1040 forms and instructions The lease is for 5 years. 1040 forms and instructions Her business use of the property was 50% in 2012 and 90% in 2013. 1040 forms and instructions She paid rent of $3,600 for 2012, of which $3,240 is deductible. 1040 forms and instructions She must include $147 in income in 2013. 1040 forms and instructions The $147 is the sum of Amount A and Amount B. 1040 forms and instructions Amount A is $147 ($10,000 × 70% × 2. 1040 forms and instructions 1%), the product of the fair market value, the average business use for 2012 and 2013, and the applicable percentage for year one from Table A-19 . 1040 forms and instructions Amount B is zero. 1040 forms and instructions Lease for less than one year. 1040 forms and instructions   A special rule for the inclusion amount applies if the lease term is less than one year and you do not use the property predominantly (more than 50%) for qualified business use. 1040 forms and instructions The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. 1040 forms and instructions The numerator of the fraction is the number of days in the lease term and the denominator is 365 (or 366 for leap years). 1040 forms and instructions   The lease term for listed property other than residential rental or nonresidential real property includes options to renew. 1040 forms and instructions If you have two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property, treat them as one lease. 1040 forms and instructions Example 2. 1040 forms and instructions On October 1, 2012, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. 1040 forms and instructions This property had a fair market value of $15,000 and a recovery period of 5 years under ADS. 1040 forms and instructions The lease term was 6 months (ending on March 31, 2013), during which he used the property 45% in business. 1040 forms and instructions He must include $71 in income in 2013. 1040 forms and instructions The $71 is the sum of Amount A and Amount B. 1040 forms and instructions Amount A is $71 ($15,000 × 45% × 2. 1040 forms and instructions 1% × 183/365), the product of the fair market value, the average business use for both years, and the applicable percentage for year one from Table A-19 , prorated for the length of the lease. 1040 forms and instructions Amount B is zero. 1040 forms and instructions Where to report inclusion amount. 1040 forms and instructions   Report the inclusion amount figured as described in the preceding discussions as other income on the same form or schedule on which you took the deduction for your rental costs. 1040 forms and instructions For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. 1040 forms and instructions If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21. 1040 forms and instructions Do the Passenger Automobile Limits Apply? The depreciation deduction, including the section 179 deduction and special depreciation allowance, you can claim for a passenger automobile (defined earlier) each year is limited. 1040 forms and instructions This section describes the maximum depreciation deduction amounts for 2013 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit. 1040 forms and instructions Exception for leased cars. 1040 forms and instructions   The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles. 1040 forms and instructions For information on when you are considered regularly engaged in the business of leasing listed property, including passenger automobiles, see Exception for leased property , earlier, under What Is the Business-Use Requirement . 1040 forms and instructions Maximum Depreciation Deduction The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. 1040 forms and instructions They are based on the date you placed the automobile in service. 1040 forms and instructions Passenger Automobiles The maximum deduction amounts for most passenger automobiles are shown in the following table. 1040 forms and instructions Maximum Depreciation Deduction for Passenger Automobiles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,1601 $5,100 $3,050 $1,875 2012 11,1601 5,100 3,050 1,875 2011 11,0602 4,900 2,950 1,775 2010 11,0602  4,900 2,950 1,775 2009 10,9603 4,800 2,850 1,775 2008 10,9603  4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6104 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7105 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6606 4,900 2,950 1,775 1If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. 1040 forms and instructions 2If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,060. 1040 forms and instructions 3If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $2,960. 1040 forms and instructions 4If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $2,960. 1040 forms and instructions 5If you acquired the vehicle before 5/06/03, the maximum deduction is $7,660. 1040 forms and instructions If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. 1040 forms and instructions 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. 1040 forms and instructions If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount by multiplying the maximum amount by the percentage of business/investment use determined on an annual basis during the tax year. 1040 forms and instructions If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. 1040 forms and instructions The numerator of the fraction is the number of months and partial months in the short tax year and the denominator is 12. 1040 forms and instructions Example. 1040 forms and instructions On April 15, 2013, Virginia Hart bought and placed in service a new car for $14,500. 1040 forms and instructions She used the car only in her business. 1040 forms and instructions She files her tax return based on the calendar year. 1040 forms and instructions She does not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. 1040 forms and instructions Under MACRS, a car is 5-year property. 1040 forms and instructions Since she placed her car in service on April 15 and used it only for business, she uses the percentages in Table A-1 to figure her MACRS depreciation on the car. 1040 forms and instructions Virginia multiplies the $14,500 unadjusted basis of her car by 0. 1040 forms and instructions 20 to get her MACRS depreciation of $2,900 for 2013. 1040 forms and instructions This $2,900 is below the maximum depreciation deduction of $3,160 for passenger automobiles placed in service in 2013. 1040 forms and instructions She can deduct the full $2,900. 1040 forms and instructions Electric Vehicles The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. 1040 forms and instructions The maximum deduction amounts for electric vehicles placed in service after August 5, 1997, and before January 1, 2007, are shown in the following table. 1040 forms and instructions Owners of electric vehicles placed in service after December 31, 2006, should use the table of maximum deduction amounts later for electric vehicles classified as passenger automobiles or use the table of maximum deduction amounts for trucks and vans later, for electric vehicles classified as trucks and vans. 1040 forms and instructions Maximum Depreciation Deduction For Electric Vehicles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2006 $8,980 $14,400 $8,650 $5,225 2005 8,880 14,200 8,450 5,125 2004 31,8301 14,300 8,550 5,125 5/06/2003– 12/31/2003 32,0302 14,600 8,750 5,225 1/01/2003– 5/05/2003 22,8803 14,600 8,750 5,225 1If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $8,880. 1040 forms and instructions 2If you acquired the vehicle before 5/06/03, the maximum deduction is $22,880. 1040 forms and instructions If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. 1040 forms and instructions 3 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. 1040 forms and instructions Trucks and Vans The maximum depreciation deductions for trucks and vans placed in service after 2002 are higher than those for other passenger automobiles. 1040 forms and instructions The maximum deduction amounts for trucks and vans are shown in the following table. 1040 forms and instructions Maximum Depreciation Deduction For Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 11,3601 5,300 3,150 1,875 2011 11,2602 5,200 3,150 1,875 2010 11,1603 5,100 3,050 1,875 2009 11,0604 4,900 2,950 1,775 2008 11,1605 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2006 3,260 5,200 3,150 1,875 2005 3,260 5,200 3,150 1,875 2004 10,9106 5,300 3,150 1,875 5/06/2003– 12/31/2003 11,0107 5,400 3,250 1,975 1/01/2003– 5/05/2003 7,9608 5,400 3,250 1,975 1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,360. 1040 forms and instructions 2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,260. 1040 forms and instructions 3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. 1040 forms and instructions 4 If you elect not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,060. 1040 forms and instructions 5If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,160. 1040 forms and instructions 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, or the maximum deduction is $3,260. 1040 forms and instructions 7 If you acquired the vehicle before 5/06/03, the maximum deduction is $7,960. 1040 forms and instructions If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. 1040 forms and instructions 8 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. 1040 forms and instructions Depreciation Worksheet for Passenger Automobiles You can use the following worksheet to figure your depreciation deduction using the percentage tables. 1040 forms and instructions Then use the information from this worksheet to prepare Form 4562. 1040 forms and instructions Depreciation Worksheet for Passenger Automobiles   Part I   1. 1040 forms and instructions MACRS system (GDS or ADS)     2. 1040 forms and instructions Property class     3. 1040 forms and instructions Date placed in service     4. 