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1040x processing time 4. 1040x processing time   Retirement Savings Contributions Credit (Saver's Credit) Table of Contents What's New Introduction Full-time student. 1040x processing time Adjusted gross income. 1040x processing time Distributions received by spouse. 1040x processing time Testing period. 1040x processing time What's New Modified AGI limit for retirement savings contributions credit increased. 1040x processing time  For 2013, you may be able to claim the retirement savings contributions credit if your modified AGI is not more than: $59,000 if your filing status is married filing jointly, $44,250 if your filing status is head of household, or $29,500 if your filing status is single, married filing separately, or qualifying widow(er). 1040x processing time Introduction You may be able to take a tax credit if you make eligible contributions (defined later) to a qualified retirement plan, an eligible deferred compensation plan, or an individual retirement arrangement (IRA). 1040x processing time You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). 1040x processing time This credit could reduce the federal income tax you pay dollar for dollar. 1040x processing time    Can you claim the credit?   If you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you can claim the credit if all of the following apply. 1040x processing time You were born before January 2, 1996. 1040x processing time You are not a full-time student (explained next). 1040x processing time No one else, such as your parent(s), claims an exemption for you on their tax return. 1040x processing time Your adjusted gross income (defined below) is not more than: $59,000 if your filing status is married filing jointly, $44,250 if your filing status is head of household, or $29,500 if your filing status is single, married filing separately, or qualifying widow(er). 1040x processing time Full-time student. 1040x processing time   You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government. 1040x processing time You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full time. 1040x processing time Adjusted gross income. 1040x processing time   This is generally the amount on line 38 of your 2013 Form 1040; line 22 of your 2013 Form 1040A; or line 37 of your 2013 Form 1040NR. 1040x processing time However, you must add to that amount any exclusion or deduction claimed for the year for: Foreign earned income, Foreign housing costs, Income for bona fide residents of American Samoa, and Income from Puerto Rico. 1040x processing time Eligible contributions. 1040x processing time   These include: Contributions to a traditional or Roth IRA, Salary reduction contributions (elective deferrals, including amounts designated as after-tax Roth contributions) to: A 401(k) plan (including a SIMPLE 401(k)), A section 403(b) annuity, An eligible deferred compensation plan of a state or local government (a governmental 457 plan), A SIMPLE IRA plan, or A salary reduction SEP, and Contributions to a section 501(c)(18) plan. 1040x processing time They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity. 1040x processing time For purposes of the credit, an employee contribution will be voluntary as long as it is not required as a condition of employment. 1040x processing time Reducing eligible contributions. 1040x processing time   Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included above under Eligible contributions. 1040x processing time Also reduce your eligible contributions by any distribution from a Roth IRA that is not rolled over, even if the distribution is not taxable. 1040x processing time   Do not reduce your eligible contributions by any of the following. 1040x processing time The portion of any distribution which is not includible in income because it is a trustee-to-trustee transfer or a rollover distribution. 1040x processing time Distributions that are taxable as the result of an in-plan rollover to your designated Roth account. 1040x processing time Any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if: The distribution is made before the due date (including extensions) of your tax return for that year, You do not take a deduction for the contribution, and The distribution includes any income attributable to the contribution. 1040x processing time Loans from a qualified employer plan treated as a distribution. 1040x processing time Distributions of excess contributions or deferrals (and income attributable to excess contributions and deferrals). 1040x processing time Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k). 1040x processing time Distributions from an eligible retirement plan that are converted or rolled over to a Roth IRA. 1040x processing time Distributions from a military retirement plan. 1040x processing time Distributions from an inherited IRA by a nonspousal beneficiary. 1040x processing time Distributions received by spouse. 1040x processing time   Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit. 1040x processing time Testing period. 1040x processing time   The testing period consists of the year for which you claim the credit, the period after the end of that year and before the due date (including extensions) for filing your return for that year, and the 2 tax years before that year. 1040x processing time Example. 1040x processing time You and your spouse filed joint returns in 2011 and 2012, and plan to do so in 2013 and 2014. 1040x processing time You received a taxable distribution from a qualified plan in 2011 and a taxable distribution from an eligible deferred compensation plan in 2012. 1040x processing time Your spouse received taxable distributions from a Roth IRA in 2013 and tax-free distributions from a Roth IRA in 2014 before April 15. 1040x processing time You made eligible contributions to an IRA in 2013 and you otherwise qualify for this credit. 1040x processing time You must reduce the amount of your qualifying contributions in 2013 by the total of the distributions you received in 2011, 2012, 2013, and 2014. 1040x processing time Maximum eligible contributions. 1040x processing time   After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person. 1040x processing time Effect on other credits. 1040x processing time   The amount of this credit will not change the amount of your refundable tax credits. 1040x processing time A refundable tax credit, such as the earned income credit or the refundable amount of your child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes. 1040x processing time Maximum credit. 1040x processing time   This is a nonrefundable credit. 1040x processing time The amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not counting any refundable credits) in any year. 1040x processing time If your tax liability is reduced to zero because of other nonrefundable credits, such as the credit for child and dependent care expenses, then you will not be entitled to this credit. 1040x processing time How to figure and report the credit. 1040x processing time   The amount of the credit you can get is based on the contributions you make and your credit rate. 1040x processing time Your credit rate can be as low as 10% or as high as 50%. 1040x processing time Your credit rate depends on your income and your filing status. 1040x processing time See Form 8880 to determine your credit rate. 1040x processing time   The maximum contribution taken into account is $2,000 per person. 1040x processing time On a joint return, up to $2,000 is taken into account for each spouse. 1040x processing time   Figure the credit on Form 8880. 1040x processing time Report the credit on line 50 of your Form 1040; line 32 of your Form 1040A; or line 47 of your Form 1040NR and attach Form 8880 to your return. 1040x 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Tax Benefits for Education: Information Center

Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education.

  • A tax credit reduces the amount of income tax you may have to pay.
  • A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
  • Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
  • An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit. 
  • Education credits are claimed on Form 8863, Education Credits. For details, see IRS Publication 970, Tax Benefits of Education.
 You can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for educational credits or deductions, including the American opportunity credit, the lifetime learning credit and the tuition and fees deduction.

Credits


American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit originally modified the existing Hope credit for tax years 2009 and 2010. The American opportunity credit was later extended through 2017, making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the the prior Hope and existing lifetime learning credit.

If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.

Lifetime Learning Credit

The lifetime learning credit helps parents and students pay for post-secondary education.

For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.

Generally, you can claim the lifetime learning credit if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.

If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year.


Deductions


Tuition and Fees Deduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.

You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

You cannot claim the tuition and fees deduction if any of the following apply:

  • Your filing status is married filing separately.

  • Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.

  • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).

  • You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.

  • You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.

Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Student Loan Interest Deduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.

Qualified Student Loan

This is a loan you took out solely to pay qualified education expenses (defined later) that were:

  • For you, your spouse, or a person who was your dependent when you took out the loan.
  • Paid or incurred within a reasonable period of time before or after you took out the loan.
  • For education provided during an academic period for an eligible student.

Loans from the following sources are not qualified student loans:

  • A related person.
  • A qualified employer plan.

Qualified Education Expenses

For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:

  • Tuition and fees.
  • Room and board.
  • Books, supplies and equipment.
  • Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it is not more than the greater of:

  • The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
  • The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Business Deduction for Work-Related Education


If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.

If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.

Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the lifetime learning credit. You may qualify for these other benefits even if you do not meet the requirements listed above.

To claim a business deduction for work-related education, you must:

  • Be working.
  • Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
  • File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
  • Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.

Qualifying Work-Related Education

You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:

  • The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
  • The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:

  • Is needed to meet the minimum educational requirements of your present trade or business or
  • Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

Education Required by Employer or by Law

Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.

  • It is required for you to keep your present salary, status or job.
  • The requirement serves a business purpose of your employer.
  • The education is not part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.

Education to Maintain or Improve Skills

If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.


Savings Plans


529 Plans

States sponsor 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.

For 2009 and 2010, an ARRA change to tax-free college savings plans and prepaid tuition programs added to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, lifetime learning credit or tuition and fees deduction.

Coverdell Education Savings Account

This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and  the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Here are some things to remember about distributions from Coverdell accounts:

  • Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.

  • There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible.

  • Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.

  • If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.


Scholarships and Fellowships


A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.

A scholarship or fellowship is tax free only if you meet the following conditions:

  • You are a candidate for a degree at an eligible educational institution.
  • You use the scholarship or fellowship to pay qualified education expenses.

Qualified Education Expenses

For purposes of tax-free scholarships and fellowships, these are expenses for:

  • Tuition and fees required to enroll at or attend an eligible educational institution.
  • Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses. 

Expenses that Don’t Qualify

Qualified education expenses do not include the cost of:

  • Room and board.
  • Travel.
  • Research.
  • Clerical help.
  • Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

For more information, see Pub. 970.


Exclusions from Income


You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the lifetime learning credit.

Employer-Provided Educational Assistance


If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.

Educational Assistance Program

To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.

Educational Assistance Benefits

Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items.

  • Meals, lodging, or transportation.
  • Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
  • Courses involving sports, games, or hobbies unless they:
    • Have a reasonable relationship to the business of your employer, or
    • Are required as part of a degree program.

Benefits over $5,250

If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.

Working Condition Fringe Benefit 

However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.


