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2012 Tax Return Form 1040

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2012 Tax Return Form 1040

2012 tax return form 1040 1. 2012 tax return form 1040   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. 2012 tax return form 1040 Amount realized on a recourse debt. 2012 tax return form 1040 Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. 2012 tax return form 1040 S. 2012 tax return form 1040 Individual Income Tax Return 1040X Amended U. 2012 tax return form 1040 S. 2012 tax return form 1040 Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. 2012 tax return form 1040 However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. 2012 tax return form 1040 See chapter 5 for information about getting publications and forms. 2012 tax return form 1040 Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 2012 tax return form 1040 An exchange is a transfer of property for other property or services. 2012 tax return form 1040 The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. 2012 tax return form 1040 Sale or lease. 2012 tax return form 1040    Some agreements that seem to be leases may really be conditional sales contracts. 2012 tax return form 1040 The intention of the parties to the agreement can help you distinguish between a sale and a lease. 2012 tax return form 1040   There is no test or group of tests to prove what the parties intended when they made the agreement. 2012 tax return form 1040 You should consider each agreement based on its own facts and circumstances. 2012 tax return form 1040 For more information, see chapter 3 in Publication 535, Business Expenses. 2012 tax return form 1040 Cancellation of a lease. 2012 tax return form 1040    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. 2012 tax return form 1040 Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. 2012 tax return form 1040 Copyright. 2012 tax return form 1040    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. 2012 tax return form 1040 It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. 2012 tax return form 1040 Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. 2012 tax return form 1040   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. 2012 tax return form 1040 For more information, see Section 1231 Gains and Losses in chapter 3. 2012 tax return form 1040 Easement. 2012 tax return form 1040   The amount received for granting an easement is subtracted from the basis of the property. 2012 tax return form 1040 If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. 2012 tax return form 1040 If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. 2012 tax return form 1040   Any amount received that is more than the basis to be reduced is a taxable gain. 2012 tax return form 1040 The transaction is reported as a sale of property. 2012 tax return form 1040   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. 2012 tax return form 1040 However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. 2012 tax return form 1040   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. 2012 tax return form 1040 Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. 2012 tax return form 1040 See Gain or Loss From Condemnations, later. 2012 tax return form 1040 Property transferred to satisfy debt. 2012 tax return form 1040   A transfer of property to satisfy a debt is an exchange. 2012 tax return form 1040 Note's maturity date extended. 2012 tax return form 1040   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. 2012 tax return form 1040 Also, it is not considered a closed and completed transaction that would result in a gain or loss. 2012 tax return form 1040 However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. 2012 tax return form 1040 Each case must be determined by its own facts. 2012 tax return form 1040 For more information, see Regulations section 1. 2012 tax return form 1040 1001-3. 2012 tax return form 1040 Transfer on death. 2012 tax return form 1040   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. 2012 tax return form 1040 No taxable gain or deductible loss results from the transfer. 2012 tax return form 1040 Bankruptcy. 2012 tax return form 1040   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. 2012 tax return form 1040 Consequently, the transfer generally does not result in gain or loss. 2012 tax return form 1040 For more information, see Publication 908, Bankruptcy Tax Guide. 2012 tax return form 1040 Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. 2012 tax return form 1040 A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. 2012 tax return form 1040 A loss is the adjusted basis of the property that is more than the amount you realize. 2012 tax return form 1040   Table 1-1. 2012 tax return form 1040 How To Figure Whether You Have a Gain or Loss IF your. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 THEN you have a. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 Adjusted basis is more than the amount realized, Loss. 2012 tax return form 1040 Amount realized is more than the adjusted basis, Gain. 2012 tax return form 1040 Basis. 2012 tax return form 1040   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. 2012 tax return form 1040 The basis of property you buy is usually its cost. 2012 tax return form 1040 However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. 2012 tax return form 1040 See Basis Other Than Cost in Publication 551, Basis of Assets. 2012 tax return form 1040 Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. 2012 tax return form 1040 See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 2012 tax return form 1040 Adjusted basis. 2012 tax return form 1040   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. 2012 tax return form 1040 Increases include costs of any improvements having a useful life of more than 1 year. 2012 tax return form 1040 Decreases include depreciation and casualty losses. 2012 tax return form 1040 For more details and additional examples, see Adjusted Basis in Publication 551. 2012 tax return form 1040 Amount realized. 2012 tax return form 1040   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. 2012 tax return form 1040 The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. 2012 tax return form 1040 Fair market value. 2012 tax return form 1040   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. 2012 tax return form 1040 If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. 2012 tax return form 1040 If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. 2012 tax return form 1040 Example. 2012 tax return form 1040 You used a building in your business that cost you $70,000. 2012 tax return form 1040 You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. 2012 tax return form 1040 You sold the building for $100,000 plus property having an FMV of $20,000. 2012 tax return form 1040 The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. 2012 tax return form 1040 The selling expenses were $4,000. 2012 tax return form 1040 Your gain on the sale is figured as follows. 2012 tax return form 1040 Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. 2012 tax return form 1040   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. 2012 tax return form 1040 Recognized gains must be included in gross income. 2012 tax return form 1040 Recognized losses are deductible from gross income. 2012 tax return form 1040 However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. 2012 tax return form 1040 See Nontaxable Exchanges, later. 2012 tax return form 1040 Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. 2012 tax return form 1040 Interest in property. 2012 tax return form 1040   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. 2012 tax return form 1040 If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. 2012 tax return form 1040 Your basis in the property is disregarded. 2012 tax return form 1040 This rule does not apply if all interests in the property are disposed of at the same time. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. 2012 tax return form 1040 You decide to sell your life interest in the farm. 2012 tax return form 1040 The entire amount you receive is a recognized gain. 2012 tax return form 1040 Your basis in the farm is disregarded. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 The facts are the same as in Example 1, except that your brother joins you in selling the farm. 2012 tax return form 1040 The entire interest in the property is sold, so your basis in the farm is not disregarded. 2012 tax return form 1040 Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. 2012 tax return form 1040 Canceling a sale of real property. 2012 tax return form 1040   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. 2012 tax return form 1040 If the buyer returns the property in the year of sale, no gain or loss is recognized. 2012 tax return form 1040 This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. 2012 tax return form 1040 If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. 2012 tax return form 1040 When the property is returned in a later year, you acquire a new basis in the property. 2012 tax return form 1040 That basis is equal to the amount you pay to the buyer. 2012 tax return form 1040 Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. 2012 tax return form 1040 You have a gain if the amount realized is more than your adjusted basis in the property. 2012 tax return form 1040 However, you do not have a loss if the amount realized is less than the adjusted basis of the property. 2012 tax return form 1040 Bargain sales to charity. 2012 tax return form 1040   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. 2012 tax return form 1040 If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. 2012 tax return form 1040 The adjusted basis of the part sold is figured as follows. 2012 tax return form 1040 Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. 2012 tax return form 1040 This allocation rule does not apply if a charitable contribution deduction is not allowable. 2012 tax return form 1040   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. 2012 tax return form 1040 Example. 2012 tax return form 1040 You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. 2012 tax return form 1040 Your adjusted basis in the property is $4,000. 2012 tax return form 1040 Your gain on the sale is $1,200, figured as follows. 2012 tax return form 1040 Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. 2012 tax return form 1040 You must subtract depreciation you took or could have taken from the basis of the business or rental part. 2012 tax return form 1040 However, see the special rule below for a home used partly for business or rental. 2012 tax return form 1040 You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. 2012 tax return form 1040 Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. 2012 tax return form 1040 Any gain on the personal part of the property is a capital gain. 2012 tax return form 1040 You cannot deduct a loss on the personal part. 2012 tax return form 1040 Home used partly for business or rental. 2012 tax return form 1040    If you use property partly as a home and partly for business or to produce rental income, the computation and 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 tax return form 1040 See Property Used Partly for Business or Rental, in Publication 523. 2012 tax return form 1040 Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. 2012 tax return form 1040 You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. 2012 tax return form 1040 However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. 2012 tax return form 1040 Figure the loss you can deduct as follows. 2012 tax return form 1040 Use the lesser of the property's adjusted basis or fair market value at the time of the change. 2012 tax return form 1040 Add to (1) the cost of any improvements and other increases to basis since the change. 2012 tax return form 1040 Subtract from (2) depreciation and any other decreases to basis since the change. 2012 tax return form 1040 Subtract the amount you realized on the sale from the result in (3). 2012 tax return form 1040 If the amount you realized is more than the result in (3), treat this result as zero. 2012 tax return form 1040 The result in (4) is the loss you can deduct. 2012 tax return form 1040 Example. 2012 tax return form 1040 You changed your main home to rental property 5 years ago. 2012 tax return form 1040 At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. 