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Aarp Free Tax Preparation

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Aarp Free Tax Preparation

Aarp free tax preparation 1. Aarp free tax preparation   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. Aarp free tax preparation Amount realized on a recourse debt. Aarp free tax preparation 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. Aarp free tax preparation S. Aarp free tax preparation Individual Income Tax Return 1040X Amended U. Aarp free tax preparation S. Aarp free tax preparation 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. Aarp free tax preparation However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Aarp free tax preparation See chapter 5 for information about getting publications and forms. Aarp free tax preparation Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Aarp free tax preparation An exchange is a transfer of property for other property or services. Aarp free tax preparation The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Aarp free tax preparation Sale or lease. Aarp free tax preparation    Some agreements that seem to be leases may really be conditional sales contracts. Aarp free tax preparation The intention of the parties to the agreement can help you distinguish between a sale and a lease. Aarp free tax preparation   There is no test or group of tests to prove what the parties intended when they made the agreement. Aarp free tax preparation You should consider each agreement based on its own facts and circumstances. Aarp free tax preparation For more information, see chapter 3 in Publication 535, Business Expenses. Aarp free tax preparation Cancellation of a lease. Aarp free tax preparation    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Aarp free tax preparation 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. Aarp free tax preparation Copyright. Aarp free tax preparation    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. Aarp free tax preparation 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. Aarp free tax preparation Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Aarp free tax preparation   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. Aarp free tax preparation For more information, see Section 1231 Gains and Losses in chapter 3. Aarp free tax preparation Easement. Aarp free tax preparation   The amount received for granting an easement is subtracted from the basis of the property. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation   Any amount received that is more than the basis to be reduced is a taxable gain. Aarp free tax preparation The transaction is reported as a sale of property. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation See Gain or Loss From Condemnations, later. Aarp free tax preparation Property transferred to satisfy debt. Aarp free tax preparation   A transfer of property to satisfy a debt is an exchange. Aarp free tax preparation Note's maturity date extended. Aarp free tax preparation   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Aarp free tax preparation Also, it is not considered a closed and completed transaction that would result in a gain or loss. Aarp free tax preparation 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. Aarp free tax preparation Each case must be determined by its own facts. Aarp free tax preparation For more information, see Regulations section 1. Aarp free tax preparation 1001-3. Aarp free tax preparation Transfer on death. Aarp free tax preparation   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. Aarp free tax preparation No taxable gain or deductible loss results from the transfer. Aarp free tax preparation Bankruptcy. Aarp free tax preparation   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Aarp free tax preparation Consequently, the transfer generally does not result in gain or loss. Aarp free tax preparation For more information, see Publication 908, Bankruptcy Tax Guide. Aarp free tax preparation Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Aarp free tax preparation A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Aarp free tax preparation A loss is the adjusted basis of the property that is more than the amount you realize. Aarp free tax preparation   Table 1-1. Aarp free tax preparation How To Figure Whether You Have a Gain or Loss IF your. Aarp free tax preparation . Aarp free tax preparation . Aarp free tax preparation THEN you have a. Aarp free tax preparation . Aarp free tax preparation . Aarp free tax preparation Adjusted basis is more than the amount realized, Loss. Aarp free tax preparation Amount realized is more than the adjusted basis, Gain. Aarp free tax preparation Basis. Aarp free tax preparation   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Aarp free tax preparation The basis of property you buy is usually its cost. Aarp free tax preparation 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. Aarp free tax preparation See Basis Other Than Cost in Publication 551, Basis of Assets. Aarp free tax preparation 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. Aarp free tax preparation See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Aarp free tax preparation Adjusted basis. Aarp free tax preparation   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Aarp free tax preparation Increases include costs of any improvements having a useful life of more than 1 year. Aarp free tax preparation Decreases include depreciation and casualty losses. Aarp free tax preparation For more details and additional examples, see Adjusted Basis in Publication 551. Aarp free tax preparation Amount realized. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation Fair market value. Aarp free tax preparation   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. Aarp free tax preparation If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Aarp free tax preparation If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Aarp free tax preparation Example. Aarp free tax preparation You used a building in your business that cost you $70,000. Aarp free tax preparation You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Aarp free tax preparation You sold the building for $100,000 plus property having an FMV of $20,000. Aarp free tax preparation The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Aarp free tax preparation The selling expenses were $4,000. Aarp free tax preparation Your gain on the sale is figured as follows. Aarp free tax preparation 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. Aarp free tax preparation   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Aarp free tax preparation Recognized gains must be included in gross income. Aarp free tax preparation Recognized losses are deductible from gross income. Aarp free tax preparation However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Aarp free tax preparation See Nontaxable Exchanges, later. Aarp free tax preparation 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. Aarp free tax preparation Interest in property. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation Your basis in the property is disregarded. Aarp free tax preparation This rule does not apply if all interests in the property are disposed of at the same time. Aarp free tax preparation Example 1. Aarp free tax preparation Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Aarp free tax preparation You decide to sell your life interest in the farm. Aarp free tax preparation The entire amount you receive is a recognized gain. Aarp free tax preparation Your basis in the farm is disregarded. Aarp free tax preparation Example 2. Aarp free tax preparation The facts are the same as in Example 1, except that your brother joins you in selling the farm. Aarp free tax preparation The entire interest in the property is sold, so your basis in the farm is not disregarded. Aarp free tax preparation Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Aarp free tax preparation Canceling a sale of real property. Aarp free tax preparation   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. Aarp free tax preparation If the buyer returns the property in the year of sale, no gain or loss is recognized. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation When the property is returned in a later year, you acquire a new basis in the property. Aarp free tax preparation That basis is equal to the amount you pay to the buyer. Aarp free tax preparation 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. Aarp free tax preparation You have a gain if the amount realized is more than your adjusted basis in the property. Aarp free tax preparation However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Aarp free tax preparation Bargain sales to charity. Aarp free tax preparation   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Aarp free tax preparation 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. Aarp free tax preparation The adjusted basis of the part sold is figured as follows. Aarp free tax preparation 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. Aarp free tax preparation This allocation rule does not apply if a charitable contribution deduction is not allowable. Aarp free tax preparation   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Aarp free tax preparation Example. Aarp free tax preparation 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. Aarp free tax preparation Your adjusted basis in the property is $4,000. Aarp free tax preparation Your gain on the sale is $1,200, figured as follows. Aarp free tax preparation 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. Aarp free tax preparation You must subtract depreciation you took or could have taken from the basis of the business or rental part. Aarp free tax preparation However, see the special rule below for a home used partly for business or rental. Aarp free tax preparation You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Aarp free tax preparation 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. Aarp free tax preparation Any gain on the personal part of the property is a capital gain. Aarp free tax preparation You cannot deduct a loss on the personal part. Aarp free tax preparation Home used partly for business or rental. Aarp free tax preparation    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. Aarp free tax preparation See Property Used Partly for Business or Rental, in Publication 523. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation Figure the loss you can deduct as follows. Aarp free tax preparation Use the lesser of the property's adjusted basis or fair market value at the time of the change. Aarp free tax preparation Add to (1) the cost of any improvements and other increases to basis since the change. Aarp free tax preparation Subtract from (2) depreciation and any other decreases to basis since the change. Aarp free tax preparation Subtract the amount you realized on the sale from the result in (3). Aarp free tax preparation If the amount you realized is more than the result in (3), treat this result as zero. Aarp free tax preparation The result in (4) is the loss you can deduct. Aarp free tax preparation Example. Aarp free tax preparation You changed your main home to rental property 5 years ago. Aarp free tax preparation At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Aarp free tax preparation This year, you sold the property for $55,000. Aarp free tax preparation You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation   If you have a gain on the sale, you generally must recognize the full amount of the gain. Aarp free tax preparation You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Aarp free tax preparation   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. Aarp free tax preparation However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Aarp free tax preparation   For more information, see Business Use or Rental of Home in Publication 523. Aarp free tax preparation In addition, special rules apply if the home sold was acquired in a like-kind exchange. Aarp free tax preparation See Special Situations in Publication 523. Aarp free tax preparation Also see Like-Kind Exchanges, later. Aarp free tax preparation Abandonments The abandonment of property is a disposition of property. Aarp free tax preparation 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. Aarp free tax preparation Generally, abandonment is not treated as a sale or exchange of the property. Aarp free tax preparation If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Aarp free tax preparation If your adjusted basis is more than the amount you realize (if any), then you have a loss. Aarp free tax preparation Loss from abandonment of business or investment property is deductible as a loss. Aarp free tax preparation A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Aarp free tax preparation This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Aarp free tax preparation If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Aarp free tax preparation The abandonment loss is deducted in the tax year in which the loss is sustained. Aarp free tax preparation If