Related Items:

 

Page Last Reviewed or Updated: 24-Jan-2014

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1040x processing time 8. 1040x processing time   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. 1040x processing time Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. 1040x processing time Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. 1040x processing time Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. 1040x processing time Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. 1040x processing time This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. 1040x processing time A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 1040x processing time An exchange is a transfer of property for other property or services. 1040x processing time Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. 1040x processing time If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. 1040x processing time If the adjusted basis of the property is more than the amount you realize, you will have a loss. 1040x processing time Basis and adjusted basis. 1040x processing time   The basis of property you buy is usually its cost. 1040x processing time The adjusted basis of property is basis plus certain additions and minus certain deductions. 1040x processing time See chapter 6 for more information about basis and adjusted basis. 1040x processing time Amount realized. 1040x processing time   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. 1040x processing time The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. 1040x processing time   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x processing time Amount recognized. 1040x processing time   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. 1040x processing time A recognized gain is a gain you must include in gross income and report on your income tax return. 1040x processing time A recognized loss is a loss you deduct from gross income. 1040x processing time However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. 1040x processing time See Like-Kind Exchanges next. 1040x processing time Also, a loss from the disposition of property held for personal use is not deductible. 1040x processing time Like-Kind Exchanges Certain exchanges of property are not taxable. 1040x processing time This means any gain from the exchange is not recognized, and any loss cannot be deducted. 1040x processing time Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. 1040x processing time The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040x processing time To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. 1040x processing time Qualifying property. 1040x processing time Like-kind property. 1040x processing time These two requirements are discussed later. 1040x processing time Multiple-party transactions. 1040x processing time   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. 1040x processing time Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. 1040x processing time Receipt of title from third party. 1040x processing time   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. 1040x processing time Basis of property received. 1040x processing time   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. 1040x processing time See chapter 6 for more information. 1040x processing time Money paid. 1040x processing time   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. 1040x processing time The basis of the property received is the basis of the property given up, increased by the money paid. 1040x processing time Example. 1040x processing time You traded an old tractor with an adjusted basis of $15,000 for a new one. 1040x processing time The new tractor costs $300,000. 1040x processing time You were allowed $80,000 for the old tractor and paid $220,000 cash. 1040x processing time You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). 1040x processing time If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. 1040x processing time In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. 1040x processing time Reporting the exchange. 1040x processing time   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. 1040x processing time The Instructions for Form 8824 explain how to report the details of the exchange. 1040x processing time   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. 1040x processing time You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. 1040x processing time See chapter 9 for more information. 1040x processing time Qualifying property. 1040x processing time   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. 1040x processing time Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. 1040x processing time Nonqualifying property. 1040x processing time   The rules for like-kind exchanges do not apply to exchanges of the following property. 1040x processing time Property you use for personal purposes, such as your home and family car. 1040x processing time Stock in trade or other property held primarily for sale, such as crops and produce. 1040x processing time Stocks, bonds, or notes. 1040x processing time However, see Qualifying property above. 1040x processing time Other securities or evidences of indebtedness, such as accounts receivable. 1040x processing time Partnership interests. 1040x processing time However, you may have a nontaxable exchange under other rules. 1040x processing time See Other Nontaxable Exchanges in chapter 1 of Publication 544. 1040x processing time Like-kind property. 1040x processing time   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. 1040x processing time Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 1040x processing time Generally, real property exchanged for real property qualifies as an exchange of like-kind property. 1040x processing time For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. 1040x processing time   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. 1040x processing time An exchange of a tractor for acreage, however, is not an exchange of like-kind property. 1040x processing time The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. 1040x processing time For example, the exchange of a bull for a cow is not a like-kind exchange. 1040x processing time An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. 1040x processing time    Note. 1040x processing time Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. 1040x processing time Personal property. 1040x processing time   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. 1040x processing time Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. 1040x processing time Property classified in any General Asset Class may not be classified within a Product Class. 1040x processing time Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. 1040x processing time General Asset Classes. 1040x processing time   General Asset Classes describe the types of property frequently used in many businesses. 1040x processing time They include, but are not limited to, the following property. 1040x processing time Office furniture, fixtures, and equipment (asset class 00. 1040x processing time 11). 1040x processing time Information systems, such as computers and peripheral equipment (asset class 00. 1040x processing time 12). 1040x processing time Data handling equipment except computers (asset class 00. 1040x processing time 13). 1040x processing time Automobiles and taxis (asset class 00. 1040x processing time 22). 1040x processing time Light general purpose trucks (asset class 00. 1040x processing time 241). 1040x processing time Heavy general purpose trucks (asset class 00. 1040x processing time 242). 1040x processing time Tractor units for use over-the-road (asset class 00. 1040x processing time 26). 1040x processing time Trailers and trailer-mounted containers (asset class 00. 1040x processing time 27). 1040x processing time Industrial steam and electric generation and/or distribution systems (asset class 00. 1040x processing time 4). 1040x processing time Product Classes. 1040x processing time   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). 1040x processing time The latest version of the manual can be accessed at www. 1040x processing time census. 1040x processing time gov/eos/www/naics/. 1040x processing time Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. 1040x processing time ntis. 1040x processing time gov/products/naics. 1040x processing time aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. 1040x processing time A CD-ROM version with search and retrieval software is also available from NTIS. 1040x processing time    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. 1040x processing time Partially nontaxable exchange. 