2012 tax return form 1040 This year, you sold the property for $55,000. 2012 tax return form 1040 You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. 2012 tax return form 1040 Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. 2012 tax return form 1040 Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. 2012 tax return form 1040   If you have a gain on the sale, you generally must recognize the full amount of the gain. 2012 tax return form 1040 You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. 2012 tax return form 1040   You may be able to exclude all or part of the gain if you 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 tax return form 1040 However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. 2012 tax return form 1040   For more information, see Business Use or Rental of Home in Publication 523. 2012 tax return form 1040 In addition, special rules apply if the home sold was acquired in a like-kind exchange. 2012 tax return form 1040 See Special Situations in Publication 523. 2012 tax return form 1040 Also see Like-Kind Exchanges, later. 2012 tax return form 1040 Abandonments The abandonment of property is a disposition of property. 2012 tax return form 1040 You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. 2012 tax return form 1040 Generally, abandonment is not treated as a sale or exchange of the property. 2012 tax return form 1040 If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 2012 tax return form 1040 If your adjusted basis is more than the amount you realize (if any), then you have a loss. 2012 tax return form 1040 Loss from abandonment of business or investment property is deductible as a loss. 2012 tax return form 1040 A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 2012 tax return form 1040 This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. 2012 tax return form 1040 If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. 2012 tax return form 1040 The abandonment loss is deducted in the tax year in which the loss is sustained. 2012 tax return form 1040 If the abandoned property is secured by debt, special rules apply. 2012 tax return form 1040 The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). 2012 tax return form 1040 For more information, including examples, see chapter 3 of Publication 4681. 2012 tax return form 1040 You cannot deduct any loss from abandonment of your home or other property held for personal use only. 2012 tax return form 1040 Cancellation of debt. 2012 tax return form 1040   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. 2012 tax return form 1040 This income is separate from any loss realized from abandonment of the property. 2012 tax return form 1040   You must report this income on your tax return unless one of the following applies. 2012 tax return form 1040 The cancellation is intended as a gift. 2012 tax return form 1040 The debt is qualified farm debt. 2012 tax return form 1040 The debt is qualified real property business debt. 2012 tax return form 1040 You are insolvent or bankrupt. 2012 tax return form 1040 The debt is qualified principal residence indebtedness. 2012 tax return form 1040 File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. 2012 tax return form 1040 For more information, including other exceptions and exclusion, see Publication 4681. 2012 tax return form 1040 Forms 1099-A and 1099-C. 2012 tax return form 1040   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. 2012 tax return form 1040 However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. 2012 tax return form 1040 The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 2012 tax return form 1040 For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 2012 tax return form 1040 Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. 2012 tax return form 1040 The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 2012 tax return form 1040 This is true even if you voluntarily return the property to the lender. 2012 tax return form 1040 You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. 2012 tax return form 1040 Buyer's (borrower's) gain or loss. 2012 tax return form 1040   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. 2012 tax return form 1040 The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 2012 tax return form 1040 See Gain or Loss From Sales and Exchanges, earlier. 2012 tax return form 1040 You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. 2012 tax return form 1040 Amount realized on a nonrecourse debt. 2012 tax return form 1040   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. 2012 tax return form 1040 The full canceled debt is included even if the fair market value of the property is less than the canceled debt. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 Chris bought a new car for $15,000. 2012 tax return form 1040 He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. 2012 tax return form 1040 Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. 2012 tax return form 1040 The credit company repossessed the car because he stopped making loan payments. 2012 tax return form 1040 The balance due after taking into account the payments Chris made was $10,000. 2012 tax return form 1040 The fair market value of the car when repossessed was $9,000. 2012 tax return form 1040 The amount Chris realized on the repossession is $10,000. 2012 tax return form 1040 That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. 2012 tax return form 1040 Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). 2012 tax return form 1040 He has a $5,000 nondeductible loss. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 Abena paid $200,000 for her home. 2012 tax return form 1040 She paid $15,000 down and borrowed the remaining $185,000 from a bank. 2012 tax return form 1040 Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. 2012 tax return form 1040 The bank foreclosed on the loan because Abena stopped making payments. 2012 tax return form 1040 When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. 2012 tax return form 1040 The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. 2012 tax return form 1040 She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). 2012 tax return form 1040 She has a $5,000 realized gain. 2012 tax return form 1040 Amount realized on a recourse debt. 2012 tax return form 1040   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. 2012 tax return form 1040 You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. 2012 tax return form 1040 The amount realized does not include the canceled debt that is your income from cancellation of debt. 2012 tax return form 1040 See Cancellation of debt, below. 2012 tax return form 1040 Seller's (lender's) gain or loss on repossession. 2012 tax return form 1040   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. 2012 tax return form 1040 For more information, see Repossession in Publication 537. 2012 tax return form 1040    Table 1-2. 2012 tax return form 1040 Worksheet for Foreclosures and Repossessions Part 1. 2012 tax return form 1040 Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 2012 tax return form 1040 Complete this part only  if you were personally liable for the debt. 2012 tax return form 1040 Otherwise,  go to Part 2. 2012 tax return form 1040   1. 2012 tax return form 1040 Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. 2012 tax return form 1040 Enter the fair market value of the transferred property   3. 2012 tax return form 1040 Ordinary income from cancellation of debt upon foreclosure or    repossession. 2012 tax return form 1040 * Subtract line 2 from line 1. 2012 tax return form 1040   If less than zero, enter zero   Part 2. 2012 tax return form 1040 Figure your gain or loss from foreclosure or repossession. 2012 tax return form 1040   4. 2012 tax return form 1040 If you completed Part 1, enter the smaller of line 1 or line 2. 2012 tax return form 1040   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. 2012 tax return form 1040 Enter any proceeds you received from the foreclosure sale   6. 2012 tax return form 1040 Add lines 4 and 5   7. 2012 tax return form 1040 Enter the adjusted basis of the transferred property   8. 2012 tax return form 1040 Gain or loss from foreclosure or repossession. 2012 tax return form 1040 Subtract line 7  from line 6   * The income may not be taxable. 2012 tax return form 1040 See Cancellation of debt. 2012 tax return form 1040 Cancellation of debt. 2012 tax return form 1040   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. 2012 tax return form 1040 This income is separate from any gain or loss realized from the foreclosure or repossession. 2012 tax return form 1040 Report the income from cancellation of a debt related to a business or rental activity as business or rental income. 2012 tax return form 1040    You can use Table 1-2 to figure your income from cancellation of debt. 2012 tax return form 1040   You must report this income on your tax return unless one of the following applies. 2012 tax return form 1040 The cancellation is intended as a gift. 2012 tax return form 1040 The debt is qualified farm debt. 2012 tax return form 1040 The debt is qualified real property business debt. 2012 tax return form 1040 You are insolvent or bankrupt. 2012 tax return form 1040 The debt is qualified principal residence indebtedness. 2012 tax return form 1040 File Form 982 to report the income exclusion. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). 2012 tax return form 1040 In this case, the amount he realizes is $9,000. 2012 tax return form 1040 This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). 2012 tax return form 1040 Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). 2012 tax return form 1040 He has a $6,000 nondeductible loss. 2012 tax return form 1040 He also is treated as receiving ordinary income from cancellation of debt. 2012 tax return form 1040 That income is $1,000 ($10,000 − $9,000). 2012 tax return form 1040 This is the part of the canceled debt not included in the amount realized. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). 2012 tax return form 1040 In this case, the amount she realizes is $170,000. 2012 tax return form 1040 This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). 2012 tax return form 1040 Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). 2012 tax return form 1040 She has a $5,000 nondeductible loss. 2012 tax return form 1040 She also is treated as receiving ordinary income from cancellation of debt. 2012 tax return form 1040 (The debt is not exempt from tax as discussed under Cancellation of debt, above. 2012 tax return form 1040 ) That income is $10,000 ($180,000 − $170,000). 2012 tax return form 1040 This is the part of the canceled debt not included in the amount realized. 2012 tax return form 1040 Forms 1099-A and 1099-C. 2012 tax return form 1040   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. 2012 tax return form 1040 However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. 2012 tax return form 1040 The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 2012 tax return form 1040 For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. 2012 tax return form 1040 Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. 2012 tax return form 1040 Involuntary conversions are also called involuntary exchanges. 2012 tax return form 1040 Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. 2012 tax return form 1040 You report the gain or deduct the loss on your tax return for the year you realize it. 2012 tax return form 1040 You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. 2012 tax return form 1040 However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. 2012 tax return form 1040 Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. 2012 tax return form 1040 Your basis for the new property is the same as your basis for the converted property. 2012 tax return form 1040 This means that the gain is deferred until a taxable sale or exchange occurs. 2012 tax return form 1040 If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. 2012 tax return form 1040 This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. 2012 tax return form 1040 If you have a gain or loss from the destruction or theft of property, see Publication 547. 2012 tax return form 1040 Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. 2012 tax return form 1040 The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. 