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2012 Form 1040 Schedule A

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2012 Form 1040 Schedule A

2012 form 1040 schedule a Publication 523 - Main Content Table of Contents Main HomeVacant land. 2012 form 1040 schedule a Factors used to determine main home. 2012 form 1040 schedule a Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining BasisCost As Basis Basis Other Than Cost Adjusted Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Nonqualified Use Business Use or Rental of HomeUnrecaptured section 1250 gain. 2012 form 1040 schedule a Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. 2012 form 1040 schedule a Individual taxpayer identification number (ITIN). 2012 form 1040 schedule a More information. 2012 form 1040 schedule a Comprehensive Examples Special SituationsException for sales to related persons. 2012 form 1040 schedule a Deducting Taxes in the Year of SaleForm 1099-S. 2012 form 1040 schedule a More information. 2012 form 1040 schedule a Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. 2012 form 1040 schedule a Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. 2012 form 1040 schedule a ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. 2012 form 1040 schedule a To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. 2012 form 1040 schedule a Land. 2012 form 1040 schedule a   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a You buy a piece of land and move your main home to it. 2012 form 1040 schedule a Then, you sell the land on which your main home was located. 2012 form 1040 schedule a This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. 2012 form 1040 schedule a Vacant land. 2012 form 1040 schedule a   The sale of vacant land is not a sale of your main home unless: The vacant land is adjacent to land containing your home, You owned and used the vacant land as part of your main home, The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land. 2012 form 1040 schedule a If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. 2012 form 1040 schedule a See Excluding the Gain , later. 2012 form 1040 schedule a The destruction of your home is treated as a sale of your home. 2012 form 1040 schedule a As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. 2012 form 1040 schedule a For information, see Publication 547. 2012 form 1040 schedule a More than one home. 2012 form 1040 schedule a   If you have more than one home, you can exclude gain only from the sale of your main home. 2012 form 1040 schedule a You must include in income the gain from the sale of any other home. 2012 form 1040 schedule a If you have two homes and live in each of them, your main home is ordinarily the one you live in most of the time during the year. 2012 form 1040 schedule a Example 1. 2012 form 1040 schedule a You own two homes, one in New York and one in Florida. 2012 form 1040 schedule a From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. 2012 form 1040 schedule a In the absence of facts and circumstances indicating otherwise, the New York home is your main home. 2012 form 1040 schedule a You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. 2012 form 1040 schedule a Example 2. 2012 form 1040 schedule a You own a house, but you live in another house that you rent. 2012 form 1040 schedule a The rented house is your main home. 2012 form 1040 schedule a Example 3. 2012 form 1040 schedule a You own two homes, one in Virginia and one in New Hampshire. 2012 form 1040 schedule a In 2009 and 2010, you lived in the Virginia home. 2012 form 1040 schedule a In 2011 and 2012, you lived in the New Hampshire home. 2012 form 1040 schedule a In 2013, you lived again in the Virginia home. 2012 form 1040 schedule a Your main home in 2009, 2010, and 2013 is the Virginia home. 2012 form 1040 schedule a Your main home in 2011 and 2012 is the New Hampshire home. 2012 form 1040 schedule a You would be eligible to exclude gain from the sale of either home (but not both) in 2013. 2012 form 1040 schedule a Factors used to determine main home. 2012 form 1040 schedule a   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. 2012 form 1040 schedule a Those factors include the following. 2012 form 1040 schedule a Your place of employment. 2012 form 1040 schedule a The location of your family members' main home. 2012 form 1040 schedule a Your mailing address for bills and correspondence. 2012 form 1040 schedule a The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. 2012 form 1040 schedule a The location of the banks you use. 2012 form 1040 schedule a The location of recreational clubs and religious organizations of which you are a member. 2012 form 1040 schedule a Property used partly as your main home. 2012 form 1040 schedule a   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. 2012 form 1040 schedule a For details, see Business Use or Rental of Home , later. 2012 form 1040 schedule a Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. 2012 form 1040 schedule a Subtract the adjusted basis from the amount realized to get your gain or loss. 2012 form 1040 schedule a     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. 2012 form 1040 schedule a   Gain is the excess of the amount realized over the adjusted basis of the property. 2012 form 1040 schedule a Loss. 2012 form 1040 schedule a   Loss is the excess of the adjusted basis over the amount realized for the property. 2012 form 1040 schedule a Selling Price The selling price is the total amount you receive for your home. 2012 form 1040 schedule a It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. 2012 form 1040 schedule a Personal property. 2012 form 1040 schedule a   The selling price of your home does not include amounts you received for personal property sold with your home. 2012 form 1040 schedule a Personal property is property that is not a permanent part of the home. 2012 form 1040 schedule a Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. 2012 form 1040 schedule a Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). 2012 form 1040 schedule a Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. 2012 form 1040 schedule a Payment by employer. 2012 form 1040 schedule a   You may have to sell your home because of a job transfer. 2012 form 1040 schedule a If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. 2012 form 1040 schedule a Your employer will include it as wages in box 1 of your Form W-2 and you will include it in your income on Form 1040, line 7, or on Form 1040NR, line 8. 2012 form 1040 schedule a Option to buy. 2012 form 1040 schedule a   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. 2012 form 1040 schedule a If the option is not exercised, you must report the amount as ordinary income in the year the option expires. 2012 form 1040 schedule a Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. 2012 form 1040 schedule a Form 1099-S. 2012 form 1040 schedule a   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. 2012 form 1040 schedule a   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. 2012 form 1040 schedule a Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. 2012 form 1040 schedule a Amount Realized The amount realized is the selling price minus selling expenses. 2012 form 1040 schedule a Selling expenses. 2012 form 1040 schedule a   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. 2012 form 1040 schedule a ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. 2012 form 1040 schedule a This adjusted basis must be determined before you can figure gain or loss on the sale of your home. 2012 form 1040 schedule a For information on how to figure your home's adjusted basis, see Determining Basis , later. 2012 form 1040 schedule a Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. 2012 form 1040 schedule a Gain on sale. 2012 form 1040 schedule a   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable. 2012 form 1040 schedule a Loss on sale. 2012 form 1040 schedule a   If the amount realized is less than the adjusted basis, the difference is a loss. 2012 form 1040 schedule a Generally, a loss on the sale of your main home cannot be deducted. 2012 form 1040 schedule a Jointly owned home. 2012 form 1040 schedule a   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. 2012 form 1040 schedule a Separate returns. 2012 form 1040 schedule a   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. 2012 form 1040 schedule a Your ownership interest is generally determined by state law. 2012 form 1040 schedule a Joint owners not married. 2012 form 1040 schedule a   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. 2012 form 1040 schedule a Each of you applies the rules discussed in this publication on an individual basis. 2012 form 1040 schedule a Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. 2012 form 1040 schedule a Foreclosure or repossession. 2012 form 1040 schedule a   If your home was foreclosed on or repossessed, you have a disposition. 2012 form 1040 schedule a See Publication 4681 to determine if you have ordinary income, gain, or loss. 2012 form 1040 schedule a More information. 2012 form 1040 schedule a   If part of a home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. 