1040x processing time   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. 1040x processing time You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. 1040x processing time A loss is not deductible. 1040x processing time Example 1. 1040x processing time You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. 1040x processing time You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). 1040x processing time However, only $10,000, the cash received, is recognized (included in income). 1040x processing time Example 2. 1040x processing time Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. 1040x processing time Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). 1040x processing time Example 3. 1040x processing time Assume in Example 1 that the FMV of the land you received was only $15,000. 1040x processing time Your $5,000 loss is not recognized. 1040x processing time Unlike property given up. 1040x processing time   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. 1040x processing time The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. 1040x processing time Like-kind exchanges between related persons. 1040x processing time   Special rules apply to like-kind exchanges between related persons. 1040x processing time These rules affect both direct and indirect exchanges. 1040x processing time Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 1040x processing time The gain or loss on the original exchange must be recognized as of the date of the later disposition. 1040x processing time The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. 1040x processing time Related persons. 1040x processing time   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. 1040x processing time ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. 1040x processing time   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. 1040x processing time Example. 1040x processing time You used a grey pickup truck in your farming business. 1040x processing time Your sister used a red pickup truck in her landscaping business. 1040x processing time In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. 1040x processing time At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. 1040x processing time The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. 1040x processing time You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). 1040x processing time Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). 1040x processing time However, because this was a like-kind exchange, you recognized no gain. 1040x processing time Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). 1040x processing time She recognized gain only to the extent of the money she received, $200. 1040x processing time Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). 1040x processing time In 2013, you sold the red pickup truck to a third party for $7,000. 1040x processing time Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 1040x processing time On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. 1040x processing time You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). 1040x processing time In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. 1040x processing time Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). 1040x processing time Exceptions to the rules for related persons. 1040x processing time   The following property dispositions are excluded from these rules. 1040x processing time Dispositions due to the death of either related person. 1040x processing time Involuntary conversions. 1040x processing time Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. 1040x processing time Multiple property exchanges. 1040x processing time   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. 1040x processing time However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. 1040x processing time Transfer and receive properties in two or more exchange groups. 1040x processing time Transfer or receive more than one property within a single exchange group. 1040x processing time   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x processing time Deferred exchange. 1040x processing time   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. 1040x processing time A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. 1040x processing time The property you receive is replacement property. 1040x processing time The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. 1040x processing time In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. 1040x processing time   For more information see Deferred Exchanges in chapter 1 of Publication 544. 1040x processing time Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. 1040x processing time This rule does not apply if the recipient is a nonresident alien. 1040x processing time Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. 1040x processing time Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. 1040x processing time The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 1040x processing time This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. 1040x processing time This rule applies for determining loss as well as gain. 1040x processing time Any gain recognized on a transfer in trust increases the basis. 1040x processing time For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. 1040x processing time Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). 1040x processing time You may also have a capital gain if your section 1231 transactions result in a net gain. 1040x processing time See Section 1231 Gains and Losses in  chapter 9. 1040x processing time To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). 1040x processing time Your net capital gains may be taxed at a lower tax rate than ordinary income. 1040x processing time See Capital Gains Tax Rates , later. 1040x processing time Your deduction for a net capital loss may be limited. 1040x processing time See Treatment of Capital Losses , later. 1040x processing time Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. 1040x processing time The following items are examples of capital assets. 1040x processing time A home owned and occupied by you and your family. 1040x processing time Household furnishings. 1040x processing time A car used for pleasure. 1040x processing time If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. 1040x processing time Stocks and bonds. 1040x processing time However, there are special rules for gains on qualified small business stock. 1040x processing time For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. 1040x processing time Personal-use property. 1040x processing time   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. 1040x processing time Loss from the sale or exchange of personal-use property is not deductible. 1040x processing time You can deduct a loss relating to personal-use property only if it results from a casualty or theft. 1040x processing time For information on casualties and thefts, see chapter 11. 1040x processing time Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. 1040x processing time The time you own an asset before disposing of it is the holding period. 1040x processing time If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. 1040x processing time Report it in Part I of Schedule D (Form 1040). 1040x processing time If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. 1040x processing time Report it in Part II of Schedule D (Form 1040). 1040x processing time Holding period. 1040x processing time   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. 1040x processing time The day you disposed of the property is part of your holding period. 1040x processing time Example. 1040x processing time If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. 1040x processing time If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. 1040x processing time Inherited property. 1040x processing time   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. 1040x processing time This rule does not apply to livestock used in a farm business. 1040x processing time See Holding period under Livestock , later. 1040x processing time Nonbusiness bad debt. 1040x processing time   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. 1040x processing time See chapter 4 of Publication 550. 1040x processing time Nontaxable exchange. 1040x processing time   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. 1040x processing time That is, it begins on the same day as your holding period for the old property. 1040x processing time Gift. 1040x processing time   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. 1040x processing time Real property. 