2012 tax return form 1040 The owner receives a condemnation award (money or property) in exchange for the property taken. 2012 tax return form 1040 A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. 2012 tax return form 1040 Example. 2012 tax return form 1040 A local government authorized to acquire land for public parks informed you that it wished to acquire your property. 2012 tax return form 1040 After the local government took action to condemn your property, you went to court to keep it. 2012 tax return form 1040 But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. 2012 tax return form 1040 This is a condemnation of private property for public use. 2012 tax return form 1040 Threat of condemnation. 2012 tax return form 1040   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. 2012 tax return form 1040 You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. 2012 tax return form 1040   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. 2012 tax return form 1040 If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. 2012 tax return form 1040 Reports of condemnation. 2012 tax return form 1040   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. 2012 tax return form 1040 You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. 2012 tax return form 1040 If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. 2012 tax return form 1040 Example. 2012 tax return form 1040 Your property lies along public utility lines. 2012 tax return form 1040 The utility company has the authority to condemn your property. 2012 tax return form 1040 The company informs you that it intends to acquire your property by negotiation or condemnation. 2012 tax return form 1040 A threat of condemnation exists when you receive the notice. 2012 tax return form 1040 Related property voluntarily sold. 2012 tax return form 1040   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. 2012 tax return form 1040 A substantial economic relationship exists if together the properties were one economic unit. 2012 tax return form 1040 You also must show that the condemned property could not reasonably or adequately be replaced. 2012 tax return form 1040 You can elect to postpone reporting the gain by buying replacement property. 2012 tax return form 1040 See Postponement of Gain, later. 2012 tax return form 1040 Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. 2012 tax return form 1040 If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. 2012 tax return form 1040 You can postpone reporting gain from a condemnation if you buy replacement property. 2012 tax return form 1040 If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. 2012 tax return form 1040 See Postponement of Gain, later. 2012 tax return form 1040 If your net condemnation award is less than your adjusted basis, you have a loss. 2012 tax return form 1040 If your loss is from property you held for personal use, you cannot deduct it. 2012 tax return form 1040 You must report any deductible loss in the tax year it happened. 2012 tax return form 1040 You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. 2012 tax return form 1040 Main home condemned. 2012 tax return form 1040   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. 2012 tax return form 1040 You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). 2012 tax return form 1040 For information on this exclusion, see Publication 523. 2012 tax return form 1040 If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. 2012 tax return form 1040 See Postponement of Gain, later. 2012 tax return form 1040 Table 1-3. 2012 tax return form 1040 Worksheet for Condemnations Part 1. 2012 tax return form 1040 Gain from severance damages. 2012 tax return form 1040  If you did not receive severance damages, skip Part 1 and go to Part 2. 2012 tax return form 1040   1. 2012 tax return form 1040 Enter gross severance damages received   2. 2012 tax return form 1040 Enter your expenses in getting severance damages   3. 2012 tax return form 1040 Subtract line 2 from line 1. 2012 tax return form 1040 If less than zero, enter -0-   4. 2012 tax return form 1040 Enter any special assessment on remaining property taken out of your award   5. 2012 tax return form 1040 Net severance damages. 2012 tax return form 1040 Subtract line 4 from line 3. 2012 tax return form 1040 If less than zero, enter -0-   6. 2012 tax return form 1040 Enter the adjusted basis of the remaining property   7. 2012 tax return form 1040 Gain from severance damages. 2012 tax return form 1040 Subtract line 6 from line 5. 2012 tax return form 1040 If less than zero, enter -0-   8. 2012 tax return form 1040 Refigured adjusted basis of the remaining property. 2012 tax return form 1040 Subtract line 5 from line 6. 2012 tax return form 1040 If less than zero, enter -0-   Part 2. 2012 tax return form 1040 Gain or loss from condemnation award. 2012 tax return form 1040   9. 2012 tax return form 1040 Enter the gross condemnation award received   10. 2012 tax return form 1040 Enter your expenses in getting the condemnation award   11. 2012 tax return form 1040 If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. 2012 tax return form 1040 If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. 2012 tax return form 1040 Otherwise, enter -0-   12. 2012 tax return form 1040 Add lines 10 and 11   13. 2012 tax return form 1040 Net condemnation award. 2012 tax return form 1040 Subtract line 12 from line 9   14. 2012 tax return form 1040 Enter the adjusted basis of the condemned property   15. 2012 tax return form 1040 Gain from condemnation award. 2012 tax return form 1040 If line 14 is more than line 13, enter -0-. 2012 tax return form 1040 Otherwise, subtract line 14 from  line 13 and skip line 16   16. 2012 tax return form 1040 Loss from condemnation award. 2012 tax return form 1040 Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. 2012 tax return form 1040 )   Part 3. 2012 tax return form 1040 Postponed gain from condemnation. 2012 tax return form 1040  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. 2012 tax return form 1040 )   17. 2012 tax return form 1040 If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. 2012 tax return form 1040 Otherwise, enter -0-   18. 2012 tax return form 1040 If line 15 is more than zero, enter the amount from line 13. 2012 tax return form 1040 Otherwise, enter -0-   19. 2012 tax return form 1040 Add lines 17 and 18. 2012 tax return form 1040 If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. 2012 tax return form 1040 Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. 2012 tax return form 1040 Subtract line 20 from line 19. 2012 tax return form 1040 If less than zero, enter -0-   22. 2012 tax return form 1040 If you completed Part 1, add lines 7 and 15. 2012 tax return form 1040 Otherwise, enter the amount from line 15. 2012 tax return form 1040 If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. 2012 tax return form 1040 Recognized gain. 2012 tax return form 1040 Enter the smaller of line 21 or line 22. 2012 tax return form 1040   24. 2012 tax return form 1040 Postponed gain. 2012 tax return form 1040 Subtract line 23 from line 22. 2012 tax return form 1040 If less than zero, enter -0-   Condemnation award. 2012 tax return form 1040   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. 2012 tax return form 1040 The award is also the amount you are paid for the sale of your property under threat of condemnation. 2012 tax return form 1040 Payment of your debts. 2012 tax return form 1040   Amounts taken out of the award to pay your debts are considered paid to you. 2012 tax return form 1040 Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. 2012 tax return form 1040 Example. 2012 tax return form 1040 The state condemned your property for public use. 2012 tax return form 1040 The award was set at $200,000. 2012 tax return form 1040 The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. 2012 tax return form 1040 You are considered to have received the entire $200,000 as a condemnation award. 2012 tax return form 1040 Interest on award. 2012 tax return form 1040   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. 2012 tax return form 1040 You must report the interest separately as ordinary income. 2012 tax return form 1040 Payments to relocate. 2012 tax return form 1040   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. 2012 tax return form 1040 Do not include them in your income. 2012 tax return form 1040 Replacement housing payments used to buy new property are included in the property's basis as part of your cost. 2012 tax return form 1040 Net condemnation award. 2012 tax return form 1040   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. 2012 tax return form 1040 If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. 2012 tax return form 1040 This is discussed later under Special assessment taken out of award. 2012 tax return form 1040 Severance damages. 2012 tax return form 1040    Severance damages are not part of the award paid for the property condemned. 2012 tax return form 1040 They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. 2012 tax return form 1040   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. 2012 tax return form 1040 Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. 2012 tax return form 1040   The contracting parties should agree on the specific amount of severance damages in writing. 2012 tax return form 1040 If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. 2012 tax return form 1040   You cannot make a completely new allocation of the total award after the transaction is completed. 2012 tax return form 1040 However, you can show how much of the award both parties intended for severance damages. 2012 tax return form 1040 The severance damages part of the award is determined from all the facts and circumstances. 2012 tax return form 1040 Example. 2012 tax return form 1040 You sold part of your property to the state under threat of condemnation. 2012 tax return form 1040 The contract you and the condemning authority signed showed only the total purchase price. 2012 tax return form 1040 It did not specify a fixed sum for severance damages. 2012 tax return form 1040 However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. 2012 tax return form 1040 You may treat this part as severance damages. 2012 tax return form 1040 Treatment of severance damages. 2012 tax return form 1040   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. 2012 tax return form 1040 Use them to reduce the basis of the remaining property. 2012 tax return form 1040 If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. 2012 tax return form 1040   If your net severance damages are more than the basis of your retained property, you have a gain. 2012 tax return form 1040 You may be able to postpone reporting the gain. 2012 tax return form 1040 See Postponement of Gain, later. 2012 tax return form 1040    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. 2012 tax return form 1040 Net severance damages. 2012 tax return form 1040   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. 2012 tax return form 1040 You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. 2012 tax return form 1040 The balance is your net severance damages. 2012 tax return form 1040 Expenses of obtaining a condemnation award and severance damages. 2012 tax return form 1040   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. 2012 tax return form 1040 Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. 2012 tax return form 1040 If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. 2012 tax return form 1040 Example. 2012 tax return form 1040 You receive a condemnation award and severance damages. 2012 tax return form 1040 One-fourth of the total was designated as severance damages in your agreement with the condemning authority. 2012 tax return form 1040 You had legal expenses for the entire condemnation proceeding. 2012 tax return form 1040 You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. 2012 tax return form 1040 You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. 2012 tax return form 1040 Special assessment retained out of award. 2012 tax return form 1040   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. 2012 tax return form 1040 An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. 2012 tax return form 1040 Examples of improvements that may cause a special assessment are widening a street and installing a sewer. 2012 tax return form 1040   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. 2012 tax return form 1040 Example. 