2012 form 1040 schedule a Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. 2012 form 1040 schedule a Abandonment. 2012 form 1040 schedule a   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. 2012 form 1040 schedule a Trading (exchanging) homes. 2012 form 1040 schedule a   If you trade your home for another home, treat the trade as a sale and a purchase. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a You owned and lived in a home with an adjusted basis of $41,000. 2012 form 1040 schedule a A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. 2012 form 1040 schedule a This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). 2012 form 1040 schedule a If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). 2012 form 1040 schedule a Transfer to spouse. 2012 form 1040 schedule a   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). 2012 form 1040 schedule a This is true even if you receive cash or other consideration for the home. 2012 form 1040 schedule a As a result, the rules explained in this publication do not apply. 2012 form 1040 schedule a   If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. 2012 form 1040 schedule a You have no gain or loss. 2012 form 1040 schedule a Exception. 2012 form 1040 schedule a   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. 2012 form 1040 schedule a In that case, you generally will have a gain or loss. 2012 form 1040 schedule a More information. 2012 form 1040 schedule a    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. 2012 form 1040 schedule a Involuntary conversion. 2012 form 1040 schedule a   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. 2012 form 1040 schedule a This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations (see Home destroyed or condemned ). 2012 form 1040 schedule a Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. 2012 form 1040 schedule a Your basis in your home is determined by how you got the home. 2012 form 1040 schedule a Generally, your basis is its cost if you bought it or built it. 2012 form 1040 schedule a If you got it in some other way (inheritance, gift, etc. 2012 form 1040 schedule a ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. 2012 form 1040 schedule a While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. 2012 form 1040 schedule a The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. 2012 form 1040 schedule a To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. 2012 form 1040 schedule a Filled-in examples of that worksheet are included in the Comprehensive Examples , later. 2012 form 1040 schedule a Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. 2012 form 1040 schedule a Purchase. 2012 form 1040 schedule a   If you bought your home, your basis is its cost to you. 2012 form 1040 schedule a This includes the purchase price and certain settlement or closing costs. 2012 form 1040 schedule a In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. 2012 form 1040 schedule a If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. 2012 form 1040 schedule a Seller-paid points. 2012 form 1040 schedule a   If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart. 2012 form 1040 schedule a    IF you bought your home. 2012 form 1040 schedule a . 2012 form 1040 schedule a . 2012 form 1040 schedule a THEN reduce your home's basis by the seller-paid points. 2012 form 1040 schedule a . 2012 form 1040 schedule a . 2012 form 1040 schedule a after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. 2012 form 1040 schedule a after April 3, 1994 even if you did not deduct them. 2012 form 1040 schedule a Settlement fees or closing costs. 2012 form 1040 schedule a   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. 2012 form 1040 schedule a You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. 2012 form 1040 schedule a A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). 2012 form 1040 schedule a   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 2012 form 1040 schedule a   Some of the settlement fees or closing costs that you can include in your basis are: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, Owner's title insurance, and Any amounts the seller owes that you agree to pay, such as: Certain real estate taxes (discussed later), Back interest, Recording or mortgage fees, Charges for improvements or repairs, and Sales commissions. 2012 form 1040 schedule a   Some settlement fees and closing costs you cannot include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage. 2012 form 1040 schedule a Real estate taxes. 2012 form 1040 schedule a   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. 2012 form 1040 schedule a    IF. 2012 form 1040 schedule a . 2012 form 1040 schedule a . 2012 form 1040 schedule a AND. 2012 form 1040 schedule a . 2012 form 1040 schedule a . 2012 form 1040 schedule a THEN the taxes. 2012 form 1040 schedule a . 2012 form 1040 schedule a . 2012 form 1040 schedule a you pay taxes that the seller owed on the home up to the date of sale the seller does not reimburse you are added to the basis of your home. 2012 form 1040 schedule a the seller reimburses you do not affect the basis of your home. 2012 form 1040 schedule a the seller pays taxes for you (taxes owed beginning on the date of sale) you do not reimburse the seller are subtracted from the basis of your home. 2012 form 1040 schedule a you reimburse the seller do not affect the basis of your home. 2012 form 1040 schedule a Construction. 2012 form 1040 schedule a   If you contracted to have your house built on land you own, your basis is: The cost of the land, plus The amount it cost you to complete the house, including: The cost of labor and materials, Any amounts paid to a contractor, Any architect's fees, Building permit charges, Utility meter and connection charges, and Legal fees directly connected with building the house. 2012 form 1040 schedule a   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. 2012 form 1040 schedule a It also includes certain settlement or closing costs. 2012 form 1040 schedule a You may have to reduce your basis by points the seller paid for you. 2012 form 1040 schedule a For more information, see Seller-paid points and Settlement fees or closing costs , earlier. 2012 form 1040 schedule a Built by you. 2012 form 1040 schedule a   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. 2012 form 1040 schedule a Do not include in the cost of the house: The value of your own labor, or The value of any other labor you did not pay for. 2012 form 1040 schedule a Temporary housing. 2012 form 1040 schedule a   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. 2012 form 1040 schedule a To figure the amount of the reduction, multiply the contract price by a fraction. 2012 form 1040 schedule a The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. 2012 form 1040 schedule a Cooperative apartment. 2012 form 1040 schedule a   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. 2012 form 1040 schedule a This may include your share of a mortgage on the apartment building. 2012 form 1040 schedule a Condominium. 2012 form 1040 schedule a   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. 2012 form 1040 schedule a Basis Other Than Cost You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. 2012 form 1040 schedule a These situations are discussed in the following pages. 2012 form 1040 schedule a Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. 2012 form 1040 schedule a Other special rules may apply in certain situations. 2012 form 1040 schedule a If you converted the property, or some part of it, to business or rental use, see Property Changed to Business or Rental Use, in Publication 551. 2012 form 1040 schedule a Home received as gift. 2012 form 1040 schedule a   Use the following chart to find the basis of a home you received as a gift. 2012 form 1040 schedule a IF the donor's adjusted basis at the time of the gift was. 2012 form 1040 schedule a . 2012 form 1040 schedule a . 2012 form 1040 schedule a THEN your basis is. 2012 form 1040 schedule a . 2012 form 1040 schedule a . 2012 form 1040 schedule a more than the fair market value of the home at that time the same as the donor's adjusted basis at the time of the gift. 2012 form 1040 schedule a   Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. 2012 form 1040 schedule a If using the fair market value results in a gain, you have neither gain nor loss. 2012 form 1040 schedule a equal to or less than the fair market value at that time, and you received the gift before 1977 the smaller of the: • donor's adjusted basis, plus  any federal gift tax paid on  the gift, or • the home's fair market value  at the time of the gift. 2012 form 1040 schedule a equal to or less than the fair market value at that time, and you received the gift after 1976 the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). 2012 form 1040 schedule a Fair market value. 2012 form 1040 schedule a   The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. 2012 form 1040 schedule a If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax. 2012 form 1040 schedule a Part of federal gift tax due to net increase in value. 2012 form 1040 schedule a   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. 