1040x processing time   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. 1040x processing time   However, taking possession of real property under an option agreement is not enough to start the holding period. 1040x processing time The holding period cannot start until there is an actual contract of sale. 1040x processing time The holding period of the seller cannot end before that time. 1040x processing time Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. 1040x processing time Net short-term capital gain or loss. 1040x processing time   Combine your short-term capital gains and losses. 1040x processing time Do this by adding all of your short-term capital gains. 1040x processing time Then add all of your short-term capital losses. 1040x processing time Subtract the lesser total from the greater. 1040x processing time The difference is your net short-term capital gain or loss. 1040x processing time Net long-term capital gain or loss. 1040x processing time   Follow the same steps to combine your long-term capital gains and losses. 1040x processing time The result is your net long-term capital gain or loss. 1040x processing time Net gain. 1040x processing time   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. 1040x processing time However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. 1040x processing time See Capital Gains Tax Rates , later. 1040x processing time Net loss. 1040x processing time   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. 1040x processing time But there are limits on how much loss you can deduct and when you can deduct it. 1040x processing time See Treatment of Capital Losses next. 1040x processing time Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. 1040x processing time For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). 1040x processing time If your other income is low, you may not be able to use the full $3,000. 1040x processing time The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). 1040x processing time Capital loss carryover. 1040x processing time   Generally, you have a capital loss carryover if either of the following situations applies to you. 1040x processing time Your net loss on Schedule D (Form 1040), is more than the yearly limit. 1040x processing time Your taxable income without your deduction for exemptions is less than zero. 1040x processing time If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. 1040x processing time    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). 1040x processing time Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. 1040x processing time These lower rates are called the maximum capital gains rates. 1040x processing time The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 1040x processing time See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). 1040x processing time Also see Publication 550. 1040x processing time Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. 1040x processing time A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). 1040x processing time Property held for sale in the ordinary course of your farm business. 1040x processing time   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. 1040x processing time Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). 1040x processing time The treatment of this property is discussed in chapter 3. 1040x processing time Land and depreciable properties. 1040x processing time   Land and depreciable property you use in farming are not capital assets. 1040x processing time Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. 1040x processing time However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. 1040x processing time The sales of these business assets are reported on Form 4797. 1040x processing time See chapter 9 for more information. 1040x processing time Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. 1040x processing time Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. 1040x processing time A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. 1040x processing time The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. 1040x processing time A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. 1040x processing time Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. 1040x processing time Hedging transactions. 1040x processing time Transactions that are not hedging transactions. 1040x processing time Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. 1040x processing time There is a limit on the amount of capital losses you can deduct each year. 1040x processing time Hedging transactions are not subject to the mark-to-market rules. 1040x processing time If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. 1040x processing time They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. 1040x processing time The gain or loss on the termination of these hedges is generally ordinary gain or loss. 1040x processing time Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. 1040x processing time Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. 1040x processing time Examples include fuel and feed. 1040x processing time If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. 1040x processing time Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. 1040x processing time It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. 1040x processing time Retain the identification of each hedging transaction with your books and records. 1040x processing time Also, identify the item(s) or aggregate risk that is being hedged in your records. 1040x processing time Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. 1040x processing time For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. 1040x processing time Accounting methods for hedging transactions. 1040x processing time   The accounting method you use for a hedging transaction must clearly reflect income. 1040x processing time This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. 1040x processing time There are requirements and limits on the method you can use for certain hedging transactions. 1040x processing time See Regulations section 1. 1040x processing time 446-4(e) for those requirements and limits. 1040x processing time   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. 1040x processing time Cash method. 1040x processing time Farm-price method. 1040x processing time Unit-livestock-price method. 1040x processing time   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. 1040x processing time   Your books and records must describe the accounting method used for each type of hedging transaction. 1040x processing time They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. 1040x processing time You must make the additional identification no more than 35 days after entering into the hedging transaction. 1040x processing time Example of a hedging transaction. 1040x processing time   You file your income tax returns on the cash method. 1040x processing time On July 2 you anticipate a yield of 50,000 bushels of corn this year. 1040x processing time The December futures price is $5. 1040x processing time 75 a bushel, but there are indications that by harvest time the price will drop. 1040x processing time To protect yourself against a drop in the price, you enter into the following hedging transaction. 1040x processing time You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. 1040x processing time 75 a bushel. 1040x processing time   The price did not drop as anticipated but rose to $6 a bushel. 1040x processing time In November, you sell your crop at a local elevator for $6 a bushel. 1040x processing time You also close out your futures position by buying ten December contracts for $6 a bushel. 1040x processing time You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. 1040x processing time   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. 1040x processing time Your loss on the hedge is 25 cents a bushel. 1040x processing time In effect, the net selling price of your corn is $5. 1040x processing time 75 a bushel. 1040x processing time   Report the results of your futures transactions and your sale of corn separately on Schedule F. 1040x processing time See the instructions for the 2013 Schedule F (Form 1040). 1040x processing time   The loss on your futures transactions is $13,900, figured as follows. 1040x processing time July 2 - Sold December corn futures (50,000 bu. 1040x processing time @$5. 1040x processing time 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 1040x processing time @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. 1040x processing time   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. 1040x processing time × $6). 