1040 forms and instructions Recovery period     5. 1040 forms and instructions Method and convention     6. 1040 forms and instructions Depreciation rate (from tables)     7. 1040 forms and instructions Maximum depreciation deduction for this year from the appropriate table       8. 1040 forms and instructions Business/investment-use percentage       9. 1040 forms and instructions Multiply line 7 by line 8. 1040 forms and instructions This is your adjusted maximum depreciation deduction       10. 1040 forms and instructions Section 179 deduction claimed this year (not more than line 9). 1040 forms and instructions Enter -0- if this is not the year you placed the car in service. 1040 forms and instructions         Note. 1040 forms and instructions  1) If line 10 is equal to line 9, stop here. 1040 forms and instructions Your combined section 179 and depreciation deduction (including your special depreciation allowance) is limited to the amount on line 9. 1040 forms and instructions  2) If line 10 is less than line 9, complete Part II. 1040 forms and instructions   Part II   11. 1040 forms and instructions Subtract line 10 from line 9. 1040 forms and instructions This is the limit on the amount you can deduct for depreciation (including any special depreciation allowance )       12. 1040 forms and instructions Cost or other basis (reduced by any alternative motor vehicle credit 1or credit for electric vehicles 2)       13. 1040 forms and instructions Multiply line 12 by line 8. 1040 forms and instructions This is your business/investment cost       14. 1040 forms and instructions Section 179 deduction claimed in the year you placed the car in service       15. 1040 forms and instructions Subtract line 14 from line 13. 1040 forms and instructions This is your tentative basis for depreciation       16. 1040 forms and instructions Multiply line 15 by . 1040 forms and instructions 50 if the 50% special depreciation allowance applies. 1040 forms and instructions This is your special depreciation allowance. 1040 forms and instructions Enter -0- if this is not the year you placed the car in service, the car is not qualified property, or you elected not to claim a special depreciation allowance       Note 1) If line 16 is equal to line 11, stop here. 1040 forms and instructions Your depreciation deduction (including your special depreciation allowance) is limited to the amount on line 11. 1040 forms and instructions  2) If line 16 is less than line 11, complete Part III. 1040 forms and instructions   Part III   17. 1040 forms and instructions Subtract line 16 from 11. 1040 forms and instructions This is the limit on the amount you can deduct for MACRS depreciation       18. 1040 forms and instructions Subtract line 16 from line 15. 1040 forms and instructions This is your basis for depreciation. 1040 forms and instructions       19. 1040 forms and instructions Multiply line 18 by line 6. 1040 forms and instructions This is your tentative MACRS depreciation deduction. 1040 forms and instructions       20. 1040 forms and instructions Enter the lesser of line 17 or line 19. 1040 forms and instructions This is your MACRS depreciation deduction. 1040 forms and instructions     1 When figuring the amount to enter on line 12, do not reduce your cost or other basis by any section 179 deduction you claimed for your car. 1040 forms and instructions 2 Reduce the basis by the lesser of $4,000 or 10% of the cost of the vehicle even if the credit is less than that amount. 1040 forms and instructions             Deductions After the Recovery Period If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your automobile at the end of the recovery period. 1040 forms and instructions If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. 1040 forms and instructions You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. 1040 forms and instructions The maximum amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. 1040 forms and instructions See Maximum Depreciation Deduction , earlier. 1040 forms and instructions Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger automobile limits had not applied. 1040 forms and instructions You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. 1040 forms and instructions There is no unrecovered basis at the end of the recovery period because you are considered to have used this property 100% for business and investment purposes during all of the recovery period. 1040 forms and instructions Example. 1040 forms and instructions In May 2007, you bought and placed in service a car costing $31,500. 1040 forms and instructions The car was 5-year property under GDS (MACRS). 1040 forms and instructions You did not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. 1040 forms and instructions You used the car exclusively for business during the recovery period (2007 through 2012). 1040 forms and instructions You figured your depreciation as shown below. 1040 forms and instructions Year Percentage Amount Limit   Allowed 2007 20. 1040 forms and instructions 0% $6,300 $2,960   $2,960 2008 32. 1040 forms and instructions 0 10,080 4,800   4,800 2009 19. 1040 forms and instructions 2 6,048 2,850   2,850 2010 11. 1040 forms and instructions 52 3,629 1,675   1,675 2011 11. 1040 forms and instructions 52 3,629 1,675   1,675 2012 5. 1040 forms and instructions 76 1,814 1,675   1,675 Total   $15,635 At the end of 2012, you had an unrecovered basis of $15,865 ($31,500 − $15,635). 1040 forms and instructions If in 2013 and later years you continue to use the car 100% for business, you can deduct each year the lesser of $1,675 or your remaining unrecovered basis. 1040 forms and instructions If your business use of the car had been less than 100% during any year, your depreciation deduction would have been less than the maximum amount allowable for that year. 1040 forms and instructions However, in figuring your unrecovered basis in the car, you would still reduce your basis by the maximum amount allowable as if the business use had been 100%. 1040 forms and instructions For example, if you had used your car 60% for business instead of 100%, your allowable depreciation deductions would have been $9,519 ($15,865 × 60%), but you still would have to reduce your basis by $15,865 to determine your unrecovered basis. 1040 forms and instructions Deductions For Passenger Automobiles Acquired in a Trade-in If you acquire a passenger automobile in a trade-in, depreciate the carryover basis separately as if the trade-in did not occur. 1040 forms and instructions Depreciate the part of the new automobile's basis that exceeds its carryover basis (excess basis) as if it were newly placed in service property. 1040 forms and instructions This excess basis is the additional cash paid for the new automobile in the trade-in. 1040 forms and instructions The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit. 1040 forms and instructions Special rules apply in determining the passenger automobile limits. 1040 forms and instructions These rules and examples are discussed in section 1. 1040 forms and instructions 168(i)-6(d)(3) of the regulations. 1040 forms and instructions Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of and both of the basis components for the new automobile as if placed in service at the time of the trade-in. 1040 forms and instructions For more information, including how to make this election, see Election out under Property Acquired in a Like-kind Exchange or Involuntary Conversion in chapter 4 and sections 1. 1040 forms and instructions 168(i)-6(i) and 1. 1040 forms and instructions 168(i)-6(j) of the regulations. 1040 forms and instructions What Records Must Be Kept? You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or with sufficient evidence to support your own statements. 1040 forms and instructions For listed property, you must keep records for as long as any recapture can still occur. 1040 forms and instructions Recapture can occur in any tax year of the recovery period. 1040 forms and instructions Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. 1040 forms and instructions You do not have to record information in an account book, diary, or similar record if the information is already shown on the receipt. 1040 forms and instructions However, your records should back up your receipts in an orderly manner. 1040 forms and instructions Elements of expenditure or use. 1040 forms and instructions   Your records or other documentary evidence must support all the following. 1040 forms and instructions The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses. 1040 forms and instructions The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year. 1040 forms and instructions The date of the expenditure or use. 1040 forms and instructions The business or investment purpose for the expenditure or use. 1040 forms and instructions   Written documents of your expenditure or use are generally better evidence than oral statements alone. 1040 forms and instructions You do not have to keep a daily log. 1040 forms and instructions However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time of the expenditure or use and backed up by other documents is preferable to a statement you prepare later. 1040 forms and instructions Timeliness. 1040 forms and instructions   You must record the elements of an expenditure or use at the time you have full knowledge of the elements. 1040 forms and instructions An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use generally is considered a timely record if, in the regular course of business: The statement is given by an employee to the employer, or The statement is given by an independent contractor to the client or customer. 1040 forms and instructions   For example, a log maintained on a weekly basis, that accounts for use during the week, will be considered a record made at or near the time of use. 1040 forms and instructions Business purpose supported. 