2012 form 1040 schedule a The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 2012 form 1040 schedule a The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. 2012 form 1040 schedule a Home acquired from a decedent who died before or after 2010. 2012 form 1040 schedule a   If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). 2012 form 1040 schedule a If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. 2012 form 1040 schedule a If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes. 2012 form 1040 schedule a Surviving spouse. 2012 form 1040 schedule a   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. 2012 form 1040 schedule a The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). 2012 form 1040 schedule a The basis in your interest will remain the same. 2012 form 1040 schedule a Your new basis in the home is the total of these two amounts. 2012 form 1040 schedule a   If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. 2012 form 1040 schedule a Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). 2012 form 1040 schedule a Community property. 2012 form 1040 schedule a   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. 2012 form 1040 schedule a When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. 2012 form 1040 schedule a For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. 2012 form 1040 schedule a   For more information about community property, see Publication 555, Community Property. 2012 form 1040 schedule a    If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis. 2012 form 1040 schedule a Home received as trade. 2012 form 1040 schedule a   If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. 2012 form 1040 schedule a If you traded one home for another, you have made a sale and purchase. 2012 form 1040 schedule a In that case, you may have a gain. 2012 form 1040 schedule a See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. 2012 form 1040 schedule a Home received from spouse. 2012 form 1040 schedule a   If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer. 2012 form 1040 schedule a Transfers after July 18, 1984. 2012 form 1040 schedule a   If you received the home after July 18, 1984, there was no gain or loss on the transfer. 2012 form 1040 schedule a In most cases, your basis in this home is the same as your spouse's (or former spouse's) adjusted basis just before you received it. 2012 form 1040 schedule a This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. 2012 form 1040 schedule a   If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. 2012 form 1040 schedule a This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. 2012 form 1040 schedule a Your basis in the half interest you already owned does not change. 2012 form 1040 schedule a Your new basis in the home is the total of these two amounts. 2012 form 1040 schedule a Transfers before July 19, 1984. 2012 form 1040 schedule a   If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, your basis in the home is generally its fair market value at the time you received it. 2012 form 1040 schedule a More information. 2012 form 1040 schedule a   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. 2012 form 1040 schedule a Involuntary conversion. 2012 form 1040 schedule a   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. 2012 form 1040 schedule a If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in: Publication 547, in the case of a home that was destroyed, or Chapter 1 of Publication 544, in the case of a home that was condemned. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a A fire destroyed your home that you owned and used for only 6 months. 2012 form 1040 schedule a The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. 2012 form 1040 schedule a Your gain is $50,000 ($130,000 − $80,000). 2012 form 1040 schedule a You bought a replacement home for $100,000. 2012 form 1040 schedule a The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. 2012 form 1040 schedule a The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. 2012 form 1040 schedule a The basis of the new home is figured as follows. 2012 form 1040 schedule a Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. 2012 form 1040 schedule a   For more information about basis, see Publication 551. 2012 form 1040 schedule a Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. 2012 form 1040 schedule a To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. 2012 form 1040 schedule a Filled-in examples of that worksheet are included in Comprehensive Examples , later. 2012 form 1040 schedule a Recordkeeping. 2012 form 1040 schedule a You should keep records to prove your home's adjusted basis. 2012 form 1040 schedule a Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. 2012 form 1040 schedule a But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. 2012 form 1040 schedule a Keep records proving the basis of both homes as long as they are needed for tax purposes. 2012 form 1040 schedule a The records you should keep include: Proof of the home's purchase price and purchase expenses; Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis; Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain; Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness; Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. 2012 form 1040 schedule a Increases to Basis These include the following. 2012 form 1040 schedule a Additions and other improvements that have a useful life of more than 1 year. 2012 form 1040 schedule a Special assessments for local improvements. 2012 form 1040 schedule a Amounts you spent after a casualty to restore damaged property. 2012 form 1040 schedule a Improvements. 2012 form 1040 schedule a   These add to the value of your home, prolong its useful life, or adapt it to new uses. 2012 form 1040 schedule a You add the cost of additions and other improvements to the basis of your property. 2012 form 1040 schedule a   The following chart lists some other examples of improvements. 2012 form 1040 schedule a Examples of Improvements That Increase Basis Additions Bedroom Bathroom Deck Garage Porch Patio Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Lawn & Grounds Landscaping Driveway Walkway Fence  Retaining wall Sprinkler system Swimming pool  Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system  Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances  Kitchen modernization  Flooring Wall-to-wall carpeting  Insulation Attic Walls Floors Pipes and duct work Improvements no longer part of home. 2012 form 1040 schedule a   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a You put wall-to-wall carpeting in your home 15 years ago. 2012 form 1040 schedule a Later, you replaced that carpeting with new wall-to-wall carpeting. 2012 form 1040 schedule a The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. 2012 form 1040 schedule a Repairs. 2012 form 1040 schedule a   These maintain your home in good condition but do not add to its value or prolong its life. 2012 form 1040 schedule a You do not add their cost to the basis of your property. 2012 form 1040 schedule a Examples. 2012 form 1040 schedule a Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. 2012 form 1040 schedule a Exception. 2012 form 1040 schedule a   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. 2012 form 1040 schedule a For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. 2012 form 1040 schedule a Decreases to Basis These include the following. 2012 form 1040 schedule a Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). 2012 form 1040 schedule a For details, see Publication 4681. 2012 form 1040 schedule a Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. 2012 form 1040 schedule a For details, see Publication 4681. 2012 form 1040 schedule a Gain you postponed from the sale of a previous home before May 7, 1997. 2012 form 1040 schedule a Deductible casualty losses. 2012 form 1040 schedule a Insurance payments you received or expect to receive for casualty losses. 2012 form 1040 schedule a Payments you received for granting an easement or right-of-way. 2012 form 1040 schedule a Depreciation allowed or allowable if you used your home for business or rental purposes. 2012 form 1040 schedule a Energy-related credits allowed for expenditures made on the residence. 2012 form 1040 schedule a (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. 2012 form 1040 schedule a ) Adoption credit you claimed for improvements added to the basis of your home. 2012 form 1040 schedule a Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. 2012 form 1040 schedule a Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. 2012 form 1040 schedule a An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. 2012 form 1040 schedule a District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. 2012 form 1040 schedule a General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. 2012 form 1040 schedule a Discharges of qualified principal residence indebtedness. 2012 form 1040 schedule a   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. 2012 form 1040 schedule a This exclusion applies to discharges made after 2006 and before 2014. 2012 form 1040 schedule a If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income. 2012 form 1040 schedule a   File Form 982 with your tax return. 