the abandoned property is secured by debt, special rules apply. Aarp free tax preparation 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). Aarp free tax preparation For more information, including examples, see chapter 3 of Publication 4681. Aarp free tax preparation You cannot deduct any loss from abandonment of your home or other property held for personal use only. Aarp free tax preparation Cancellation of debt. Aarp free tax preparation   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. Aarp free tax preparation This income is separate from any loss realized from abandonment of the property. Aarp free tax preparation   You must report this income on your tax return unless one of the following applies. Aarp free tax preparation The cancellation is intended as a gift. Aarp free tax preparation The debt is qualified farm debt. Aarp free tax preparation The debt is qualified real property business debt. Aarp free tax preparation You are insolvent or bankrupt. Aarp free tax preparation The debt is qualified principal residence indebtedness. Aarp free tax preparation File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Aarp free tax preparation For more information, including other exceptions and exclusion, see Publication 4681. Aarp free tax preparation Forms 1099-A and 1099-C. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Aarp free tax preparation 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. Aarp free tax preparation The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Aarp free tax preparation This is true even if you voluntarily return the property to the lender. Aarp free tax preparation You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Aarp free tax preparation Buyer's (borrower's) gain or loss. Aarp free tax preparation   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. Aarp free tax preparation The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Aarp free tax preparation See Gain or Loss From Sales and Exchanges, earlier. Aarp free tax preparation You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Aarp free tax preparation Amount realized on a nonrecourse debt. Aarp free tax preparation   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. Aarp free tax preparation The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Aarp free tax preparation Example 1. Aarp free tax preparation Chris bought a new car for $15,000. Aarp free tax preparation He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Aarp free tax preparation Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Aarp free tax preparation The credit company repossessed the car because he stopped making loan payments. Aarp free tax preparation The balance due after taking into account the payments Chris made was $10,000. Aarp free tax preparation The fair market value of the car when repossessed was $9,000. Aarp free tax preparation The amount Chris realized on the repossession is $10,000. Aarp free tax preparation 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. Aarp free tax preparation Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Aarp free tax preparation He has a $5,000 nondeductible loss. Aarp free tax preparation Example 2. Aarp free tax preparation Abena paid $200,000 for her home. Aarp free tax preparation She paid $15,000 down and borrowed the remaining $185,000 from a bank. Aarp free tax preparation Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Aarp free tax preparation The bank foreclosed on the loan because Abena stopped making payments. Aarp free tax preparation 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. Aarp free tax preparation The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Aarp free tax preparation She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Aarp free tax preparation She has a $5,000 realized gain. Aarp free tax preparation Amount realized on a recourse debt. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation The amount realized does not include the canceled debt that is your income from cancellation of debt. Aarp free tax preparation See Cancellation of debt, below. Aarp free tax preparation Seller's (lender's) gain or loss on repossession. Aarp free tax preparation   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. Aarp free tax preparation For more information, see Repossession in Publication 537. Aarp free tax preparation    Table 1-2. Aarp free tax preparation Worksheet for Foreclosures and Repossessions Part 1. Aarp free tax preparation Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Aarp free tax preparation Complete this part only  if you were personally liable for the debt. Aarp free tax preparation Otherwise,  go to Part 2. Aarp free tax preparation   1. Aarp free tax preparation 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. Aarp free tax preparation Enter the fair market value of the transferred property   3. Aarp free tax preparation Ordinary income from cancellation of debt upon foreclosure or    repossession. Aarp free tax preparation * Subtract line 2 from line 1. Aarp free tax preparation   If less than zero, enter zero   Part 2. Aarp free tax preparation Figure your gain or loss from foreclosure or repossession. Aarp free tax preparation   4. Aarp free tax preparation If you completed Part 1, enter the smaller of line 1 or line 2. Aarp free tax preparation   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Aarp free tax preparation Enter any proceeds you received from the foreclosure sale   6. Aarp free tax preparation Add lines 4 and 5   7. Aarp free tax preparation Enter the adjusted basis of the transferred property   8. Aarp free tax preparation Gain or loss from foreclosure or repossession. Aarp free tax preparation Subtract line 7  from line 6   * The income may not be taxable. Aarp free tax preparation See Cancellation of debt. Aarp free tax preparation Cancellation of debt. Aarp free tax preparation   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. Aarp free tax preparation This income is separate from any gain or loss realized from the foreclosure or repossession. Aarp free tax preparation Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Aarp free tax preparation    You can use Table 1-2 to figure your income from cancellation of debt. Aarp free tax preparation   You must report this income on your tax return unless one of the following applies. Aarp free tax preparation The cancellation is intended as a gift. Aarp free tax preparation The debt is qualified farm debt. Aarp free tax preparation The debt is qualified real property business debt. Aarp free tax preparation You