1040x processing time Report it on Schedule F, Part I, line 2, as income from sales of products you raised. 1040x processing time   Assume you were right and the price went down 25 cents a bushel. 1040x processing time In effect, you would still net $5. 1040x processing time 75 a bushel, figured as follows. 1040x processing time Sold cash corn, per bushel $5. 1040x processing time 50 Gain on hedge, per bushel . 1040x processing time 25 Net price, per bushel $5. 1040x processing time 75       The gain on your futures transactions would have been $11,100, figured as follows. 1040x processing time July 2 - Sold December corn futures (50,000 bu. 1040x processing time @$5. 1040x processing time 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 1040x processing time @$5. 1040x processing time 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. 1040x processing time   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. 1040x processing time Livestock This part discusses the sale or exchange of livestock used in your farm business. 1040x processing time Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. 1040x processing time However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. 1040x processing time See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. 1040x processing time The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. 1040x processing time The sale of this livestock is reported on Schedule F. 1040x processing time See chapter 3. 1040x processing time Also, special rules apply to sales or exchanges caused by weather-related conditions. 1040x processing time See chapter 3. 1040x processing time Holding period. 1040x processing time   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). 1040x processing time Livestock. 1040x processing time   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. 1040x processing time Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. 1040x processing time Livestock used in farm business. 1040x processing time   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. 1040x processing time The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. 1040x processing time An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. 1040x processing time However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. 1040x processing time Example 1. 1040x processing time You discover an animal that you intend to use for breeding purposes is sterile. 1040x processing time You dispose of it within a reasonable time. 1040x processing time This animal was held for breeding purposes. 1040x processing time Example 2. 1040x processing time You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. 1040x processing time These young animals were held for breeding or dairy purposes. 1040x processing time Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. 1040x processing time See Sales Caused by Weather-Related Conditions in chapter 3. 1040x processing time Example 3. 1040x processing time You are in the business of raising hogs for slaughter. 1040x processing time Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. 1040x processing time You sell the brood sows after obtaining the litter. 1040x processing time Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. 1040x processing time Example 4. 1040x processing time You are in the business of raising registered cattle for sale to others for use as breeding cattle. 1040x processing time The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. 1040x processing time Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. 1040x processing time Such use does not demonstrate that you are holding the cattle for breeding purposes. 1040x processing time However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. 1040x processing time The same applies to hog and sheep breeders. 1040x processing time Example 5. 1040x processing time You breed, raise, and train horses for racing purposes. 1040x processing time Every year you cull horses from your racing stable. 1040x processing time In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. 1040x processing time These horses are all considered held for sporting purposes. 1040x processing time Figuring gain or loss on the cash method. 1040x processing time   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. 1040x processing time Raised livestock. 1040x processing time   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. 1040x processing time Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. 1040x processing time The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. 1040x processing time However, see Uniform Capitalization Rules in chapter 6. 1040x processing time Purchased livestock. 1040x processing time   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. 1040x processing time Example. 1040x processing time A farmer sold a breeding cow on January 8, 2013, for $1,250. 1040x processing time Expenses of the sale were $125. 1040x processing time The cow was bought July 2, 2009, for $1,300. 1040x processing time Depreciation (not less than the amount allowable) was $867. 1040x processing time Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. 1040x processing time Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. 1040x processing time Any loss on the disposition of such property is treated as a long-term capital loss. 1040x processing time Converted wetland. 1040x processing time   This is generally land that was drained or filled to make the production of agricultural commodities possible. 1040x processing time It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. 1040x processing time   A wetland (before conversion) is land that meets all the following conditions. 1040x processing time It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. 1040x processing time It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. 1040x processing time It supports, under normal circumstances, mostly plants that grow in saturated soil. 1040x processing time Highly erodible cropland. 1040x processing time   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. 1040x processing time Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. 1040x processing time Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. 1040x processing time Successor. 1040x processing time   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. 1040x processing time Timber Standing timber you held as investment property is a capital asset. 1040x processing time Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. 1040x processing time If you held the timber primarily for sale to customers, it is not a capital asset. 1040x processing time Gain or loss on its sale is ordinary business income or loss. 1040x processing time It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). 1040x processing time See the Instructions for Schedule F (Form 1040). 1040x processing time Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. 1040x processing time Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. 1040x processing time , are ordinary farm income and expenses reported on Schedule F. 1040x processing time Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. 1040x processing time Timber considered cut. 1040x processing time   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. 1040x processing time This is true whether the timber is cut under contract or whether you cut it yourself. 1040x processing time Christmas trees. 1040x processing time   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. 1040x processing time They qualify for both rules discussed below. 1040x processing time Election to treat cutting as a sale or exchange. 1040x processing time   Under the general rule, the cutting of timber results in no gain or loss. 1040x processing time It is not until a sale or exchange occurs that gain or loss is realized. 1040x processing time But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. 1040x processing time Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. 1040x processing time Any later sale results in ordinary business income or loss. 1040x processing time See the example below. 1040x processing time   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. 1040x processing time Making the election. 1040x processing time   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. 1040x processing time You do not have to make the election in the first year you cut the timber. 1040x processing time You can make it in any year to which the election would apply. 1040x processing time If the timber is partnership property, the election is made on the partnership return. 1040x processing time This election cannot be made on an amended return. 