1040 forms and instructions   Generally, an adequate record of business purpose must be in the form of a written statement. 1040 forms and instructions However, the amount of detail necessary to establish a business purpose depends on the facts and circumstances of each case. 1040 forms and instructions A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. 1040 forms and instructions For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. 1040 forms and instructions Business use supported. 1040 forms and instructions   An adequate record contains enough information on each element of every business or investment use. 1040 forms and instructions The amount of detail required to support the use depends on the facts and circumstances. 1040 forms and instructions For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of the truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. 1040 forms and instructions   Although you generally must prepare an adequate written record, you can prepare a record of the business use of listed property in a computer memory device that uses a logging program. 1040 forms and instructions Separate or combined expenditures or uses. 1040 forms and instructions   Each use by you normally is considered a separate use. 1040 forms and instructions However, you can combine repeated uses as a single item. 1040 forms and instructions   Record each expenditure as a separate item. 1040 forms and instructions Do not combine it with other expenditures. 1040 forms and instructions If you choose, however, you can combine amounts you spent for the use of listed property during a tax year, such as for gasoline or automobile repairs. 1040 forms and instructions If you combine these expenses, you do not need to support the business purpose of each expense. 1040 forms and instructions Instead, you can divide the expenses based on the total business use of the listed property. 1040 forms and instructions   You can account for uses that can be considered part of a single use, such as a round trip or uninterrupted business use, by a single record. 1040 forms and instructions For example, you can account for the use of a truck to make deliveries at several locations that begin and end at the business premises and can include a stop at the business in between deliveries by a single record of miles driven. 1040 forms and instructions You can account for the use of a passenger automobile by a salesperson for a business trip away from home over a period of time by a single record of miles traveled. 1040 forms and instructions Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. 1040 forms and instructions Confidential information. 1040 forms and instructions   If any of the information on the elements of an expenditure or use is confidential, you do not need to include it in the account book or similar record if you record it at or near the time of the expenditure or use. 1040 forms and instructions You must keep it elsewhere and make it available as support to the IRS director for your area on request. 1040 forms and instructions Substantial compliance. 1040 forms and instructions   If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the satisfaction of the IRS director for your area, you can establish this element by any evidence the IRS director for your area deems adequate. 1040 forms and instructions   If you fail to establish to the satisfaction of the IRS director for your area that you have substantially complied with the adequate records requirement for an element of an expenditure or use, you must establish the element as follows. 1040 forms and instructions By your own oral or written statement containing detailed information as to the element. 1040 forms and instructions By other evidence sufficient to establish the element. 1040 forms and instructions   If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct evidence, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. 1040 forms and instructions If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. 1040 forms and instructions Sampling. 1040 forms and instructions   You can maintain an adequate record for part of a tax year and use that record to support your business and investment use of listed property for the entire tax year if it can be shown by other evidence that the periods for which you maintain an adequate record are representative of the use throughout the year. 1040 forms and instructions Example 1. 1040 forms and instructions Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. 1040 forms and instructions She uses her automobile for local business visits to the homes or offices of clients, for meetings with suppliers and subcontractors, and to pick up and deliver items to clients. 1040 forms and instructions There is no other business use of the automobile, but she and family members also use it for personal purposes. 1040 forms and instructions She maintains adequate records for the first 3 months of the year showing that 75% of the automobile use was for business. 1040 forms and instructions Subcontractor invoices and paid bills show that her business continued at approximately the same rate for the rest of the year. 1040 forms and instructions If there is no change in circumstances, such as the purchase of a second car for exclusive use in her business, the determination that her combined business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. 1040 forms and instructions Example 2. 1040 forms and instructions Assume the same facts as in Example 1, except that Denise maintains adequate records during the first week of every month showing that 75% of her use of the automobile is for business. 1040 forms and instructions Her business invoices show that her business continued at the same rate during the later weeks of each month so that her weekly records are representative of the automobile's business use throughout the month. 1040 forms and instructions The determination that her business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. 1040 forms and instructions Example 3. 1040 forms and instructions Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products. 1040 forms and instructions For the first 3 weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. 1040 forms and instructions During these weeks, his business use of the automobile does not follow a consistent pattern. 1040 forms and instructions During the fourth week of each month, he delivers all business orders taken during the previous month. 1040 forms and instructions The business use of his automobile, as supported by adequate records, is 70% of its total use during that fourth week. 1040 forms and instructions The determination based on the record maintained during the fourth week of the month that his business/investment use of the automobile for the tax year is 70% does not rest on sufficient supporting evidence because his use during that week is not representative of use during other periods. 1040 forms and instructions Loss of records. 1040 forms and instructions   When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. 1040 forms and instructions How Is Listed Property Information Reported? You must provide the information about your listed property requested in Part V of Form 4562, Section A, if you claim either of the following deductions. 1040 forms and instructions Any deduction for a vehicle. 1040 forms and instructions A depreciation deduction for any other listed property. 1040 forms and instructions If you claim any deduction for a vehicle, you also must provide the information requested in Section B. 1040 forms and instructions If you provide the vehicle for your employee's use, the employee must give you this information. 1040 forms and instructions If you provide any vehicle for use by an employee, you must first answer the questions in Section C to see if you meet an exception to completing Section B for that vehicle. 1040 forms and instructions Vehicles used by your employees. 1040 forms and instructions   You do not have to complete Section B, Part V, for vehicles used by your employees who are not more-than-5% owners or related persons if you meet at least one of the following requirements. 1040 forms and instructions You maintain a written policy statement that prohibits one of the following uses of the vehicles. 1040 forms and instructions All personal use including commuting. 1040 forms and instructions Personal use, other than commuting, by employees who are not officers, directors, or 1%-or-more owners. 1040 forms and instructions You treat all use of the vehicles by your employees as personal use. 1040 forms and instructions You provide more than five vehicles for use by your employees, and you keep in your records the information on their use given to you by the employees. 1040 forms and instructions For demonstrator automobiles provided to full-time salespersons, you maintain a written policy statement that limits the total mileage outside the salesperson's normal working hours and prohibits use of the automobile by anyone else, for vacation trips, or to store personal possessions. 1040 forms and instructions Exceptions. 1040 forms and instructions   If you file Form 2106, 2106-EZ, or Schedule C-EZ (Form 1040), and you are not required to file Form 4562, report information about listed property on that form and not on Form 4562. 1040 forms and instructions Also, if you file Schedule C (Form 1040) and are claiming the standard mileage rate or actual vehicle expenses (except depreciation) and you are not required to file Form 4562 for any other reason, report vehicle information in Part IV of Schedule C and not on Form 4562. 1040 forms and instructions Prev  Up  Next   Home   More Online Publications
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The 1040 Forms And Instructions