2012 form 1040 schedule a See the form's instructions for detailed information. 2012 form 1040 schedule a    A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. 2012 form 1040 schedule a In most cases, this would occur in a refinancing or a restructuring of the mortgage. 2012 form 1040 schedule a Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. 2012 form 1040 schedule a This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. 2012 form 1040 schedule a To qualify, you must meet the ownership and use tests described later. 2012 form 1040 schedule a You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. 2012 form 1040 schedule a This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. 2012 form 1040 schedule a You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. 2012 form 1040 schedule a If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. 2012 form 1040 schedule a See Publication 505, Tax Withholding and Estimated Tax. 2012 form 1040 schedule a Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. 2012 form 1040 schedule a You meet the ownership test. 2012 form 1040 schedule a You meet the use test. 2012 form 1040 schedule a During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. 2012 form 1040 schedule a For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. 2012 form 1040 schedule a If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. 2012 form 1040 schedule a You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . 2012 form 1040 schedule a Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. 2012 form 1040 schedule a This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). 2012 form 1040 schedule a Exception. 2012 form 1040 schedule a   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. 2012 form 1040 schedule a However, the maximum amount you may be able to exclude will be reduced. 2012 form 1040 schedule a See Reduced Maximum Exclusion , later. 2012 form 1040 schedule a Example 1—home owned and occupied for at least 2 years. 2012 form 1040 schedule a Mya bought and moved into her main home in September 2011. 2012 form 1040 schedule a She sold the home at a gain in October 2013. 2012 form 1040 schedule a During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. 2012 form 1040 schedule a She meets the ownership and use tests. 2012 form 1040 schedule a Example 2—ownership test met but use test not met. 2012 form 1040 schedule a Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. 2012 form 1040 schedule a He later sold the home for a gain in June 2013. 2012 form 1040 schedule a He owned the home during the entire 5-year period ending on the date of sale. 2012 form 1040 schedule a He meets the ownership test but not the use test. 2012 form 1040 schedule a He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). 2012 form 1040 schedule a Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. 2012 form 1040 schedule a You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a Naomi bought and moved into a house in July 2009. 2012 form 1040 schedule a She lived there for 13 months and then moved in with a friend. 2012 form 1040 schedule a She later moved back into her house and lived there for 12 months until she sold it in August 2013. 2012 form 1040 schedule a Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months. 2012 form 1040 schedule a Temporary absence. 2012 form 1040 schedule a   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. 2012 form 1040 schedule a The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. 2012 form 1040 schedule a Example 1. 2012 form 1040 schedule a David Johnson, who is single, bought and moved into his home on February 1, 2011. 2012 form 1040 schedule a Each year during 2011 and 2012, David left his home for a 2-month summer vacation. 2012 form 1040 schedule a David sold the house on March 1, 2013. 2012 form 1040 schedule a Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. 2012 form 1040 schedule a The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. 2012 form 1040 schedule a Example 2. 2012 form 1040 schedule a Professor Paul Beard, who is single, bought and moved into a house in December 2010, went abroad for a 1-year sabbatical leave in January 2012, returned to the house in January 2013, and sold it at a gain in February 2013. 2012 form 1040 schedule a Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. 2012 form 1040 schedule a He cannot exclude any part of his gain because he did not use the residence for the required 2 years. 2012 form 1040 schedule a Ownership and use tests met at different times. 2012 form 1040 schedule a   You can meet the ownership and use tests during different 2-year periods. 2012 form 1040 schedule a However, you must meet both tests during the 5-year period ending on the date of the sale. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a Beginning in 2002, Helen Jones lived in a rented apartment. 2012 form 1040 schedule a The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. 2012 form 1040 schedule a In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. 2012 form 1040 schedule a On July 12, 2013, while still living in her daughter's home, she sold her condominium. 2012 form 1040 schedule a Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. 2012 form 1040 schedule a She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). 2012 form 1040 schedule a She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). 2012 form 1040 schedule a The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. 2012 form 1040 schedule a Cooperative apartment. 2012 form 1040 schedule a   If you sold stock as a tenant-shareholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitled you to occupy as your main home for at least 2 years. 2012 form 1040 schedule a Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. 2012 form 1040 schedule a Exception for individuals with a disability. 2012 form 1040 schedule a   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. 2012 form 1040 schedule a Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. 2012 form 1040 schedule a   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. 2012 form 1040 schedule a Previous home destroyed or condemned. 2012 form 1040 schedule a   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. 2012 form 1040 schedule a This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home (see Involuntary Conversions in Publication 551). 2012 form 1040 schedule a Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. 2012 form 1040 schedule a Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. 2012 form 1040 schedule a   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. 2012 form 1040 schedule a You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. 2012 form 1040 schedule a This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. 2012 form 1040 schedule a   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a John bought and moved into a home in 2005. 2012 form 1040 schedule a He lived in it as his main home for 2½ years. 2012 form 1040 schedule a For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. 2012 form 1040 schedule a He then sold the home at a gain in 2013. 2012 form 1040 schedule a To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. 2012 form 1040 schedule a This means he can disregard those 6 years. 2012 form 1040 schedule a Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. 2012 form 1040 schedule a He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. 2012 form 1040 schedule a Period of suspension. 2012 form 1040 schedule a   The period of suspension cannot last more than 10 years. 2012 form 1040 schedule a Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. 2012 form 1040 schedule a You cannot suspend the 5-year period for more than one property at a time. 2012 form 1040 schedule a You can revoke your choice to suspend the 5-year period at any time. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a Mary bought a home on April 1, 1997. 2012 form 1040 schedule a She used it as her main home until August 31, 2000. 2012 form 1040 schedule a On September 1, 2000, she went on qualified official extended duty with the Navy. 2012 form 1040 schedule a She did not live in the house again before selling it on July 31, 2013. 2012 form 1040 schedule a Mary chooses to use the entire 10-year suspension period. 2012 form 1040 schedule a Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. 2012 form 1040 schedule a During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. 2012 form 1040 schedule a She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. 2012 form 1040 schedule a Uniformed services. 2012 form 1040 schedule a   The uniformed services are: The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard), The commissioned corps of the National Oceanic and Atmospheric Administration, and The commissioned corps of the Public Health Service. 2012 form 1040 schedule a Foreign Service member. 2012 form 1040 schedule a   For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following. 2012 form 1040 schedule a A Chief of mission. 2012 form 1040 schedule a An Ambassador at large. 2012 form 1040 schedule a A member of the Senior Foreign Service. 2012 form 1040 schedule a A Foreign Service officer. 