2012 tax return form 1040 To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. 2012 tax return form 1040 You were awarded $5,000 for this and spent $300 to get the award. 2012 tax return form 1040 Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. 2012 tax return form 1040 The city then paid you only $4,300. 2012 tax return form 1040 Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). 2012 tax return form 1040 If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). 2012 tax return form 1040 The net award would not change, even if you later paid the assessment from the amount you received. 2012 tax return form 1040 Severance damages received. 2012 tax return form 1040   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. 2012 tax return form 1040 Any balance of the special assessment is used to reduce the condemnation award. 2012 tax return form 1040 Example. 2012 tax return form 1040 You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. 2012 tax return form 1040 You spent $300 to obtain the severance damages. 2012 tax return form 1040 A special assessment of $800 was retained out of the award. 2012 tax return form 1040 The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. 2012 tax return form 1040 Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. 2012 tax return form 1040 Part business or rental. 2012 tax return form 1040   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. 2012 tax return form 1040 Figure your gain or loss separately because gain or loss on each part may be treated differently. 2012 tax return form 1040   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. 2012 tax return form 1040 Example. 2012 tax return form 1040 You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. 2012 tax return form 1040 You rented half the building and lived in the other half. 2012 tax return form 1040 You paid $25,000 for the building and spent an additional $1,000 for a new roof. 2012 tax return form 1040 You claimed allowable depreciation of $4,600 on the rental half. 2012 tax return form 1040 You spent $200 in legal expenses to obtain the condemnation award. 2012 tax return form 1040 Figure your gain or loss as follows. 2012 tax return form 1040     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. 2012 tax return form 1040 Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. 2012 tax return form 1040 Your basis for the new property is the same as your basis for the old. 2012 tax return form 1040 Money or unlike property received. 2012 tax return form 1040   You ordinarily must report the gain if you receive money or unlike property. 2012 tax return form 1040 You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. 2012 tax return form 1040 You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. 2012 tax return form 1040 See Controlling interest in a corporation, later. 2012 tax return form 1040   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. 2012 tax return form 1040 If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. 2012 tax return form 1040   The basis of the replacement property is its cost, reduced by the postponed gain. 2012 tax return form 1040 Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. 2012 tax return form 1040 See Controlling interest in a corporation, later. 2012 tax return form 1040 You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. 2012 tax return form 1040 Postponing gain on severance damages. 2012 tax return form 1040   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. 2012 tax return form 1040 See Treatment of severance damages, earlier. 2012 tax return form 1040 You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). 2012 tax return form 1040   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. 2012 tax return form 1040 If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. 2012 tax return form 1040   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. 2012 tax return form 1040 Postponing gain on the sale of related property. 2012 tax return form 1040   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. 2012 tax return form 1040 You must meet the requirements explained earlier under Related property voluntarily sold. 2012 tax return form 1040 You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). 2012 tax return form 1040 Buying replacement property from a related person. 2012 tax return form 1040   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. 2012 tax return form 1040 For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. 2012 tax return form 1040   This rule applies to the following taxpayers. 2012 tax return form 1040 C corporations. 2012 tax return form 1040 Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. 2012 tax return form 1040 All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. 2012 tax return form 1040   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. 2012 tax return form 1040 If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. 2012 tax return form 1040 If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. 2012 tax return form 1040 Exception. 2012 tax return form 1040   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. 2012 tax return form 1040 Advance payment. 2012 tax return form 1040   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). 2012 tax return form 1040 Replacement property. 2012 tax return form 1040   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. 2012 tax return form 1040 You do not have to use the actual funds from the condemnation award to acquire the replacement property. 2012 tax return form 1040 Property you acquire by gift or inheritance does not qualify as replacement property. 2012 tax return form 1040 Similar or related in service or use. 2012 tax return form 1040   Your replacement property must be similar or related in service or use to the property it replaces. 2012 tax return form 1040   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. 2012 tax return form 1040 For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. 2012 tax return form 1040 Owner-user. 2012 tax return form 1040   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. 2012 tax return form 1040 Example. 2012 tax return form 1040 Your home was condemned and you invested the proceeds from the condemnation in a grocery store. 2012 tax return form 1040 Your replacement property is not similar or related in service or use to the condemned property. 2012 tax return form 1040 To be similar or related in service or use, your replacement property must also be used by you as your home. 2012 tax return form 1040 Owner-investor. 2012 tax return form 1040   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. 2012 tax return form 1040 You decide this by determining all the following information. 2012 tax return form 1040 Whether the properties are of similar service to you. 2012 tax return form 1040 The nature of the business risks connected with the properties. 2012 tax return form 1040 What the properties demand of you in the way of management, service, and relations to your tenants. 2012 tax return form 1040 Example. 2012 tax return form 1040 You owned land and a building you rented to a manufacturing company. 2012 tax return form 1040 The building was condemned. 2012 tax return form 1040 During the replacement period, you had a new building built on other land you already owned. 2012 tax return form 1040 You rented out the new building for use as a wholesale grocery warehouse. 2012 tax return form 1040 The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. 2012 tax return form 1040 Your management activities. 2012 tax return form 1040 The amount and kind of services you provide to your tenants. 2012 tax return form 1040 The nature of your business risks connected with the properties. 2012 tax return form 1040 Leasehold replaced with fee simple property. 2012 tax return form 1040   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. 2012 tax return form 1040   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. 2012 tax return form 1040 A leasehold is property held under a lease, usually for a term of years. 2012 tax return form 1040 Outdoor advertising display replaced with real property. 2012 tax return form 1040   You can elect to treat an outdoor advertising display as real property. 2012 tax return form 1040 If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. 2012 tax return form 1040 For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. 2012 tax return form 1040   You can make this election only if you did not claim a section 179 deduction for the display. 2012 tax return form 1040 You cannot cancel this election unless you get the consent of the IRS. 2012 tax return form 1040   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. 2012 tax return form 1040 Substituting replacement property. 2012 tax return form 1040   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. 2012 tax return form 1040 But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. 2012 tax return form 1040 Controlling interest in a corporation. 2012 tax return form 1040   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. 2012 tax return form 1040 You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. 2012 tax return form 1040 Basis adjustment to corporation's property. 2012 tax return form 1040   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. 2012 tax return form 1040 You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). 2012 tax return form 1040   Allocate this reduction to the following classes of property in the order shown below. 2012 tax return form 1040 Property that is similar or related in service or use to the condemned property. 2012 tax return form 1040 Depreciable property not reduced in (1). 2012 tax return form 1040 All other property. 2012 tax return form 1040 If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. 2012 tax return form 1040 The reduced basis of any single property cannot be less than zero. 2012 tax return form 1040 Main home replaced. 2012 tax return form 1040   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. 2012 tax return form 1040 The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. 2012 tax return form 1040   You must reduce the basis of your replacement property by the postponed gain. 2012 tax return form 1040 Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. 2012 tax return form 1040 Example. 2012 tax return form 1040 City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. 2012 tax return form 1040 The city paid you a condemnation award of $400,000. 2012 tax return form 1040 Your adjusted basis in the property was $80,000. 2012 tax return form 1040 You realize a gain of $320,000 ($400,000 − $80,000). 2012 tax return form 1040 You purchased a new home for $100,000. 2012 tax return form 1040 You can exclude $250,000 of the realized gain from your gross income. 2012 tax return form 1040 The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). 2012 tax return form 1040 You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). 2012 tax return form 1040 The remaining $20,000 of realized gain is postponed. 2012 tax return form 1040 Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). 2012 tax return form 1040 Replacement period. 2012 tax return form 1040   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. 2012 tax return form 1040 This is the replacement period. 2012 tax return form 1040   The replacement period for a condemnation begins on the earlier of the following dates. 2012 tax return form 1040 The date on which you disposed of the condemned property. 2012 tax return form 1040 The date on which the threat of condemnation began. 2012 tax return form 1040   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. 2012 tax return form 1040 However, see the exceptions below. 2012 tax return form 1040 Three-year replacement period for certain property. 2012 tax return form 1040   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. 2012 tax return form 1040 However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. 2012 tax return form 1040 Five-year replacement period for certain property. 2012 tax return form 1040   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. 2012 tax return form 1040 Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. 2012 tax return form 1040 Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. 2012 tax return form 1040 Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. 2012 tax return form 1040 Extended replacement period for taxpayers affected by other federally declared disasters. 