1040 forms and instructions Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 1040 forms and instructions Cost Basis The basis of property you buy is usually its cost. 1040 forms and instructions The cost is the amount you pay in cash, debt obligations, other property, or services. 1040 forms and instructions Your cost also includes amounts you pay for the following items. 1040 forms and instructions Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if assumed for the seller). 1040 forms and instructions  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. 1040 forms and instructions Loans with low or no interest. 1040 forms and instructions   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. 1040 forms and instructions You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040 forms and instructions For more information, see Unstated Interest and Original Issue Discount in Publication 537. 1040 forms and instructions Purchase of a business. 1040 forms and instructions   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. 1040 forms and instructions Allocate the price among the various assets, including any section 197 intangibles. 1040 forms and instructions See Allocating the Basis, later. 1040 forms and instructions Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. 1040 forms and instructions If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. 1040 forms and instructions You must adjust the basis of stocks for certain events that occur after purchase. 1040 forms and instructions See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. 1040 forms and instructions Identifying stock or bonds sold. 1040 forms and instructions   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. 1040 forms and instructions If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 1040 forms and instructions For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 1040 forms and instructions Mutual fund shares. 1040 forms and instructions   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. 1040 forms and instructions For more information, see Publication 550. 1040 forms and instructions Real Property Real property, also called real estate, is land and generally anything built on or attached to it. 1040 forms and instructions If you buy real property, certain fees and other expenses become part of your cost basis in the property. 1040 forms and instructions Real estate taxes. 1040 forms and instructions   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 1040 forms and instructions You cannot deduct them as taxes. 1040 forms and instructions   If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. 1040 forms and instructions Do not include that amount in the basis of the property. 1040 forms and instructions If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 1040 forms and instructions Settlement costs. 1040 forms and instructions   Your basis includes the settlement fees and closing costs for buying property. 1040 forms and instructions You cannot include in your basis the fees and costs for getting a loan on property. 1040 forms and instructions A fee for buying property is a cost that must be paid even if you bought the property for cash. 1040 forms and instructions   The following items are some of the settlement fees or closing costs you can include in the basis of your property. 1040 forms and instructions Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 1040 forms and instructions   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040 forms and instructions   The following items are some settlement fees and closing costs you cannot include in the basis of the property. 1040 forms and instructions Casualty insurance premiums. 1040 forms and instructions Rent for occupancy of the property before closing. 1040 forms and instructions Charges for utilities or other services related to occupancy of the property before closing. 1040 forms and instructions Charges connected with getting a loan. 1040 forms and instructions The following are examples of these charges. 1040 forms and instructions Points (discount points, loan origination fees). 1040 forms and instructions Mortgage insurance premiums. 1040 forms and instructions Loan assumption fees. 1040 forms and instructions Cost of a credit report. 1040 forms and instructions Fees for an appraisal required by a lender. 1040 forms and instructions Fees for refinancing a mortgage. 1040 forms and instructions If these costs relate to business property, items (1) through (3) are deductible as business expenses. 1040 forms and instructions Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. 1040 forms and instructions Points. 1040 forms and instructions   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. 1040 forms and instructions Generally, you deduct the points over the term of the loan. 1040 forms and instructions For more information on how to deduct points, see Points in chapter 4 of Publication 535. 1040 forms and instructions Points on home mortgage. 1040 forms and instructions   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. 1040 forms and instructions If certain requirements are met, you can deduct the points in full for the year in which they are paid. 1040 forms and instructions Reduce the basis of your home by any seller-paid points. 1040 forms and instructions For more information, see Points in Publication 936, Home Mortgage Interest Deduction. 1040 forms and instructions Assumption of mortgage. 1040 forms and instructions   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. 1040 forms and instructions Example. 1040 forms and instructions If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. 1040 forms and instructions Constructing assets. 1040 forms and instructions   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040 forms and instructions Some of these expenses include the following costs. 1040 forms and instructions Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 1040 forms and instructions In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. 1040 forms and instructions You must include them in the asset's basis. 1040 forms and instructions Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. 1040 forms and instructions    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 1040 forms and instructions Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. 1040 forms and instructions If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. 1040 forms and instructions In certain circumstances, you may be subject to the uniform capitalization rules, next. 1040 forms and instructions Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. 1040 forms and instructions Activities subject to the rules. 1040 forms and instructions   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. 1040 forms and instructions Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. 1040 forms and instructions However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. 1040 forms and instructions   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. 1040 forms and instructions Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. 1040 forms and instructions Tangible personal property includes films, sound recordings, video tapes, books, or similar property. 1040 forms and instructions    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. 1040 forms and instructions To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. 1040 forms and instructions You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040 forms and instructions   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. 1040 forms and instructions Example. 1040 forms and instructions If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. 1040 forms and instructions The nondeductible part of the cost is not subject to the uniform capitalization rules. 1040 forms and instructions More information. 1040 forms and instructions   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. 1040 forms and instructions Exceptions. 1040 forms and instructions   The following are not subject to the uniform capitalization rules. 1040 forms and instructions Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. 1040 forms and instructions For other exceptions to the uniform capitalization rules, see section 1. 1040 forms and instructions 263A-1(b) of the regulations. 1040 forms and instructions   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. 1040 forms and instructions Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. 1040 forms and instructions The basis of an intangible asset is usually the cost to buy or create it. 1040 forms and instructions If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. 1040 forms and instructions The basis of certain intangibles can be amortized. 1040 forms and instructions See chapter 8 of Publication 535 for information on the amortization of these costs. 1040 forms and instructions Patents. 1040 forms and instructions   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. 1040 forms and instructions If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. 1040 forms and instructions The value of the inventor's time spent on an invention is not part of the basis. 1040 forms and instructions Copyrights. 1040 forms and instructions   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. 1040 forms and instructions Do not include the value of your time as the author, or any other person's time you did not pay for. 1040 forms and instructions Franchises, trademarks, and trade names. 1040 forms and instructions   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. 1040 forms and instructions Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. 1040 forms and instructions You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040 forms and instructions See Trade or Business Acquired below. 1040 forms and instructions Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. 