2012 form 1040 schedule a Part of the Foreign Service personnel. 2012 form 1040 schedule a Employee of the intelligence community. 2012 form 1040 schedule a   For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following. 2012 form 1040 schedule a The Office of the Director of National Intelligence. 2012 form 1040 schedule a The Central Intelligence Agency. 2012 form 1040 schedule a The National Security Agency. 2012 form 1040 schedule a The Defense Intelligence Agency. 2012 form 1040 schedule a The National Geospatial-Intelligence Agency. 2012 form 1040 schedule a The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. 2012 form 1040 schedule a Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard. 2012 form 1040 schedule a The Bureau of Intelligence and Research of the Department of State. 2012 form 1040 schedule a Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. 2012 form 1040 schedule a Qualified official extended duty. 2012 form 1040 schedule a   You are on qualified official extended duty if you are on extended duty while: Serving at a duty station at least 50 miles from your main home, or Living in Government quarters under Government orders. 2012 form 1040 schedule a   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. 2012 form 1040 schedule a Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. 2012 form 1040 schedule a (But see Special rules for joint returns, next. 2012 form 1040 schedule a ) Special rules for joint returns. 2012 form 1040 schedule a   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. 2012 form 1040 schedule a You are married and file a joint return for the year. 2012 form 1040 schedule a Either you or your spouse meets the ownership test. 2012 form 1040 schedule a Both you and your spouse meet the use test. 2012 form 1040 schedule a During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. 2012 form 1040 schedule a If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. 2012 form 1040 schedule a For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. 2012 form 1040 schedule a Example 1—one spouse sells a home. 2012 form 1040 schedule a Emily sells her home in June 2013 for a gain of $300,000. 2012 form 1040 schedule a She marries Jamie later in the year. 2012 form 1040 schedule a She meets the ownership and use tests, but Jamie does not. 2012 form 1040 schedule a Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. 2012 form 1040 schedule a The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. 2012 form 1040 schedule a Example 2—each spouse sells a home. 2012 form 1040 schedule a The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. 2012 form 1040 schedule a He meets the ownership and use tests on his home, but Emily does not. 2012 form 1040 schedule a Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. 2012 form 1040 schedule a However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. 2012 form 1040 schedule a Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. 2012 form 1040 schedule a The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. 2012 form 1040 schedule a Sale of main home by surviving spouse. 2012 form 1040 schedule a   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. 2012 form 1040 schedule a   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. 2012 form 1040 schedule a The sale or exchange took place after 2008. 2012 form 1040 schedule a The sale or exchange took place no more than 2 years after the date of death of your spouse. 2012 form 1040 schedule a You have not remarried. 2012 form 1040 schedule a You and your spouse met the use test at the time of your spouse's death. 2012 form 1040 schedule a You or your spouse met the ownership test at the time of your spouse's death. 2012 form 1040 schedule a Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. 2012 form 1040 schedule a The ownership and use tests were described earlier. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a Harry owned and used a house as his main home since 2009. 2012 form 1040 schedule a Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. 2012 form 1040 schedule a Harry died on August 15, 2013, and Wilma inherited the property. 2012 form 1040 schedule a Wilma sold the property on September 1, 2013, at which time she had not remarried. 2012 form 1040 schedule a Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. 2012 form 1040 schedule a Home transferred from spouse. 2012 form 1040 schedule a   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. 2012 form 1040 schedule a Use of home after divorce. 2012 form 1040 schedule a   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. 2012 form 1040 schedule a Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. 2012 form 1040 schedule a This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. 2012 form 1040 schedule a In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. 2012 form 1040 schedule a A change in place of employment. 2012 form 1040 schedule a Health. 2012 form 1040 schedule a Unforeseen circumstances. 2012 form 1040 schedule a Qualified individual. 2012 form 1040 schedule a   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. 2012 form 1040 schedule a You. 2012 form 1040 schedule a Your spouse. 2012 form 1040 schedule a A co-owner of the home. 2012 form 1040 schedule a A person whose main home is the same as yours. 2012 form 1040 schedule a Primary reason for sale. 2012 form 1040 schedule a   One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true. 2012 form 1040 schedule a You qualify under a “safe harbor. 2012 form 1040 schedule a ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. 2012 form 1040 schedule a Safe harbors corresponding to the reasons listed above are described later. 2012 form 1040 schedule a A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances. 2012 form 1040 schedule a  Factors that may be relevant in determining your primary reason for sale include whether: Your sale and the circumstances causing it were close in time, The circumstances causing your sale occurred during the time you owned and used the property as your main home, The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home, Your financial ability to maintain the property became materially impaired, The suitability of the property as your main home materially changed, and During the time you owned the property, you used it as your home. 2012 form 1040 schedule a Change in Place of Employment You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual. 2012 form 1040 schedule a Employment. 2012 form 1040 schedule a   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. 2012 form 1040 schedule a It also includes the start or continuation of self-employment. 2012 form 1040 schedule a Distance safe harbor. 2012 form 1040 schedule a   A change in place of employment is considered to be the reason you sold your home if: The change occurred during the period you owned and used the property as your main home, and The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles). 2012 form 1040 schedule a Example. 2012 form 1040 schedule a Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. 2012 form 1040 schedule a He got a job in North Carolina and sold his townhouse in 2013. 2012 form 1040 schedule a Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. 2012 form 1040 schedule a Justin's sale of his home is considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale. 2012 form 1040 schedule a Health The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury. 2012 form 1040 schedule a The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. 2012 form 1040 schedule a For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual , any of the following family members of these individuals. 2012 form 1040 schedule a Parent, grandparent, stepmother, stepfather. 2012 form 1040 schedule a Child, grandchild, stepchild, adopted child, eligible foster child. 2012 form 1040 schedule a Brother, sister, stepbrother, stepsister, half-brother, half-sister. 2012 form 1040 schedule a Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. 2012 form 1040 schedule a Uncle, aunt, nephew, niece, or cousin. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. 2012 form 1040 schedule a Lauren's father has a chronic disease and is unable to care for himself. 2012 form 1040 schedule a In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. 2012 form 1040 schedule a Because the primary reason for the sale of their home was to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion. 2012 form 1040 schedule a Doctor's recommendation safe harbor. 2012 form 1040 schedule a   Health is considered to be the reason you sold your home if, for one or more of the reasons listed at the beginning of this discussion, a doctor recommends a change of residence. 2012 form 1040 schedule a Unforeseen Circumstances The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying that home. 2012 form 1040 schedule a You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved. 2012 form 1040 schedule a Specific event safe harbors. 2012 form 1040 schedule a   Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home. 2012 form 1040 schedule a An involuntary conversion of your home, such as when your home is destroyed or condemned. 