1040x processing time   Once you have made the election, it remains in effect for all later years unless you revoke it. 1040x processing time Election under section 631(a) may be revoked. 1040x processing time   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. 1040x processing time The prior election (and revocation) is disregarded for purposes of making a subsequent election. 1040x processing time See Form T (Timber), Forest Activities Schedule, for more information. 1040x processing time Gain or loss. 1040x processing time   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. 1040x processing time   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. 1040x processing time Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. 1040x processing time 611-3. 1040x processing time   Depletion of timber is discussed in chapter 7. 1040x processing time Example. 1040x processing time   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. 1040x processing time It had an adjusted basis for depletion of $40 per MBF. 1040x processing time You are a calendar year taxpayer. 1040x processing time On January 1, 2013, the timber had a FMV of $350 per MBF. 1040x processing time It was cut in April for sale. 1040x processing time On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. 1040x processing time You report the difference between the FMV and your adjusted basis for depletion as a gain. 1040x processing time This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. 1040x processing time You figure your gain as follows. 1040x processing time FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. 1040x processing time Outright sales of timber. 1040x processing time   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). 1040x processing time However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). 1040x processing time Cutting contract. 1040x processing time   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. 1040x processing time You are the owner of the timber. 1040x processing time You held the timber longer than 1 year before its disposal. 1040x processing time You kept an economic interest in the timber. 1040x processing time   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. 1040x processing time   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. 1040x processing time Include this amount on Form 4797 along with your other section 1231 gains or losses. 1040x processing time Date of disposal. 1040x processing time   The date of disposal is the date the timber is cut. 1040x processing time However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. 1040x processing time   This election applies only to figure the holding period of the timber. 1040x processing time It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). 1040x processing time   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. 1040x processing time The statement must identify the advance payments subject to the election and the contract under which they were made. 1040x processing time   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). 1040x processing time Attach the statement to the amended return and write “Filed pursuant to section 301. 1040x processing time 9100-2” at the top of the statement. 1040x processing time File the amended return at the same address the original return was filed. 1040x processing time Owner. 1040x processing time   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. 1040x processing time You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. 1040x processing time Tree stumps. 1040x processing time   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. 1040x processing time Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. 1040x processing time However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. 1040x processing time Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. 1040x processing time   See Form T (Timber) and its separate instructions for more information about dispositions of timber. 1040x processing time Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). 1040x processing time If you have a gain from the sale, you may be allowed to exclude the gain on your home. 1040x processing time For more information, see Publication 523, Selling Your Home. 1040x processing time The gain on the sale of your business property is taxable. 1040x processing time A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. 1040x processing time Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. 1040x processing time See chapter 9. 1040x processing time Losses from personal-use property, other than casualty or theft losses, are not deductible. 1040x processing time If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. 1040x processing time See chapter 10 for information about installment sales. 1040x processing time When you sell your farm, the gain or loss on each asset is figured separately. 1040x processing time The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. 1040x processing time Each of the assets sold must be classified as one of the following. 1040x processing time Capital asset held 1 year or less. 1040x processing time Capital asset held longer than 1 year. 1040x processing time Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). 1040x processing time Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). 1040x processing time Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. 1040x processing time Allocation of consideration paid for a farm. 1040x processing time   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. 1040x processing time The residual method is required only if the group of assets sold constitutes a trade or business. 1040x processing time This method determines gain or loss from the transfer of each asset. 1040x processing time It also determines the buyer's basis in the business assets. 1040x processing time For more information, see Sale of a Business in chapter 2 of Publication 544. 1040x processing time Property used in farm operation. 1040x processing time   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. 1040x processing time Recognized gains and losses on business property must be reported on your return for the year of the sale. 1040x processing time If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). 1040x processing time Example. 1040x processing time You sell your farm, including your main home, which you have owned since December 2001. 1040x processing time You realize gain on the sale as follows. 1040x processing time   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. 1040x processing time All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. 1040x processing time Treat the balance as section 1231 gain. 1040x processing time The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . 1040x processing time Partial sale. 1040x processing time   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. 1040x processing time You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. 1040x processing time For a detailed discussion on installment sales, see Publication 544. 1040x processing time Adjusted basis of the part sold. 1040x processing time   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. 1040x processing time , on the part sold. 1040x processing time If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . 1040x processing time Example. 1040x processing time You bought a 600-acre farm for $700,000. 1040x processing time The farm included land and buildings. 1040x processing time The purchase contract designated $600,000 of the purchase price to the land. 1040x processing time You later sold 60 acres of land on which you had installed a fence. 1040x processing time Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. 1040x processing time Use this amount to determine your gain or loss on the sale of the 60 acres. 1040x processing time Assessed values for local property taxes. 1040x processing time   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. 1040x processing time Example. 1040x processing time Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. 1040x processing time However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. 1040x processing time The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. 1040x processing time Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. 1040x processing time The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). 1040x processing time Sale of your home. 1040x processing time   Your home is a capital asset and not property used in the trade or business of farming. 1040x processing time If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. 1040x processing time Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. 