1040 forms and instructions If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 1040 forms and instructions However, see Trade or Business Acquired, next. 1040 forms and instructions Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. 1040 forms and instructions Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. 1040 forms and instructions Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. 1040 forms and instructions Certificates of deposit, U. 1040 forms and instructions S. 1040 forms and instructions Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040 forms and instructions Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. 1040 forms and instructions Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. 1040 forms and instructions All other assets except section 197 intangibles, goodwill, and going concern value. 1040 forms and instructions Section 197 intangibles except goodwill and going concern value. 1040 forms and instructions Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 1040 forms and instructions Agreement. 1040 forms and instructions   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. 1040 forms and instructions This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040 forms and instructions Reporting requirement. 1040 forms and instructions   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 1040 forms and instructions Use Form 8594 to provide this information. 1040 forms and instructions The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040 forms and instructions More information. 1040 forms and instructions   See Sale of a Business in chapter 2 of Publication 544 for more information. 1040 forms and instructions Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. 1040 forms and instructions Figure the basis of each asset by multiplying the lump sum by a fraction. 1040 forms and instructions The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040 forms and instructions If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. 1040 forms and instructions Demolition of building. 1040 forms and instructions   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. 1040 forms and instructions Do not claim the costs as a current deduction. 1040 forms and instructions Modification of building. 1040 forms and instructions   A modification of a building will not be treated as a demolition if the following conditions are satisfied. 1040 forms and instructions 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. 1040 forms and instructions   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. 1040 forms and instructions   If these conditions are met, add the costs of the modifications to the basis of the building. 1040 forms and instructions Subdivided lots. 1040 forms and instructions   If you buy a tract of land and subdivide it, you must determine the basis of each lot. 1040 forms and instructions This is necessary because you must figure the gain or loss on the sale of each individual lot. 1040 forms and instructions As a result, you do not recover your entire cost in the tract until you have sold all of the lots. 1040 forms and instructions   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. 1040 forms and instructions The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. 1040 forms and instructions Future improvement costs. 1040 forms and instructions   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. 1040 forms and instructions See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. 1040 forms and instructions Use of erroneous cost basis. 1040 forms and instructions   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. 1040 forms and instructions Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. 1040 forms and instructions Example. 1040 forms and instructions You bought a tract of land to which you assigned a cost of $15,000. 1040 forms and instructions You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. 1040 forms and instructions You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. 1040 forms and instructions Several years later you determine that your original basis in the tract was $22,500 and not $15,000. 1040 forms and instructions You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. 1040 forms and instructions You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). 1040 forms and instructions You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. 1040 forms and instructions Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. 1040 forms and instructions The result of these adjustments to the basis is the adjusted basis. 1040 forms and instructions Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040 forms and instructions These include the cost of any improvements having a useful life of more than 1 year. 1040 forms and instructions Rehabilitation expenses also increase basis. 1040 forms and instructions However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. 1040 forms and instructions If you have to recapture any of the credit, increase your basis by the recaptured amount. 1040 forms and instructions If you make additions or improvements to business property, keep separate accounts for them. 1040 forms and instructions Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. 1040 forms and instructions For more information, see Publication 946. 1040 forms and instructions The following items increase the basis of property. 1040 forms and instructions The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. 1040 forms and instructions Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040 forms and instructions Do not deduct them as taxes. 1040 forms and instructions However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. 1040 forms and instructions Example. 1040 forms and instructions Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. 1040 forms and instructions Add the assessment to your property's basis. 1040 forms and instructions In this example, the assessment is a depreciable asset. 1040 forms and instructions Deducting vs. 1040 forms and instructions Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. 1040 forms and instructions For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. 1040 forms and instructions However, you can choose either to deduct or to capitalize certain other costs. 1040 forms and instructions If you capitalize these costs, include them in your basis. 1040 forms and instructions If you deduct them, do not include them in your basis. 1040 forms and instructions See Uniform Capitalization Rules earlier. 1040 forms and instructions The costs you can choose to deduct or to capitalize include the following. 1040 forms and instructions Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. 1040 forms and instructions If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. 1040 forms and instructions For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. 1040 forms and instructions Table 1. 1040 forms and instructions Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. 1040 forms and instructions Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. 1040 forms and instructions Some of these items are discussed next. 1040 forms and instructions Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. 1040 forms and instructions You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. 1040 forms and instructions To make this determination, compare the repaired property to the property before the casualty. 1040 forms and instructions For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. 1040 forms and instructions Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. 1040 forms and instructions It reduces the basis of the affected part of the property. 1040 forms and instructions If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 1040 forms and instructions Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. 1040 forms and instructions For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. 1040 forms and instructions Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. 1040 forms and instructions This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. 1040 forms and instructions If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. 1040 forms and instructions Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 1040 forms and instructions For more information about the section 179 deduction, see Publication 946. 1040 forms and instructions Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. 1040 forms and instructions Reduce the basis of the property for which you received the subsidy by the excluded amount. 1040 forms and instructions For more information on this subsidy, see Publication 525. 1040 forms and instructions Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1040 forms and instructions If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 1040 forms and instructions If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040 forms and instructions Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. 1040 forms and instructions If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. 1040 forms and instructions In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. 1040 forms and instructions For information on figuring depreciation, see Publication 946. 1040 forms and instructions If you are claiming depreciation on a business vehicle, see Publication 463. 1040 forms and instructions If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. 1040 forms and instructions Include the excess depreciation in your gross income and add it to your basis in the property. 1040 forms and instructions For information on the computation of excess depreciation, see chapter 4 in Publication 463. 1040 forms and instructions Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 1040 forms and instructions A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040 forms and instructions You can exclude canceled debt from income in the following situations. 