2012 form 1040 schedule a Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible. 2012 form 1040 schedule a In the case of qualified individuals (listed earlier under Qualified individual ): Death, Unemployment (if the individual is eligible for unemployment compensation), A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses , later) for his or her household, Divorce or legal separation under a decree of divorce or separate maintenance, or Multiple births resulting from the same pregnancy. 2012 form 1040 schedule a An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. 2012 form 1040 schedule a For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. 2012 form 1040 schedule a Reasonable basic living expenses. 2012 form 1040 schedule a   Reasonable basic living expenses for your household include the following. 2012 form 1040 schedule a Amounts spent for food. 2012 form 1040 schedule a Amounts spent for clothing. 2012 form 1040 schedule a Housing and related expenses. 2012 form 1040 schedule a Medical expenses. 2012 form 1040 schedule a Transportation expenses. 2012 form 1040 schedule a Tax payments. 2012 form 1040 schedule a Court-ordered payments. 2012 form 1040 schedule a Expenses reasonably necessary to produce income. 2012 form 1040 schedule a   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. 2012 form 1040 schedule a Nonqualified Use Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. 2012 form 1040 schedule a Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next). 2012 form 1040 schedule a Exceptions. 2012 form 1040 schedule a   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. 2012 form 1040 schedule a Calculation. 2012 form 1040 schedule a   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain (net of any depreciation allowed or allowable on the property for periods after May 6, 1997) by the following fraction:   Total nonqualified use during the period of ownership after 2008     Total period of ownership     This calculation can be found in Worksheet 2, line 10, later in this publication. 2012 form 1040 schedule a   For examples of this calculation, see Business Use or Rental of Home , next. 2012 form 1040 schedule a Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income if you meet the ownership and use tests. 2012 form 1040 schedule a Example 1. 2012 form 1040 schedule a On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. 2012 form 1040 schedule a She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. 2012 form 1040 schedule a The house was rented from June 1, 2009, to March 31, 2011. 2012 form 1040 schedule a Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. 2012 form 1040 schedule a Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. 2012 form 1040 schedule a During the 5-year period ending on the date of the sale (January 31, 2008–January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. 2012 form 1040 schedule a Five-Year Period Used as Home Used as Rental 1/31/08 – 5/31/09 16 months   6/01/09 – 3/31/11   22 months 4/01/11 – 1/31/13 22 months     38 months 22 months       During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. 2012 form 1040 schedule a Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain, as shown on Worksheet 2. 2012 form 1040 schedule a Example 2. 2012 form 1040 schedule a William owned and used a house as his main home from 2007 through 2010. 2012 form 1040 schedule a On January 1, 2011, he moved to another state. 2012 form 1040 schedule a He rented his house from that date until April 30, 2013, when he sold it. 2012 form 1040 schedule a During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. 2012 form 1040 schedule a Because it was rental property at the time of the sale, he must report the sale on Form 4797. 2012 form 1040 schedule a Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. 2012 form 1040 schedule a Because he met the ownership and use tests, he can exclude gain up to $250,000. 2012 form 1040 schedule a However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. 2012 form 1040 schedule a Depreciation after May 6, 1997. 2012 form 1040 schedule a   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. 2012 form 1040 schedule a If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. 2012 form 1040 schedule a Unrecaptured section 1250 gain. 2012 form 1040 schedule a   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. 2012 form 1040 schedule a To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. 2012 form 1040 schedule a Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. 2012 form 1040 schedule a Worksheet 2. 2012 form 1040 schedule a Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. 2012 form 1040 schedule a Gain or (Loss) on Sale       1. 2012 form 1040 schedule a   Selling price of home 1. 2012 form 1040 schedule a     2. 2012 form 1040 schedule a   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. 2012 form 1040 schedule a     3. 2012 form 1040 schedule a   Subtract line 2 from line 1. 2012 form 1040 schedule a This is the amount realized 3. 2012 form 1040 schedule a     4. 2012 form 1040 schedule a   Adjusted basis of home sold (from Worksheet 1, line 13) 4. 2012 form 1040 schedule a     5. 2012 form 1040 schedule a   Gain or (loss) on the sale. 2012 form 1040 schedule a Subtract line 4 from line 3. 2012 form 1040 schedule a If this is a loss, stop here 5. 2012 form 1040 schedule a 200,000   Part 2. 2012 form 1040 schedule a Exclusion and Taxable Gain       6. 2012 form 1040 schedule a   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. 2012 form 1040 schedule a If none, enter -0- 6. 2012 form 1040 schedule a 10,000   7. 2012 form 1040 schedule a   Subtract line 6 from line 5. 2012 form 1040 schedule a If the result is less than zero, enter -0- 7. 2012 form 1040 schedule a 190,000   8. 2012 form 1040 schedule a   Aggregate number of days of nonqualified use after 2008. 2012 form 1040 schedule a If none, enter -0-. 2012 form 1040 schedule a  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. 2012 form 1040 schedule a 668   9. 2012 form 1040 schedule a   Number of days taxpayer owned the property 9. 2012 form 1040 schedule a 2,080   10. 2012 form 1040 schedule a   Divide the amount on line 8 by the amount on line 9. 2012 form 1040 schedule a Enter the result as a decimal (rounded to at least 3 places). 2012 form 1040 schedule a But do not enter an amount greater than 1. 2012 form 1040 schedule a 00 10. 2012 form 1040 schedule a 0. 2012 form 1040 schedule a 321   11. 2012 form 1040 schedule a   Gain allocated to nonqualified use. 2012 form 1040 schedule a (Line 7 multiplied by line 10) 11. 2012 form 1040 schedule a 60,990   12. 2012 form 1040 schedule a   Gain eligible for exclusion. 2012 form 1040 schedule a Subtract line 11 from line 7 12. 2012 form 1040 schedule a 129,010   13. 2012 form 1040 schedule a   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). 2012 form 1040 schedule a  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. 2012 form 1040 schedule a If you do  not qualify to exclude gain, enter -0- 13. 2012 form 1040 schedule a 250,000   14. 2012 form 1040 schedule a   Exclusion. 2012 form 1040 schedule a Enter the smaller of line 12 or line 13 14. 2012 form 1040 schedule a 129,010   15. 2012 form 1040 schedule a   Taxable gain. 2012 form 1040 schedule a Subtract line 14 from line 5. 2012 form 1040 schedule a Report your taxable gain as described under Reporting the Sale . 2012 form 1040 schedule a If the amount on line 6 is more than zero, complete line 16 15. 2012 form 1040 schedule a 70,990   16. 2012 form 1040 schedule a   Enter the smaller of line 6 or line 15. 2012 form 1040 schedule a Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. 2012 form 1040 schedule a 10,000 Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. 2012 form 1040 schedule a Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. 2012 form 1040 schedule a In addition, you do not need to report the sale of the business or rental part on Form 4797. 2012 form 1040 schedule a This is true whether or not you were entitled to claim any depreciation. 2012 form 1040 schedule a However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. 2012 form 1040 schedule a See Depreciation after May 6, 1997, earlier. 2012 form 1040 schedule a Example 1. 2012 form 1040 schedule a Ray sold his main home in 2013 at a $30,000 gain. 2012 form 1040 schedule a He has no gains or losses from the sale of property other than the gain from the sale of his home. 2012 form 1040 schedule a He meets the ownership and use tests to exclude the gain from his income. 2012 form 1040 schedule a However, he used part of the home as a business office in 2012 and claimed $500 depreciation. 2012 form 1040 schedule a Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. 2012 form 1040 schedule a In addition, he does not have to report any part of the gain on Form 4797. 2012 form 1040 schedule a Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. 2012 form 1040 schedule a He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). 2012 form 1040 schedule a Example 2. 2012 form 1040 schedule a The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. 2012 form 1040 schedule a Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. 2012 form 1040 schedule a Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. 2012 form 1040 schedule a Examples are: A working farm on which your house was located, A duplex in w