2012 tax return form 1040    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. 2012 tax return form 1040 For more information visit www. 2012 tax return form 1040 irs. 2012 tax return form 1040 gov/uac/Tax-Relief-in-Disaster-Situations. 2012 tax return form 1040 Weather-related sales of livestock in an area eligible for federal assistance. 2012 tax return form 1040   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. 2012 tax return form 1040    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. 2012 tax return form 1040 See Notice 2006-82. 2012 tax return form 1040 You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. 2012 tax return form 1040 irs. 2012 tax return form 1040 gov/irb/2006-39_IRB/ar13. 2012 tax return form 1040 html. 2012 tax return form 1040    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. 2012 tax return form 1040 If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. 2012 tax return form 1040 You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. 2012 tax return form 1040 irs. 2012 tax return form 1040 gov/irb/2013-45_IRB/ar04. 2012 tax return form 1040 html. 2012 tax return form 1040 The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. 2012 tax return form 1040 Determining when gain is realized. 2012 tax return form 1040   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. 2012 tax return form 1040 If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. 2012 tax return form 1040   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. 2012 tax return form 1040 A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. 2012 tax return form 1040   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. 2012 tax return form 1040 All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. 2012 tax return form 1040 All or part of the award is actually or constructively received. 2012 tax return form 1040 For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. 2012 tax return form 1040 Replacement property bought before the condemnation. 2012 tax return form 1040   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. 2012 tax return form 1040 Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. 2012 tax return form 1040 Example. 2012 tax return form 1040 On April 3, 2012, city authorities notified you that your property would be condemned. 2012 tax return form 1040 On June 5, 2012, you acquired property to replace the property to be condemned. 2012 tax return form 1040 You still had the new property when the city took possession of your old property on September 4, 2013. 2012 tax return form 1040 You have made a replacement within the replacement period. 2012 tax return form 1040 Extension. 2012 tax return form 1040   You can request an extension of the replacement period from the IRS director for your area. 2012 tax return form 1040 You should apply before the end of the replacement period. 2012 tax return form 1040 Your request should explain in detail why you need an extension. 2012 tax return form 1040 The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. 2012 tax return form 1040 An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. 2012 tax return form 1040   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. 2012 tax return form 1040 Extensions are usually limited to a period of 1 year or less. 2012 tax return form 1040 The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. 2012 tax return form 1040 If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri
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Know the Facts

When you borrow money to buy a car or truck, the lender can take your vehicle back if you miss a payment or in some other way violate the contract. You should also be aware that the lender:

  • Can repossess with cause without advance notice;
  • Can insist you pay off the entire loan balance in order to get the repossessed vehicle back;
  • Can sell the vehicle at auction;
  • Might be able to sue you for the difference between the vehicle's auction price and what you owe
  • Cannot break into your home or physically threaten someone while taking the vehicle

If you know you're going to be late with a payment, talk to the lender to try to work things out. If you and the lender reach an agreement, be sure you get the agreement in writing. Contact your state or local consumer protection office to find out whether your state gives you any additional rights.

Beware of Car Title Loans

Chances are you have seen or heard an ad for a car title loan to help you make ends meet. In a title loan, a consumer in need of quick cash uses the car title as collateral for a short term loan. No job or postdated checks are required. Sounds simple enough, right? Wrong.

What the title lenders don't say in their ads is that you have to turn over your car title and keys when you get the loan. They'll loan you a small fraction of the car value at sky high interest rates- as much as 25% for one month (300% APR) !!! At the end of the month you are expected to pay the whole amount back, plus the interest.

If you can't pay the loan there are only two options. You could roll the loan over for another month, with more fees and interest. However, as the loan amount increases, it becomes almost impossible to repay the debt. The other option is for the lender to repossess your car. Unfortunately, there is no federal regulation of title loans now, but some states have put some rules in place to regulate the interest charged by these lenders.

The 2012 Tax Return Form 1040

2012 tax return form 1040 Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. 2012 tax return form 1040 The IRS Must Contact Your Spouse or Former Spouse Tax Court Review of Request Community Property LawsRelief for Married Persons Who Did Not File Joint Returns Innocent Spouse ReliefUnderstated Tax Erroneous Items Actual Knowledge or Reason To Know Indications of Unfairness for Innocent Spouse Relief Separation of Liability ReliefLimitations on Relief Equitable ReliefConditions for Getting Equitable Relief Factors for Determining Whether To Grant Equitable Relief RefundsProof Required Refunds Under Equitable Relief Limit on Amount of Refund Filled-in Form 8857 Flowcharts How To Request Relief File Form 8857 to ask the IRS for the types of relief discussed in this publication. 2012 tax return form 1040 If you are requesting relief for more than three tax years, you must file an additional Form 8857. 2012 tax return form 1040 The IRS will review your Form 8857 and let you know if you qualify. 2012 tax return form 1040 A completed Form 8857 is shown later. 2012 tax return form 1040 When to file Form 8857. 2012 tax return form 1040   You should file Form 8857 as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held responsible. 2012 tax return form 1040 The following are some of the ways you may become aware of such a liability. 2012 tax return form 1040 The IRS is examining your tax return and proposing to increase your tax liability. 2012 tax return form 1040 The IRS sends you a notice. 2012 tax return form 1040   You must file Form 8857 no later than two years after the date on which the IRS first attempted to collect the tax from you that occurs after July 22, 1998. 2012 tax return form 1040 (But see the exceptions below for different filing deadlines that apply. 2012 tax return form 1040 ) For this reason, do not delay filing because you do not have all the documentation. 2012 tax return form 1040   Collection activities that may start the 2-year period are: The IRS offset your income tax refund against an amount you owed on a joint return for another year and the IRS informed you about your right to file Form 8857. 2012 tax return form 1040 The filing of a claim by the IRS in a court proceeding in which you were a party or the filing of a claim in a proceeding that involves your property. 2012 tax return form 1040 This includes the filing of a proof of claim in a bankruptcy proceeding. 2012 tax return form 1040 The filing of a suit by the United States against you to collect the joint liability. 2012 tax return form 1040 The issuance of a section 6330 notice, which notifies you of the IRS' intent to levy and your right to a collection due process (CDP) hearing. 2012 tax return form 1040 The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. 2012 tax return form 1040 Exception for equitable relief. 2012 tax return form 1040   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. 2012 tax return form 1040 irs. 2012 tax return form 1040 gov/irb/2011-32_IRB/ar11. 2012 tax return form 1040 html) expanding the amount of time to request equitable relief. 2012 tax return form 1040 The amount of time to request equitable relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both: Balance Due – Generally, you must file your request within the time period the IRS has to collect the tax. 2012 tax return form 1040 Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. 2012 tax return form 1040 In certain cases, the 10-year period is suspended. 2012 tax return form 1040 The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. 2012 tax return form 1040 See Pub. 2012 tax return form 1040 594, The IRS Collection Process, for details. 2012 tax return form 1040 Credit or Refund – Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. 2012 tax return form 1040 But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs. 2012 tax return form 1040 See Pub. 2012 tax return form 1040 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. 2012 tax return form 1040 Both a Balance Due and a Credit or Refund – If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made, and the time period for collection of a balance due amount will apply to any unpaid liability. 2012 tax return form 1040 Exception for relief based on community property laws. 2012 tax return form 1040   If you are requesting relief based on community property laws, a different filing deadline applies. 2012 tax return form 1040 See Relief from liability arising from community property law discussed later under Community Property Laws . 2012 tax return form 1040 Form 8857 filed by or on behalf of a decedent. 2012 tax return form 1040   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. 2012 tax return form 1040 An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. 2012 tax return form 1040 For purposes of separation of liability relief (discussed later), the decedent's marital status is determined on the earlier of the date relief was requested or the date of death. 2012 tax return form 1040 Situations in which you are not entitled to relief. 2012 tax return form 1040   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. 2012 tax return form 1040 In a final decision dated after July 22, 1998, a court considered whether to grant you relief from joint liability and decided not to do so. 2012 tax return form 1040 In a final decision dated after July 22, 1998, a court did not consider whether to grant you relief from joint liability, but you meaningfully participated in the proceeding and could have asked for relief. 2012 tax return form 1040 You entered into an offer in compromise with the IRS. 2012 tax return form 1040 You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. 2012 tax return form 1040 Exception for agreements relating to TEFRA partnership proceedings. 2012 tax return form 1040   You may be entitled to relief, discussed in (4) earlier, if you entered into a closing agreement for both partnership items and nonpartnership items, while you were a party to a pending TEFRA partnership proceeding. 2012 tax return form 1040 (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. 2012 tax return form 1040 ) You are not entitled to relief for the nonpartnership items, but you will be entitled to relief for the partnership items (if you otherwise qualify). 2012 tax return form 1040 Transferee liability not affected by innocent spouse relief provisions. 2012 tax return form 1040   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. 2012 tax return form 1040 Therefore, even if you are relieved of the tax liability under the innocent spouse relief provisions, you may remain liable for the unpaid tax, interest, and penalties to the extent provided by these laws. 2012 tax return form 1040 Example. 2012 tax return form 1040 Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. 2012 tax return form 1040 Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. 2012 tax return form 1040 In August 2010, the IRS assessed a deficiency for the 2008 return. 