1040 forms and instructions Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). 1040 forms and instructions If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040 forms and instructions However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. 1040 forms and instructions For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. 1040 forms and instructions For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. 1040 forms and instructions For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. 1040 forms and instructions Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. 1040 forms and instructions For more information on the rules for the sale of a home, see Publication 523. 1040 forms and instructions Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. 1040 forms and instructions This also applies to amounts you received under an employer's adoption assistance program and excluded from income. 1040 forms and instructions For more information Form 8839, Qualified Adoption Expenses. 1040 forms and instructions Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. 1040 forms and instructions You must reduce your basis in that property by the credit claimed. 1040 forms and instructions For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. 1040 forms and instructions Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. 1040 forms and instructions You also paid commissions of $2,000 and title search and legal fees of $600. 1040 forms and instructions You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. 1040 forms and instructions Immediately you spent $20,000 in remodeling the building before you placed it in service. 1040 forms and instructions You were allowed depreciation of $14,526 for the years 2005 through 2009. 1040 forms and instructions In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. 1040 forms and instructions You claimed a deduction for this loss. 1040 forms and instructions You spent $5,500 to repair the damages and extend the useful life of the building. 1040 forms and instructions The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. 1040 forms and instructions It is not affected by any of the above adjustments. 1040 forms and instructions Basis Other Than Cost There are many times when you cannot use cost as basis. 1040 forms and instructions In these cases, the fair market value or the adjusted basis of property may be used. 1040 forms and instructions Adjusted basis is discussed earlier. 1040 forms and instructions Fair market value (FMV). 1040 forms and instructions   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 1040 forms and instructions Sales of similar property on or about the same date may be helpful in figuring the property's FMV. 1040 forms and instructions Property Received for Services If you receive property for services, include the property's FMV in income. 1040 forms and instructions The amount you include in income becomes your basis. 1040 forms and instructions If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 1040 forms and instructions Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. 1040 forms and instructions If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. 1040 forms and instructions Your basis in the property is its FMV (your purchase price plus the amount you include in income). 1040 forms and instructions If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. 1040 forms and instructions However, your basis in the property is still its FMV. 1040 forms and instructions See Employee Discounts in Publication 15-B. 1040 forms and instructions Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. 1040 forms and instructions Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. 1040 forms and instructions There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. 1040 forms and instructions When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. 1040 forms and instructions Example. 1040 forms and instructions Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. 1040 forms and instructions The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. 1040 forms and instructions You do not report any income until you have completed the 5 years of service that satisfy the condition. 1040 forms and instructions Fair market value. 1040 forms and instructions   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. 1040 forms and instructions Example. 1040 forms and instructions You received stock from your employer for services you performed. 1040 forms and instructions If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. 1040 forms and instructions At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. 1040 forms and instructions This is a restriction that by its terms will never end and you must consider it when you figure the FMV. 1040 forms and instructions Election. 1040 forms and instructions   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. 1040 forms and instructions If you make this choice, the substantially vested rules do not apply. 1040 forms and instructions Your basis is the amount you paid plus the amount you included in income. 1040 forms and instructions   See the discussion of Restricted Property in Publication 525 for more information. 1040 forms and instructions Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 1040 forms and instructions A taxable gain or deductible loss is also known as a recognized gain or loss. 1040 forms and instructions If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. 1040 forms and instructions A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. 1040 forms and instructions Example. 1040 forms and instructions You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. 1040 forms and instructions You must report a taxable gain of $3,000 for the land. 1040 forms and instructions The tractor has a basis of $6,000. 1040 forms and instructions Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. 1040 forms and instructions Similar or related property. 1040 forms and instructions   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. 1040 forms and instructions However, make the following adjustments. 1040 forms and instructions Decrease the basis by the following. 1040 forms and instructions Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. 1040 forms and instructions Increase the basis by the following. 1040 forms and instructions Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. 1040 forms and instructions Money or property not similar or related. 1040 forms and instructions   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. 1040 forms and instructions Example. 1040 forms and instructions The state condemned your property. 1040 forms and instructions The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. 1040 forms and instructions You realized a gain of $5,000 ($31,000 − $26,000). 1040 forms and instructions You bought replacement property similar in use to the converted property for $29,000. 1040 forms and instructions You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 1040 forms and instructions Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 1040 forms and instructions The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. 1040 forms and instructions   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040 forms and instructions Example. 1040 forms and instructions The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. 1040 forms and instructions Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. 1040 forms and instructions More information. 1040 forms and instructions   For more information about condemnations, see Involuntary Conversions in Publication 544. 1040 forms and instructions For more information about casualty and theft losses, see Publication 547. 1040 forms and instructions Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040 forms and instructions If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040 forms and instructions A nontaxable gain or loss is also known as an unrecognized gain or loss. 1040 forms and instructions Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040 forms and instructions To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 1040 forms and instructions There must also be an exchange of like-kind property. 1040 forms and instructions For more information, see Like-Kind Exchanges in Publication 544. 1040 forms and instructions The basis of the property you receive is the same as the basis of the property you gave up. 1040 forms and instructions Example. 1040 forms and instructions You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. 1040 forms and instructions Your basis in the new property is the same as the basis of the old ($50,000). 1040 forms and instructions Exchange expenses. 1040 forms and instructions   Exchange expenses are generally the closing costs you pay. 1040 forms and instructions They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. 1040 forms and instructions Add them to the basis of the like-kind property received. 1040 forms and instructions Property plus cash. 1040 forms and instructions   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. 1040 forms and instructions Example. 1040 forms and instructions You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. 1040 forms and instructions Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). 1040 forms and instructions Special rules for related persons. 1040 forms and instructions   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 1040 forms and instructions Each person must report any gain or loss not recognized on the original exchange. 1040 forms and instructions Each person reports it on the tax return filed for the year in which the later disposition occurs. 1040 forms and instructions If this rule applies, the basis of the property received in the original exchange will be its fair market value. 1040 forms and instructions   These rules generally do not apply to the following kinds of property dispositions. 