1040x processing time   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. 1040x processing time For more information on basis, see chapter 6. 1040x processing time More information. 1040x processing time   For more information on selling your home, see Publication 523. 1040x processing time Gain from condemnation. 1040x processing time   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. 1040x processing time However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. 1040x processing time Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. 1040x processing time The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 1040x processing time This is true even if you voluntarily return the property to the lender. 1040x processing time You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. 1040x processing time Buyer's (borrower's) gain or loss. 1040x processing time   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. 1040x processing time The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 1040x processing time See Determining Gain or Loss , earlier. 1040x processing time Worksheet 8-1. 1040x processing time Worksheet for Foreclosures andRepossessions Part 1. 1040x processing time Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 1040x processing time Complete this part only if you were personally liable for the debt. 1040x processing time Otherwise, go to Part 2. 1040x processing time   1. 1040x processing time Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. 1040x processing time Enter the Fair Market Value of the transferred property   3. 1040x processing time Ordinary income from cancellation of debt upon foreclosure or repossession. 1040x processing time * Subtract line 2 from line 1. 1040x processing time If zero or less, enter -0-   Part 2. 1040x processing time Figure your gain or loss from foreclosure or repossession. 1040x processing time   4. 1040x processing time If you completed Part 1, enter the smaller of line 1 or line 2. 1040x processing time If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. 1040x processing time Enter any proceeds you received from the foreclosure sale   6. 1040x processing time Add lines 4 and 5   7. 1040x processing time Enter the adjusted basis of the transferred property   8. 1040x processing time Gain or loss from foreclosure or repossession. 1040x processing time Subtract line 7  from line 6   * The income may not be taxable. 1040x processing time See Cancellation of debt . 1040x processing time    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. 1040x processing time Amount realized on a nonrecourse debt. 1040x processing time   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. 1040x processing time The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. 1040x processing time Example 1. 1040x processing time Ann paid $200,000 for land used in her farming business. 1040x processing time She paid $15,000 down and borrowed the remaining $185,000 from a bank. 1040x processing time Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. 1040x processing time The bank foreclosed on the loan 2 years after Ann stopped making payments. 1040x processing time When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. 1040x processing time The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. 1040x processing time She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). 1040x processing time She has a $20,000 deductible loss. 1040x processing time Example 2. 1040x processing time Assume the same facts as in Example 1 except the FMV of the land was $210,000. 1040x processing time The result is the same. 1040x processing time The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. 1040x processing time Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. 1040x processing time Amount realized on a recourse debt. 1040x processing time   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. 1040x processing time   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. 1040x processing time The amount realized does not include the canceled debt that is your income from cancellation of debt. 1040x processing time See Cancellation of debt , later. 1040x processing time Example 3. 1040x processing time Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). 1040x processing time In this case, the amount she realizes is $170,000. 1040x processing time This is the canceled debt ($180,000) up to the FMV of the land ($170,000). 1040x processing time Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). 1040x processing time She has a $30,000 deductible loss, which she figures on Form 4797, Part I. 1040x processing time She is also treated as receiving ordinary income from cancellation of debt. 1040x processing time That income is $10,000 ($180,000 − $170,000). 1040x processing time This is the part of the canceled debt not included in the amount realized. 1040x processing time She reports this as other income on Schedule F, line 8. 1040x processing time Seller's (lender's) gain or loss on repossession. 1040x processing time   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. 1040x processing time For more information, see Repossession in Publication 537, Installment Sales. 1040x processing time Cancellation of debt. 1040x processing time   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. 1040x processing time This income is separate from any gain or loss realized from the foreclosure or repossession. 1040x processing time Report the income from cancellation of a business debt on Schedule F, line 8. 1040x processing time Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 1040x processing time    You can use Worksheet 8-1 to figure your income from cancellation of debt. 1040x processing time   However, income from cancellation of debt is not taxed if any of the following apply. 1040x processing time The cancellation is intended as a gift. 1040x processing time The debt is qualified farm debt (see chapter 3). 1040x processing time The debt is qualified real property business debt (see chapter 5 of Publication 334). 1040x processing time You are insolvent or bankrupt (see  chapter 3). 1040x processing time The debt is qualified principal residence indebtedness (see chapter 3). 1040x processing time   Use Form 982 to report the income exclusion. 1040x processing time Abandonment The abandonment of property is a disposition of property. 1040x processing time You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. 1040x processing time Business or investment property. 1040x processing time   Loss from abandonment of business or investment property is deductible as a loss. 1040x processing time Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 1040x processing time If your adjusted basis is more than the amount you realize (if any), then you have a loss. 1040x processing time If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 1040x processing time This rule also applies to leasehold improvements the lessor made for the lessee. 1040x processing time However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . 1040x processing time   If the abandoned property is secured by debt, special rules apply. 1040x processing time The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). 1040x processing time For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). 1040x processing time The abandonment loss is deducted in the tax year in which the loss is sustained. 1040x processing time Report the loss on Form 4797, Part II, line 10. 1040x processing time Personal-use property. 1040x processing time   You cannot deduct any loss from abandonment of your home or other property held for personal use. 1040x processing time Canceled debt. 1040x processing time   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. 1040x processing time This income is separate from any loss realized from abandonment of the property. 1040x processing time Report income from cancellation of a debt related to a business or rental activity as business or rental income. 1040x processing time Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 1040x processing time   However, income from cancellation of debt is not taxed in certain circumstances. 1040x processing time See Cancellation of debt earlier under Foreclosure or Repossession . 1040x processing time Forms 1099-A and 1099-C. 1040x processing time   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. 1040x processing time However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. 1040x processing time The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 1040x processing time For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 1040x processing time Prev  Up  Next   Home   More Online Publications