2012 tax return form 1040 The items causing the deficiency belong to Herb. 2012 tax return form 1040 Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. 2012 tax return form 1040 However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. 2012 tax return form 1040 The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. 2012 tax return form 1040 There are no exceptions, even for victims of spousal abuse or domestic violence. 2012 tax return form 1040 We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. 2012 tax return form 1040 If you are requesting relief from joint and several liability on a joint return, the IRS must also inform him or her of its preliminary and final determinations regarding your request for relief. 2012 tax return form 1040 However, to protect your privacy, the IRS will not disclose your personal information (for example, your current name, address, phone number(s), information about your employer, your income or assets) or any other information that does not relate to making a determination about your request for relief from liability. 2012 tax return form 1040 If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. 2012 tax return form 1040 Tax Court Review of Request After you file Form 8857, you may be able to petition (ask) the United States Tax Court to review your request for relief in the following two situations. 2012 tax return form 1040 The IRS sends you a final determination letter regarding your request for relief. 2012 tax return form 1040 You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. 2012 tax return form 1040 If you seek equitable relief for an underpaid tax, you will be able to get a Tax Court review of your request only if the tax arose or remained unpaid on or after December 20, 2006. 2012 tax return form 1040 The United States Tax Court is an independent judicial body and is not part of the IRS. 2012 tax return form 1040 You must file a petition with the United States Tax Court in order for it to review your request for relief. 2012 tax return form 1040 You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. 2012 tax return form 1040 If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. 2012 tax return form 1040 You can get a copy of the rules for filing a petition by writing to the Tax Court at the following address:    United States Tax Court 400 Second Street, NW Washington, DC 20217 Or you can visit the Tax Court's website at www. 2012 tax return form 1040 ustaxcourt. 2012 tax return form 1040 gov Community Property Laws You must generally follow community property laws when filing a tax return if you are married and live in a community property state. 2012 tax return form 1040 Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2012 tax return form 1040 Generally, community property laws require you to allocate community income and expenses equally between both spouses. 2012 tax return form 1040 However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. 2012 tax return form 1040 Relief for Married Persons Who Did Not File Joint Returns Married persons who live in community property states, but who did not file joint returns, have two ways to get relief. 2012 tax return form 1040 Relief From Liability Arising From Community Property Law You are not responsible for the tax relating to an item of community income if all the following conditions exist. 2012 tax return form 1040 You did not file a joint return for the tax year. 2012 tax return form 1040 You did not include the item of community income in gross income. 2012 tax return form 1040 The item of community income you did not include is one of the following: Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee. 2012 tax return form 1040 Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. 2012 tax return form 1040 Your spouse's (or former spouse's) distributive share of partnership income. 2012 tax return form 1040 Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). 2012 tax return form 1040 Use the appropriate community property law to determine what is separate property. 2012 tax return form 1040 Any other income that belongs to your spouse (or former spouse) under community property law. 2012 tax return form 1040 You establish that you did not know of, and had no reason to know of, that community income. 2012 tax return form 1040 See  Actual Knowledge or Reason To Know , below. 2012 tax return form 1040 Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. 2012 tax return form 1040 See Indications of unfairness for liability arising from community property law, later. 2012 tax return form 1040 Actual knowledge or reason to know. 2012 tax return form 1040   You knew or had reason to know of an item of community income if: You actually knew of the item of community income, or A reasonable person in similar circumstances would have known of the item of community income. 2012 tax return form 1040 Amount of community income unknown. 2012 tax return form 1040   If you are aware of the source of the item of community income or the income-producing activity, but are unaware of the specific amount, you are considered to know or have reason to know of the item of community income. 2012 tax return form 1040 Not knowing the specific amount is not a basis for relief. 2012 tax return form 1040 Reason to know. 2012 tax return form 1040   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. 2012 tax return form 1040 The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. 2012 tax return form 1040 The financial situation of you and your spouse (or former spouse). 2012 tax return form 1040 Your educational background and business experience. 2012 tax return form 1040 Whether the item of community income represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). 2012 tax return form 1040 Indications of unfairness for liability arising from community property law. 2012 tax return form 1040   The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax due to the item of community income. 2012 tax return form 1040   The following are examples of factors the IRS will consider. 2012 tax return form 1040 Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). 2012 tax return form 1040 Whether your spouse (or former spouse) deserted you. 2012 tax return form 1040 Whether you and your spouse have been divorced or separated. 2012 tax return form 1040  For other factors see Factors for Determining Whether To Grant Equitable Relief later. 2012 tax return form 1040 Benefit from omitted item of community income. 2012 tax return form 1040   A benefit includes normal support, but does not include de minimis (small) amounts. 2012 tax return form 1040 Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers received several years after the filing of the return. 2012 tax return form 1040   For example, if you receive property, including life insurance proceeds, from your spouse (or former spouse) and the property is traceable to omitted items of community income attributable to your spouse (or former spouse), you are considered to have benefitted from those omitted items of community income. 2012 tax return form 1040 Equitable Relief If you do not qualify for the relief described above and are now liable for an underpaid or understated tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief (discussed later). 2012 tax return form 1040 How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. 2012 tax return form 1040 Fill in Form 8857 according to the instructions. 2012 tax return form 1040 For relief from liability arising from community property law, you must file Form 8857 no later than 6 months before the expiration of the period of limitations on assessment (including extensions) against your spouse for the tax year for which you are requesting relief. 2012 tax return form 1040 However, if the IRS begins an examination of your return during that 6-month period, the latest time for requesting relief is 30 days after the date the IRS' initial contact letter to you. 2012 tax return form 1040 The period of limitation on assessment is the amount of time, generally three years, that the IRS has from the date you filed the return to assess taxes that you owe. 2012 tax return form 1040 Innocent Spouse Relief By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. 2012 tax return form 1040 Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). 2012 tax return form 1040 However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. 2012 tax return form 1040 The IRS can collect these amounts from either you or your spouse (or former spouse). 2012 tax return form 1040 You must meet all of the following conditions to qualify for innocent spouse relief. 2012 tax return form 1040 You filed a joint return. 2012 tax return form 1040 There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). 2012 tax return form 1040 You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed). 2012 tax return form 1040 See Actual Knowledge or Reason To Know, later. 2012 tax return form 1040 Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. 2012 tax return form 1040 See Indications of Unfairness for Innocent Spouse Relief , later. 2012 tax return form 1040 Innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. 2012 tax return form 1040 A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. 2012 tax return form 1040 Understated Tax You have an understated tax if the IRS determined that your total tax should be more than the amount that was actually shown on your return. 2012 tax return form 1040 Erroneous Items Erroneous items are either of the following. 2012 tax return form 1040 Unreported income. 2012 tax return form 1040 This is any gross income item received by your spouse (or former spouse) that is not reported. 2012 tax return form 1040 Incorrect deduction, credit, or basis. 2012 tax return form 1040 This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). 2012 tax return form 1040 The following are examples of erroneous items. 2012 tax return form 1040 The expense for which the deduction is taken was never paid or incurred. 2012 tax return form 1040 For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising. 2012 tax return form 1040 The expense does not qualify as a deductible expense. 2012 tax return form 1040 For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. 2012 tax return form 1040 Fines are not deductible. 2012 tax return form 1040 No factual argument can be made to support the deductibility of the expense. 2012 tax return form 1040 For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs. 2012 tax return form 1040 Actual Knowledge or Reason To Know You knew or had reason to know of an understated tax if: You actually knew of the understated tax, or A reasonable person in similar circumstances would have known of the understated tax. 2012 tax return form 1040 Actual knowledge. 2012 tax return form 1040   If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. 2012 tax return form 1040 You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. 2012 tax return form 1040 For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. 2012 tax return form 1040 Reason to know. 2012 tax return form 1040   If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. 2012 tax return form 1040 You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. 2012 tax return form 1040   The IRS will consider all facts and circumstances in determining whether you had reason to know of an understated tax due to an erroneous item. 2012 tax return form 1040 The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. 2012 tax return form 1040 The financial situation of you and your spouse (or former spouse). 2012 tax return form 1040 Your educational background and business experience. 2012 tax return form 1040 The extent of your participation in the activity that resulted in the erroneous item. 2012 tax return form 1040 Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question. 2012 tax return form 1040 Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). 2012 tax return form 1040 Partial relief when a portion of erroneous item is unknown. 2012 tax return form 1040   You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. 2012 tax return form 1040 You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. 2012 tax return form 1040 Example. 2012 tax return form 1040 At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. 2012 tax return form 1040 The IRS examined your tax return several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. 