1040 forms and instructions Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. 1040 forms and instructions Related persons. 1040 forms and instructions   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. 1040 forms and instructions   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. 1040 forms and instructions ), see Nondeductible Loss in chapter 2 of Publication 544. 1040 forms and instructions Exchange of business property. 1040 forms and instructions   Exchanging the assets of one business for the assets of another business is a multiple property exchange. 1040 forms and instructions For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040 forms and instructions Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. 1040 forms and instructions The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. 1040 forms and instructions Decrease the basis by the following amounts. 1040 forms and instructions Any money you receive, and Any loss you recognize on the exchange. 1040 forms and instructions Increase the basis by the following amounts. 1040 forms and instructions Any additional costs you incur, and Any gain you recognize on the exchange. 1040 forms and instructions If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040 forms and instructions Example. 1040 forms and instructions You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. 1040 forms and instructions You realized a gain of $200 ($6,200 − $6,000). 1040 forms and instructions This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). 1040 forms and instructions You include all the gain in income (recognized gain) because the gain is less than the cash received. 1040 forms and instructions Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. 1040 forms and instructions   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040 forms and instructions The rest is the basis of the like property. 1040 forms and instructions Example. 1040 forms and instructions You had an adjusted basis of $15,000 in real estate you held for investment. 1040 forms and instructions You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. 1040 forms and instructions The truck is unlike property. 1040 forms and instructions You realized a gain of $1,500 ($16,500 − $15,000). 1040 forms and instructions This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). 1040 forms and instructions You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 1040 forms and instructions Your basis in the properties you received is figured as follows. 1040 forms and instructions Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). 1040 forms and instructions This is the truck's FMV. 1040 forms and instructions The rest ($12,500) is the basis of the real estate. 1040 forms and instructions Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 1040 forms and instructions Example. 1040 forms and instructions You are a salesperson and you use one of your cars 100% for business. 1040 forms and instructions You have used this car in your sales activities for 2 years and have depreciated it. 1040 forms and instructions Your adjusted basis in the car is $22,600 and its FMV is $23,100. 1040 forms and instructions You are interested in a new car, which sells for $28,000. 1040 forms and instructions If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). 1040 forms and instructions However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. 1040 forms and instructions Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). 1040 forms and instructions Your basis for depreciating the new car is $27,500, the same as if you traded the old car. 1040 forms and instructions Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. 1040 forms and instructions The first is an exchange of like-kind property. 1040 forms and instructions The second is personal-use property on which gain is recognized and loss is not recognized. 1040 forms and instructions First, figure your adjusted basis in the property as if you transferred two separate properties. 1040 forms and instructions Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. 1040 forms and instructions Deduct the depreciation you took or could have taken from the adjusted basis of the business part. 1040 forms and instructions Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. 1040 forms and instructions The business part of the property is permitted to be exchanged tax free. 1040 forms and instructions However, you must recognize any gain from the exchange of the nonbusiness part. 1040 forms and instructions You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. 1040 forms and instructions The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. 1040 forms and instructions If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. 1040 forms and instructions For more information, see Publication 523. 1040 forms and instructions Trade of car used partly in business. 1040 forms and instructions   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. 1040 forms and instructions   For information on figuring your basis for depreciation, see Publication 463. 1040 forms and instructions Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. 1040 forms and instructions However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. 1040 forms and instructions This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. 1040 forms and instructions If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. 1040 forms and instructions Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. 1040 forms and instructions For more information on these bonds, see Publication 550. 1040 forms and instructions At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. 1040 forms and instructions For more information, see Publication 504, Divorced or Separated Individuals. 1040 forms and instructions Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. 1040 forms and instructions FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 1040 forms and instructions Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. 1040 forms and instructions Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). 1040 forms and instructions If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. 1040 forms and instructions Example. 1040 forms and instructions You received an acre of land as a gift. 1040 forms and instructions At the time of the gift, the land had an FMV of $8,000. 1040 forms and instructions The donor's adjusted basis was $10,000. 1040 forms and instructions After you received the land, no events occurred to increase or decrease your basis. 1040 forms and instructions If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. 1040 forms and instructions If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. 1040 forms and instructions If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 1040 forms and instructions For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. 1040 forms and instructions If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. 1040 forms and instructions Business property. 1040 forms and instructions   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040 forms and instructions FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. 1040 forms and instructions Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040 forms and instructions Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. 1040 forms and instructions See Adjusted Basis earlier. 1040 forms and instructions Gift received before 1977. 1040 forms and instructions   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. 1040 forms and instructions However, do not increase your basis above the FMV of the gift at the time it was given to you. 1040 forms and instructions Example 1. 1040 forms and instructions You were given a house in 1976 with an FMV of $21,000. 1040 forms and instructions The donor's adjusted basis was $20,000. 1040 forms and instructions The donor paid a gift tax of $500. 1040 forms and instructions Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. 1040 forms and instructions Example 2. 1040 forms and instructions If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. 1040 forms and instructions This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. 1040 forms and instructions Gift received after 1976. 1040 forms and instructions   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. 1040 forms and instructions Figure the increase by multiplying the gift tax paid by a fraction. 1040 forms and instructions The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 1040 forms and instructions   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. 1040 forms and instructions The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040 forms and instructions For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 1040 forms and instructions Example. 1040 forms and instructions In 2010, you received a gift of property from your mother that had an FMV of $50,000. 1040 forms and instructions Her adjusted basis was $20,000. 1040 forms and instructions The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). 1040 forms and instructions She paid a gift tax of $9,000. 1040 forms and instructions Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . 1040 forms and instructions 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. 1040 forms and instructions See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 1040 forms and instructions If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. 1040 forms and instructions The FMV of the property at the date of the individual's death. 1040 forms and instructions The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. 1040 forms and instructions For information on the alternate valuation date, see the Instructions for Form 706. 1040 forms and instructions The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. 