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The 2012 Form 1040 Schedule A

2012 form 1040 schedule a Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. 2012 form 1040 schedule a Property not disposed of or abandoned. 2012 form 1040 schedule a Special rule for normal retirements from item accounts. 2012 form 1040 schedule a Abandoned property. 2012 form 1040 schedule a Single item accounts. 2012 form 1040 schedule a Multiple property account. 2012 form 1040 schedule a Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. 2012 form 1040 schedule a If your property qualified for MACRS, you must depreciate it under MACRS. 2012 form 1040 schedule a See Publication 946. 2012 form 1040 schedule a However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. 2012 form 1040 schedule a Also, you can elect to exclude certain property from being depreciated under MACRS. 2012 form 1040 schedule a Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. 2012 form 1040 schedule a Intangible property. 2012 form 1040 schedule a   You cannot depreciate intangible property under ACRS or MACRS. 2012 form 1040 schedule a You depreciate intangible property using any other reasonable method, usually, the straight line method. 2012 form 1040 schedule a Note. 2012 form 1040 schedule a The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. 2012 form 1040 schedule a For more information, see chapter 12 of Publication 535. 2012 form 1040 schedule a Public utility property. 2012 form 1040 schedule a   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. 2012 form 1040 schedule a This type of property is subject to depreciation under a special rule. 2012 form 1040 schedule a Videocassettes. 2012 form 1040 schedule a   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. 2012 form 1040 schedule a You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. 2012 form 1040 schedule a The straight line method, salvage value, and useful life are discussed later under Methods To Use. 2012 form 1040 schedule a You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. 2012 form 1040 schedule a How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. 2012 form 1040 schedule a These methods are straight line and declining balance. 2012 form 1040 schedule a To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. 2012 form 1040 schedule a They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. 2012 form 1040 schedule a The amount of the deduction in any year also depends on which method of depreciation you choose. 2012 form 1040 schedule a Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. 2012 form 1040 schedule a The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. 2012 form 1040 schedule a Your original basis is usually the purchase price. 2012 form 1040 schedule a However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. 2012 form 1040 schedule a Adjusted basis. 2012 form 1040 schedule a   Events will often change the basis of property. 2012 form 1040 schedule a When this occurs, the changed basis is called the adjusted basis. 2012 form 1040 schedule a Some events, such as improvements you make, increase basis. 2012 form 1040 schedule a Events such as deducting casualty losses and depreciation decrease basis. 2012 form 1040 schedule a If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. 2012 form 1040 schedule a   Publication 551 explains how to figure basis for property acquired in different ways. 2012 form 1040 schedule a It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. 2012 form 1040 schedule a Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. 2012 form 1040 schedule a It is the length of time over which you will make yearly depreciation deductions of your basis in the property. 2012 form 1040 schedule a It is how long it will continue to be useful to you, not how long the property will last. 2012 form 1040 schedule a Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. 2012 form 1040 schedule a The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. 2012 form 1040 schedule a Consider all these factors before you arrive at a useful life for your property. 2012 form 1040 schedule a The useful life of the same type of property varies from user to user. 2012 form 1040 schedule a When you determine the useful life of your property, keep in mind your own experience with similar property. 2012 form 1040 schedule a You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. 2012 form 1040 schedule a Change in useful life. 2012 form 1040 schedule a   You base your estimate of useful life on certain facts. 2012 form 1040 schedule a If these facts change significantly, you can adjust your estimate of the remaining useful life. 2012 form 1040 schedule a However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. 2012 form 1040 schedule a Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. 2012 form 1040 schedule a You generally cannot depreciate property below a reasonable salvage value. 2012 form 1040 schedule a Determining salvage value. 2012 form 1040 schedule a   Salvage value is the estimated value of property at the end of its useful life. 2012 form 1040 schedule a It is what you expect to get for the property if you sell it after you can no longer use it productively. 2012 form 1040 schedule a You must estimate the salvage value of a piece of property when you first acquire it. 2012 form 1040 schedule a   Salvage value is affected both by how you use the property and how long you use it. 2012 form 1040 schedule a If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. 2012 form 1040 schedule a However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. 2012 form 1040 schedule a Changing salvage value. 2012 form 1040 schedule a   Once you determine the salvage value for property, you should not change it merely because prices have changed. 2012 form 1040 schedule a However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. 2012 form 1040 schedule a When you redetermine the salvage value, take into account the facts that exist at the time. 2012 form 1040 schedule a Net salvage. 2012 form 1040 schedule a   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. 2012 form 1040 schedule a You can choose either salvage value or net salvage when you figure depreciation. 2012 form 1040 schedule a You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. 2012 form 1040 schedule a However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. 2012 form 1040 schedule a Your salvage value can never be less than zero. 2012 form 1040 schedule a Ten percent rule. 2012 form 1040 schedule a   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. 2012 form 1040 schedule a You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. 2012 form 1040 schedule a If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. 2012 form 1040 schedule a Methods To Use Two methods of depreciation are the straight line and declining balance methods. 2012 form 1040 schedule a If ACRS or MACRS does not apply, you can use one of these methods. 2012 form 1040 schedule a The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. 2012 form 1040 schedule a Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. 2012 form 1040 schedule a One of these methods was the straight line method. 2012 form 1040 schedule a This method was also used for intangible property. 2012 form 1040 schedule a It lets you deduct the same amount of depreciation each year. 2012 form 1040 schedule a To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. 2012 form 1040 schedule a Subtract the salvage value, if any, from the adjusted basis. 2012 form 1040 schedule a The balance is the total amount of depreciation you can take over the useful life of the property. 2012 form 1040 schedule a Divide the balance by the number of years remaining in the useful life. 2012 form 1040 schedule a This gives you the amount of your yearly depreciation deduction. 2012 form 1040 schedule a Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. 2012 form 1040 schedule a If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a In April 1994, Frank bought a franchise for $5,600. 2012 form 1040 schedule a It expires in 10 years. 2012 form 1040 schedule a This property is intangible property that cannot be depreciated under MACRS. 2012 form 1040 schedule a Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. 2012 form 1040 schedule a He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). 2012 form 1040 schedule a He must prorate the $560 for his 9 months of use in 1994. 2012 form 1040 schedule a This gives him a deduction of $420 ($560 ÷ 9/12). 2012 form 1040 schedule a In 1995, Frank can deduct $560 for the full year. 2012 form 1040 schedule a Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. 2012 form 1040 schedule a The rate cannot be more than twice the straight line rate. 2012 form 1040 schedule a Rate of depreciation. 2012 form 1040 schedule a   Under this method, you must determine your declining balance rate of depreciation. 2012 form 1040 schedule a The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. 