2012 tax return form 1040 You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. 2012 tax return form 1040 The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. 2012 tax return form 1040 The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. 2012 tax return form 1040 Indications of Unfairness for Innocent Spouse Relief The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax. 2012 tax return form 1040 The following are examples of factors the IRS will consider. 2012 tax return form 1040 Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. 2012 tax return form 1040 Whether your spouse (or former spouse) deserted you. 2012 tax return form 1040 Whether you and your spouse have been divorced or separated. 2012 tax return form 1040 Whether you received a benefit on the return from the understated tax. 2012 tax return form 1040 For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. 2012 tax return form 1040 Significant benefit. 2012 tax return form 1040   A significant benefit is any benefit in excess of normal support. 2012 tax return form 1040 Normal support depends on your particular circumstances. 2012 tax return form 1040 Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understated tax. 2012 tax return form 1040 Example. 2012 tax return form 1040 You receive money from your spouse that is beyond normal support. 2012 tax return form 1040 The money can be traced to your spouse's lottery winnings that were not reported on your joint return. 2012 tax return form 1040 You will be considered to have received a significant benefit from that income. 2012 tax return form 1040 This is true even if your spouse gives you the money several years after he or she received it. 2012 tax return form 1040 Separation of Liability Relief Under this type of relief, the understated tax (plus interest and penalties) on your joint return is allocated between you and your spouse (or former spouse). 2012 tax return form 1040 The understated tax allocated to you is generally the amount you are responsible for. 2012 tax return form 1040 This type of relief is available only for unpaid liabilities resulting from the understated tax. 2012 tax return form 1040 Refunds are not allowed. 2012 tax return form 1040 To request separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. 2012 tax return form 1040 You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. 2012 tax return form 1040 (Under this rule, you are no longer married if you are widowed. 2012 tax return form 1040 ) You were not a member of the same household (explained below) as the spouse with whom you filed the joint return at any time during the 12-month per- iod ending on the date you file Form 8857. 2012 tax return form 1040 Members of the same household. 2012 tax return form 1040   You and your spouse are not members of the same household if you are living apart and are estranged. 2012 tax return form 1040 However, you and your spouse are considered members of the same household if any of the following conditions are met. 2012 tax return form 1040 You and your spouse reside in the same dwelling. 2012 tax return form 1040 You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other's household as explained in (3) below. 2012 tax return form 1040 Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. 2012 tax return form 1040 Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. 2012 tax return form 1040 Burden of proof. 2012 tax return form 1040   You must be able to prove that you meet all of the requirements for separation of liability relief (except actual knowledge) and that you did not transfer property to avoid tax (discussed later). 2012 tax return form 1040 You must also establish the basis for allocating the erroneous items. 2012 tax return form 1040 Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. 2012 tax return form 1040 The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. 2012 tax return form 1040 A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. 2012 tax return form 1040 The IRS proves that at the time you signed your joint return, you had actual knowledge (explained below) of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). 2012 tax return form 1040 For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. 2012 tax return form 1040 Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. 2012 tax return form 1040 See Transfers of Property To Avoid Tax , later. 2012 tax return form 1040 Actual Knowledge The relief discussed here does not apply to any part of the understated tax due to your spouse's (or former spouse's) erroneous items of which you had actual knowledge. 2012 tax return form 1040 You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. 2012 tax return form 1040 If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item. 2012 tax return form 1040 You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. 2012 tax return form 1040 (This rule applies whether or not there was a receipt of cash. 2012 tax return form 1040 ) You knew of the facts that made an incorrect deduction or credit unallowable. 2012 tax return form 1040 For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return. 2012 tax return form 1040 Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. 2012 tax return form 1040 Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. 2012 tax return form 1040 Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself. 2012 tax return form 1040 Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. 2012 tax return form 1040 Neither is your actual knowledge of how the erroneous item was treated on the tax return. 2012 tax return form 1040 For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable. 2012 tax return form 1040 Example. 2012 tax return form 1040 Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. 2012 tax return form 1040 The IRS audited their return and found that Bill did not report $20,000 of self-employment income. 2012 tax return form 1040 The additional income resulted in a $6,000 understated tax, plus interest and penalties. 2012 tax return form 1040 After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. 2012 tax return form 1040 The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. 2012 tax return form 1040 Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. 2012 tax return form 1040 Karen is also liable for the understated tax, interest, and penalties due to the $20,000 of unreported income because she actually knew of the item. 2012 tax return form 1040 The IRS can collect the entire $6,000 plus interest and penalties from either Karen or Bill because they are jointly and individually liable for it. 2012 tax return form 1040 Factors supporting actual knowledge. 2012 tax return form 1040   The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. 2012 tax return form 1040 The following are examples of factors the IRS may use. 2012 tax return form 1040 Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. 2012 tax return form 1040 Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. 2012 tax return form 1040 Exception for spousal abuse or domestic violence. 2012 tax return form 1040   Even if you had actual knowledge, you may still qualify for relief if you establish that: You were the victim of spousal abuse or domestic violence before signing the return, and Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you. 2012 tax return form 1040   If you establish that you signed your joint return under duress (threat of harm or other form of coercion), then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. 2012 tax return form 1040 However, you may be required to file a separate return for that tax year. 2012 tax return form 1040 For more information about duress, see the instructions for Form 8857. 2012 tax return form 1040 Transfers of Property To Avoid Tax If your spouse (or former spouse) transfers property (or the right to property) to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the fair market value of the property on the date of the transfer. 2012 tax return form 1040 The increase may not be more than the entire amount of the liability. 2012 tax return form 1040 A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency. 2012 tax return form 1040 This presumption will not apply if: The transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement, or You establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax. 2012 tax return form 1040 If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to you will be increased as explained above. 2012 tax return form 1040 Equitable Relief If you do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. 2012 tax return form 1040 Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax (defined earlier under Innocent Spouse Relief ) or an underpaid tax. 2012 tax return form 1040 An underpaid tax is an amount of tax you properly reported on your return but you have not paid. 2012 tax return form 1040 For example, your joint 2009 return shows that you and your spouse owed $5,000. 2012 tax return form 1040 You paid $2,000 with the return. 2012 tax return form 1040 You have an underpaid tax of $3,000. 2012 tax return form 1040 Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. 2012 tax return form 1040 You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. 2012 tax return form 1040 You have an understated tax or an underpaid tax. 2012 tax return form 1040 You did not pay the tax. 2012 tax return form 1040 However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. 2012 tax return form 1040 You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated or underpaid tax. 2012 tax return form 1040 See Factors for Determining Whether To Grant Equitable Relief, later. 2012 tax return form 1040 You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. 2012 tax return form 1040 A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. 2012 tax return form 1040 Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. 2012 tax return form 1040 See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. 2012 tax return form 1040 You did not file or fail to file your return with the intent to commit fraud. 2012 tax return form 1040 The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies: The item is attributable or partially attributable to you solely due to the operation of community property law. 2012 tax return form 1040 If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. 2012 tax return form 1040 If the item is titled in your name, the item is presumed to be attributable to you. 2012 tax return form 1040 However, you can rebut this presumption based on the facts and circumstances. 2012 tax return form 1040 You did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. 2012 tax return form 1040 If you meet this exception, the IRS will consider granting equitable relief although the underpaid tax may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse). 2012 tax return form 1040 You establish that you were the victim of spousal abuse or domestic violence before signing the return, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse's (or former spouse's) retaliation. 2012 tax return form 1040 If you meet this exception, relief will be considered although the understated tax or underpaid tax may be attributable in part or in full to your item. 2012 tax return form 1040 Factors for Determining Whether To Grant Equitable Relief The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understated or underpaid tax. 2012 tax return form 1040 The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. 2012 tax return form 1040 The IRS will consider all factors and weigh them appropriately. 2012 tax return form 1040 Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. 2012 tax return form 1040 Whether you are separated (whether legally or not) or divorced from your spouse. 2012 tax return form 1040 A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. 2012 tax return form 1040 A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. 2012 tax return form 1040 Whether you would suffer a significant economic hardship if relief is not granted. 2012 tax return form 1040 (In other words, you would not be able to pay your reasonable basic living expenses. 2012 tax return form 1040 ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. 2012 tax return form 1040 This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability. 2012 tax return form 1040 Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. 2012 tax return form 1040 (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. 