1040 forms and instructions This method is discussed later. 1040 forms and instructions The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. 1040 forms and instructions For information on a qualified conservation easement, see the Instructions for Form 706. 1040 forms and instructions If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 1040 forms and instructions For more information, see the Instructions for Form 706. 1040 forms and instructions Appreciated property. 1040 forms and instructions   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. 1040 forms and instructions Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. 1040 forms and instructions Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. 1040 forms and instructions Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. 1040 forms and instructions When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. 1040 forms and instructions For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. 1040 forms and instructions For example, you and your spouse owned community property that had a basis of $80,000. 1040 forms and instructions When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 1040 forms and instructions The FMV of the community interest was $100,000. 1040 forms and instructions The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 1040 forms and instructions The basis of the other half to your spouse's heirs is also $50,000. 1040 forms and instructions For more information on community property, see Publication 555, Community Property. 1040 forms and instructions Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. 1040 forms and instructions Example. 1040 forms and instructions John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. 1040 forms and instructions John furnished two-thirds of the purchase price and Jim furnished one-third. 1040 forms and instructions Depreciation deductions allowed before John's death were $12,000. 1040 forms and instructions Under local law, each had a half interest in the income from the property. 1040 forms and instructions At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. 1040 forms and instructions Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. 1040 forms and instructions This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. 1040 forms and instructions If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. 1040 forms and instructions Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. 1040 forms and instructions It does not matter how much each spouse contributed to the purchase price. 1040 forms and instructions Also, it does not matter which spouse dies first. 1040 forms and instructions A qualified joint interest is any interest in property held by husband and wife as either of the following. 1040 forms and instructions Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. 1040 forms and instructions Basis. 1040 forms and instructions   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. 1040 forms and instructions Decrease the cost by any deductions allowed to you for depreciation and depletion. 1040 forms and instructions Increase the reduced cost by your basis in the half you inherited. 1040 forms and instructions Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. 1040 forms and instructions If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. 1040 forms and instructions If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. 1040 forms and instructions Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040 forms and instructions Special-use valuation. 1040 forms and instructions   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. 1040 forms and instructions Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 1040 forms and instructions Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. 1040 forms and instructions Figure all FMVs without regard to the special-use valuation. 1040 forms and instructions   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040 forms and instructions This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. 1040 forms and instructions   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. 1040 forms and instructions If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 1040 forms and instructions The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. 1040 forms and instructions   You make the election by filing with Form 706-A a statement that does all of the following. 1040 forms and instructions Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. 1040 forms and instructions   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. 1040 forms and instructions Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 1040 forms and instructions An example of changing property held for personal use to business use would be renting out your former main home. 1040 forms and instructions Basis for depreciation. 1040 forms and instructions   The basis for depreciation is the lesser of the following amounts. 1040 forms and instructions The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 1040 forms and instructions Example. 1040 forms and instructions Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. 1040 forms and instructions You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. 1040 forms and instructions Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 1040 forms and instructions Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 1040 forms and instructions On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 1040 forms and instructions The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). 1040 forms and instructions Sale of property. 1040 forms and instructions   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. 1040 forms and instructions Gain. 1040 forms and instructions   The basis for figuring a gain is your adjusted basis when you sell the property. 1040 forms and instructions Example. 1040 forms and instructions Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. 1040 forms and instructions Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 1040 forms and instructions Loss. 1040 forms and instructions   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 1040 forms and instructions Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. 1040 forms and instructions Example. 1040 forms and instructions Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. 1040 forms and instructions In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. 1040 forms and instructions Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). 1040 forms and instructions How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. 1040 forms and instructions By selecting the method that is best for you, you will have quick and easy access to tax help. 1040 forms and instructions Contacting your Taxpayer Advocate. 1040 forms and instructions   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. 1040 forms and instructions We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. 1040 forms and instructions Here are seven things every taxpayer should know about TAS. 1040 forms and instructions TAS is your voice at the IRS. 1040 forms and instructions Our service is free, confidential, and tailored to meet your needs. 1040 forms and instructions You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. 1040 forms and instructions We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. 1040 forms and instructions This includes businesses as well as individuals. 1040 forms and instructions Our employees know the IRS and how to navigate it. 1040 forms and instructions If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. 1040 forms and instructions We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. 1040 forms and instructions You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. 1040 forms and instructions irs. 1040 forms and instructions gov/advocate. 1040 forms and instructions You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. 1040 forms and instructions You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. 1040 forms and instructions taxtoolkit. 1040 forms and instructions irs. 1040 forms and instructions gov. 1040 forms and instructions You can get updates on hot tax topics by visiting our YouTube channel at www. 1040 forms and instructions youtube. 1040 forms and instructions com/tasnta and our Facebook page at www. 1040 forms and instructions facebook. 1040 forms and instructions com/YourVoiceAtIRS, or by following our tweets at www. 1040 forms and instructions twitter. 1040 forms and instructions com/YourVoiceAtIRS. 1040 forms and instructions Low Income Taxpayer Clinics (LITCs). 1040 forms and instructions   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. 1040 forms and instructions LITCs are independent from the IRS. 1040 forms and instructions Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. 1040 forms and instructions If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. 1040 forms and instructions For more information, see Publication 4134, Low Income Taxpayer Clinic List. 1040 forms and instructions This publication is available at IRS. 1040 forms and instructions gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. 1040 forms and instructions Free tax services. 1040 forms and instructions   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. 1040 forms and instructions Learn about free tax information from the IRS, including publications, services, and education and assistance programs. 1040 forms and instructions The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. 1040 forms and instructions The majority of the information and services listed in this publication are available to you free of charge. 1040 forms and instructions If there is a fee associated with a resource or service, it is listed in the publication. 1040 forms and instructions   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d