2012 form 1040 schedule a (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. 2012 form 1040 schedule a ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. 2012 form 1040 schedule a Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. 2012 form 1040 schedule a Depreciation deductions. 2012 form 1040 schedule a   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. 2012 form 1040 schedule a This gives you the amount of your deduction. 2012 form 1040 schedule a For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). 2012 form 1040 schedule a To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. 2012 form 1040 schedule a Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). 2012 form 1040 schedule a Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). 2012 form 1040 schedule a Your depreciation deduction for the second year is $1,600. 2012 form 1040 schedule a   As you can see from this example, your adjusted basis in the property gets smaller each year. 2012 form 1040 schedule a Also, under this method, deductions are larger in the earlier years and smaller in the later years. 2012 form 1040 schedule a You can make a change to the straight line method without consent. 2012 form 1040 schedule a Salvage value. 2012 form 1040 schedule a   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. 2012 form 1040 schedule a However, you cannot depreciate the property below its reasonable salvage value. 2012 form 1040 schedule a Determine salvage value using the rules discussed earlier, including the special 10% rule. 2012 form 1040 schedule a Example. 2012 form 1040 schedule a If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. 2012 form 1040 schedule a But if your estimate of salvage value was $900, you can only deduct $100. 2012 form 1040 schedule a This is because $100 is the amount that would lower your adjusted basis to equal salvage value. 2012 form 1040 schedule a Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. 2012 form 1040 schedule a You can group the videocassettes by title for making this projection. 2012 form 1040 schedule a You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. 2012 form 1040 schedule a The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. 2012 form 1040 schedule a For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. 2012 form 1040 schedule a How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. 2012 form 1040 schedule a If you change your method of depreciation, it is generally a change in your method of accounting. 2012 form 1040 schedule a You must get IRS consent before making the change. 2012 form 1040 schedule a However, you do not need permission for certain changes in your method of depreciation. 2012 form 1040 schedule a The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. 2012 form 1040 schedule a For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. 2012 form 1040 schedule a Change to the straight line method. 2012 form 1040 schedule a   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. 2012 form 1040 schedule a However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. 2012 form 1040 schedule a When the change is made, figure depreciation based on your adjusted basis in the property at that time. 2012 form 1040 schedule a Your adjusted basis takes into account all previous depreciation deductions. 2012 form 1040 schedule a Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. 2012 form 1040 schedule a   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. 2012 form 1040 schedule a You cannot make the change on an amended return filed after the due date of the original return (including extensions). 2012 form 1040 schedule a   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. 2012 form 1040 schedule a   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. 2012 form 1040 schedule a Changes that require permission. 2012 form 1040 schedule a   For most other changes in method of depreciation, you must get permission from the IRS. 2012 form 1040 schedule a To request a change in method of depreciation, file Form 3115. 2012 form 1040 schedule a File the application within the first 180 days of the tax year the change is to become effective. 2012 form 1040 schedule a In most cases, there is a user fee that must accompany Form 3115. 2012 form 1040 schedule a See the instructions for Form 3115 to determine if a fee is required. 2012 form 1040 schedule a Changes granted automatically. 2012 form 1040 schedule a   The IRS automatically approves certain changes of a method of depreciation. 2012 form 1040 schedule a But, you must file Form 3115 for these automatic changes. 2012 form 1040 schedule a   However, IRS can deny permission if Form 3115 is not filed on time. 2012 form 1040 schedule a For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. 2012 form 1040 schedule a B. 2012 form 1040 schedule a 420. 2012 form 1040 schedule a Changes for which approval is not automatic. 2012 form 1040 schedule a   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. 2012 form 1040 schedule a   You must request and receive permission for these changes. 2012 form 1040 schedule a To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. 2012 form 1040 schedule a Change from an improper method. 2012 form 1040 schedule a   If the IRS disallows the method you are using, you do not need permission to change to a proper method. 2012 form 1040 schedule a You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. 2012 form 1040 schedule a If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. 2012 form 1040 schedule a However, you must file the amended return before the filing date for the next tax year. 2012 form 1040 schedule a Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. 2012 form 1040 schedule a You can do this by selling, exchanging, or abandoning the item of property. 2012 form 1040 schedule a You can also withdraw it from use without disposing of it. 2012 form 1040 schedule a For example, you could place it in a supplies or scrap account. 2012 form 1040 schedule a Retirements can be either normal or abnormal depending on all facts and circumstances. 2012 form 1040 schedule a The rules discussed next do not apply to MACRS and ACRS property. 2012 form 1040 schedule a Normal retirement. 2012 form 1040 schedule a   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. 2012 form 1040 schedule a A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. 2012 form 1040 schedule a Abnormal retirement. 2012 form 1040 schedule a   A retirement can be abnormal if you withdraw the property early or under other circumstances. 2012 form 1040 schedule a For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. 2012 form 1040 schedule a Gain or loss on retirement. 2012 form 1040 schedule a   There are special rules for figuring the gain or loss on retirement of property. 2012 form 1040 schedule a The gain or loss will depend on several factors. 2012 form 1040 schedule a These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. 2012 form 1040 schedule a A single property account contains only one item of property. 2012 form 1040 schedule a A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. 2012 form 1040 schedule a Sale or exchange. 2012 form 1040 schedule a   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. 2012 form 1040 schedule a See Publication 544. 2012 form 1040 schedule a Property not disposed of or abandoned. 2012 form 1040 schedule a   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. 2012 form 1040 schedule a You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. 2012 form 1040 schedule a However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. 2012 form 1040 schedule a   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. 2012 form 1040 schedule a Special rule for normal retirements from item accounts. 2012 form 1040 schedule a   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. 2012 form 1040 schedule a However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. 2012 form 1040 schedule a   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. 2012 form 1040 schedule a Abandoned property. 2012 form 1040 schedule a   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. 2012 form 1040 schedule a However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. 2012 form 1040 schedule a Basis of property retired. 2012 form 1040 schedule a   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. 2012 form 1040 schedule a Single item accounts. 2012 form 1040 schedule a   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. 2012 form 1040 schedule a This is generally the cost or other basis of the item of property less depreciation. 2012 form 1040 schedule a See Publication 551. 2012 form 1040 schedule a Multiple property account. 2012 form 1040 schedule a   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. 2012 form 1040 schedule a If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. 2012 form 1040 schedule a   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. 2012 form 1040 schedule a The method of depreciation used for the multiple property account is used. 2012 form 1040 schedule a You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. 2012 form 1040 schedule a Prev  Up  Next   Home   More Online Publications