2012 tax return form 1040 ) Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years. 2012 tax return form 1040 Whether you knew or had reason to know about the items causing the understated tax or that the tax would not be paid, as explained next. 2012 tax return form 1040 Knowledge or reason to know. 2012 tax return form 1040   In the case of an underpaid tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability. 2012 tax return form 1040   In the case of an income tax liability that arose from an understated tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understated tax. 2012 tax return form 1040 Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. 2012 tax return form 1040 Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. 2012 tax return form 1040 This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. 2012 tax return form 1040 Reason to know. 2012 tax return form 1040   In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels. 2012 tax return form 1040 Example. 2012 tax return form 1040 You and your spouse filed a joint 2009 return. 2012 tax return form 1040 That return showed you owed $10,000. 2012 tax return form 1040 You had $5,000 of your own money and you took out a loan to pay the other $5,000. 2012 tax return form 1040 You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. 2012 tax return form 1040 Without telling you, your spouse took the $5,000 loan and spent it on himself. 2012 tax return form 1040 You and your spouse were divorced in 2010. 2012 tax return form 1040 In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. 2012 tax return form 1040 These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. 2012 tax return form 1040 The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpaid tax. 2012 tax return form 1040 Factors Weighing in Favor of Equitable Relief The following are examples of factors that will weigh in favor of equitable relief, but will not weigh against equitable relief. 2012 tax return form 1040 Whether your spouse (or former spouse) abused you. 2012 tax return form 1040 Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. 2012 tax return form 1040 Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . 2012 tax return form 1040 Not permitted under separation of liability relief. 2012 tax return form 1040 Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. 2012 tax return form 1040 Proof Required The IRS will only refund payments you made with your own money. 2012 tax return form 1040 However, you must provide proof that you made the payments with your own money. 2012 tax return form 1040 Examples of proof are a copy of your bank statement or a canceled check. 2012 tax return form 1040 No proof is required if your individual refund was used by the IRS to pay a tax you owed on a joint tax return for another year. 2012 tax return form 1040 Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. 2012 tax return form 1040 Underpaid tax. 2012 tax return form 1040   If you are granted relief for an underpaid tax, you are eligible for a refund of separate payments that you made after July 22, 1998. 2012 tax return form 1040 However, you are not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made. 2012 tax return form 1040 For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. 2012 tax return form 1040   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. 2012 tax return form 1040 Understated tax. 2012 tax return form 1040   If you are granted relief for an understated tax, you are eligible for a refund of certain payments made under an installment agreement that you entered into with the IRS, if you have not defaulted on the installment agreement. 2012 tax return form 1040 You are not in default if the IRS did not issue you a notice of default or take any action to end the installment agreement. 2012 tax return form 1040 Only installment payments made after the date you filed Form 8857 are eligible for a refund. 2012 tax return form 1040   The amount of the refund is subject to the limit discussed next. 2012 tax return form 1040 Limit on Amount of Refund The amount of your refund is limited. 2012 tax return form 1040 Read the following chart to find out the limit. 2012 tax return form 1040 IF you file Form 8857. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 THEN the refund cannot be more than. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 Within 3 years after filing your return The part of the tax paid within 3 years (plus any extension of time for filing your return) before you filed Form 8857. 2012 tax return form 1040 After the 3-year period, but within 2 years from the time you paid the tax The tax you paid within 2 years immediately before you filed Form 8857. 2012 tax return form 1040 Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. 2012 tax return form 1040 Janie and Joe Boulder filed a joint tax return for 2007. 2012 tax return form 1040 They claimed one dependency exemption for their son Michael. 2012 tax return form 1040 Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. 2012 tax return form 1040 Janie did not know about the award when the return was filed. 2012 tax return form 1040 They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). 2012 tax return form 1040 Janie and Joe were divorced on May 13, 2009. 2012 tax return form 1040 In February 2010, Janie filed her 2009 federal income tax return as head of household. 2012 tax return form 1040 She expected a refund of $1,203. 2012 tax return form 1040 In May 2010, she received a notice informing her that the IRS had offset her refund against the $815 owed on her joint 2007 income tax return and that she had a right to file Form 8857. 2012 tax return form 1040 Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. 2012 tax return form 1040 Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. 2012 tax return form 1040 Janie believes she meets the third condition. 2012 tax return form 1040 She did not know about the award and had no reason to know about it because of the secretive way Joe conducted his financial affairs. 2012 tax return form 1040 Janie believes she meets the fourth condition. 2012 tax return form 1040 She believes it would be unfair to be held liable for the tax because she did not benefit from the award. 2012 tax return form 1040 Joe spent it on personal items for his use only. 2012 tax return form 1040 Because Janie believes she qualifies for innocent spouse relief, she first completes Part I of Form 8857 to determine if she should file the form. 2012 tax return form 1040 In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. 2012 tax return form 1040 Part I Line 1. 2012 tax return form 1040   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. 2012 tax return form 1040 Line 2. 2012 tax return form 1040   She checks the box because she wants a refund. 2012 tax return form 1040 Note. 2012 tax return form 1040 Because the IRS used her individual refund to pay the tax owed on the joint tax return, she does not need to provide proof of payment. 2012 tax return form 1040 Line 3. 2012 tax return form 1040   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. 2012 tax return form 1040 Line 4. 2012 tax return form 1040   She checks the “Yes” box because she filed a joint tax return for tax year 2007. 2012 tax return form 1040 Line 5. 2012 tax return form 1040   She skips this line because she checked the “Yes” box on line 4. 2012 tax return form 1040 Part II Line 6. 2012 tax return form 1040   She enters her name, address, social security number, county, and best daytime phone number. 2012 tax return form 1040 Part III Line 7. 2012 tax return form 1040   She enters Joe's name, address, social security number, and best daytime phone number. 2012 tax return form 1040 Line 8. 2012 tax return form 1040   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. 2012 tax return form 1040 ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. 2012 tax return form 1040 Line 9. 2012 tax return form 1040   She checks the box for “High school diploma, equivalent, or less,” because she had completed high school when her 2007 joint tax return was filed. 2012 tax return form 1040 Line 10. 2012 tax return form 1040   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. 2012 tax return form 1040 Line 11. 2012 tax return form 1040   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. 2012 tax return form 1040 Line 12. 2012 tax return form 1040   She checks the “Yes” box because she signed the 2007 joint tax return. 2012 tax return form 1040 Line 13. 2012 tax return form 1040   She checks the “No” box because she did not have a mental or physical condition when the return was filed and does not have one now. 2012 tax return form 1040 Part IV Line 14. 2012 tax return form 1040   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. 2012 tax return form 1040 ” Line 15. 2012 tax return form 1040   She checks the box, “You did not know anything was incorrect or missing” because she did not know that Joe had received a $5,000 award. 2012 tax return form 1040 She explains this in the space provided. 2012 tax return form 1040 Line 16. 2012 tax return form 1040   She checks the box, “You knew that person had income” because she knew Joe had income from wages. 2012 tax return form 1040 She also lists Joe's income. 2012 tax return form 1040 Under “Type of Income” she enters “wages. 2012 tax return form 1040 ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. 2012 tax return form 1040 ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. 2012 tax return form 1040 ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. 2012 tax return form 1040 Line 17. 2012 tax return form 1040   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. 2012 tax return form 1040 Line 18. 2012 tax return form 1040   She checks the “No” box because, when the return was signed, she was not having financial problems. 2012 tax return form 1040 Line 19. 2012 tax return form 1040   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. 2012 tax return form 1040 She provides additional information in the space provided. 2012 tax return form 1040 Line 20. 2012 tax return form 1040   She checks the “No” box because Joe has never transferred money or property to her. 2012 tax return form 1040 Part V Line 21. 2012 tax return form 1040   She enters the number “1” on both the line for “Adults” and the line for “Children” because her current household consists of herself and her son. 2012 tax return form 1040 Line 22. 2012 tax return form 1040   She enters her average monthly income for her entire household. 2012 tax return form 1040 Line 23. 2012 tax return form 1040   She lists her assets, which are $500 for the fair market value of a car, $450 in her checking account, and $100 in her savings account. 2012 tax return form 1040 Signing and mailing Form 8857. 2012 tax return form 1040    Janie signs and dates the form. 2012 tax return form 1040 She attaches the copy of her divorce decree (not illustrated) required by line 8. 2012 tax return form 1040 Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. 2012 tax return form 1040 This image is too large to be displayed in the current screen. 2012 tax return form 1040 Please click the link to view the image. 2012 tax return form 1040 Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. 2012 tax return form 1040 Please click the link to view the image. 2012 tax return form 1040 Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. 2012 tax return form 1040 Please click the link to view the image. 2012 tax return form 1040 Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. 2012 tax return form 1040 Please click the link to view the image. 2012 tax return form 1040 Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. 2012 tax return form 1040 But do not rely on these flowcharts alone. 2012 tax return form 1040 Also read the earlier discussions. 2012 tax return form 1040 Figure A. 2012 tax return form 1040 Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. 2012 tax return form 1040 "Do You Qualify for Innocent Spouse Relief?" Figure B. 2012 tax return form 1040 Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. 2012 tax return form 1040 "Do You Qualify for Separation of Liability Relief?" Figure C. 2012 tax return form 1040 Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. 2012 tax return form 1040 Please click the link to view the image. 2012 tax return form 1040 "Do You Qualify for Equitable Relief?" Prev  Up  Next   Home   More Online Publications