are insolvent or bankrupt. Aarp free tax preparation The debt is qualified principal residence indebtedness. Aarp free tax preparation File Form 982 to report the income exclusion. Aarp free tax preparation Example 1. Aarp free tax preparation 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). Aarp free tax preparation In this case, the amount he realizes is $9,000. Aarp free tax preparation This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Aarp free tax preparation Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Aarp free tax preparation He has a $6,000 nondeductible loss. Aarp free tax preparation He also is treated as receiving ordinary income from cancellation of debt. Aarp free tax preparation That income is $1,000 ($10,000 − $9,000). Aarp free tax preparation This is the part of the canceled debt not included in the amount realized. Aarp free tax preparation Example 2. Aarp free tax preparation 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). Aarp free tax preparation In this case, the amount she realizes is $170,000. Aarp free tax preparation This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Aarp free tax preparation Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Aarp free tax preparation She has a $5,000 nondeductible loss. Aarp free tax preparation She also is treated as receiving ordinary income from cancellation of debt. Aarp free tax preparation (The debt is not exempt from tax as discussed under Cancellation of debt, above. Aarp free tax preparation ) That income is $10,000 ($180,000 − $170,000). Aarp free tax preparation This is the part of the canceled debt not included in the amount realized. Aarp free tax preparation Forms 1099-A and 1099-C. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Aarp free tax preparation 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. Aarp free tax preparation Involuntary conversions are also called involuntary exchanges. Aarp free tax preparation Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Aarp free tax preparation You report the gain or deduct the loss on your tax return for the year you realize it. Aarp free tax preparation 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. Aarp free tax preparation However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Aarp free tax preparation Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Aarp free tax preparation Your basis for the new property is the same as your basis for the converted property. Aarp free tax preparation This means that the gain is deferred until a taxable sale or exchange occurs. Aarp free tax preparation 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. Aarp free tax preparation This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Aarp free tax preparation If you have a gain or loss from the destruction or theft of property, see Publication 547. Aarp free tax preparation Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Aarp free tax preparation 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. Aarp free tax preparation The owner receives a condemnation award (money or property) in exchange for the property taken. Aarp free tax preparation A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Aarp free tax preparation Example. Aarp free tax preparation A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Aarp free tax preparation After the local government took action to condemn your property, you went to court to keep it. Aarp free tax preparation But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Aarp free tax preparation This is a condemnation of private property for public use. Aarp free tax preparation Threat of condemnation. Aarp free tax preparation   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. Aarp free tax preparation You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation Reports of condemnation. Aarp free tax preparation   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. Aarp free tax preparation You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Aarp free tax preparation 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. Aarp free tax preparation Example. Aarp free tax preparation Your property lies along public utility lines. Aarp free tax preparation The utility company has the authority to condemn your property. Aarp free tax preparation The company informs you that it intends to acquire your property by negotiation or condemnation. Aarp free tax preparation A threat of condemnation exists when you receive the notice. Aarp free tax preparation Related property voluntarily sold. Aarp free tax preparation   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. Aarp free tax preparation A substantial economic relationship exists if together the properties were one economic unit. Aarp free tax preparation You also must show that the condemned property could not reasonably or adequately be replaced. Aarp free tax preparation You can elect to postpone reporting the gain by buying replacement property. Aarp free tax preparation See Postponement of Gain, later. Aarp free tax preparation 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. Aarp free tax preparation If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Aarp free tax preparation You can postpone reporting gain from a condemnation if you buy replacement property. Aarp free tax preparation 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. Aarp free tax preparation See Postponement of Gain, later. Aarp free tax preparation If your net condemnation award is less than your adjusted basis, you have a loss. Aarp free tax preparation If your loss is from property you held for personal use, you cannot deduct it. Aarp free tax preparation You must report any deductible loss in the tax year it happened. Aarp free tax preparation You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Aarp free tax preparation Main home condemned. Aarp free tax preparation   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. Aarp free tax preparation You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Aarp free tax preparation For information on this exclusion, see Publication 523. Aarp free tax preparation 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. Aarp free tax preparation See Postponement of Gain, later. Aarp free tax preparation Table 1-3. Aarp free tax preparation Worksheet for Condemnations Part 1. Aarp free tax preparation Gain from severance damages. Aarp free tax preparation  If you did not receive severance damages, skip Part 1 and go to Part 2. Aarp free tax preparation   1. Aarp free tax preparation Enter gross severance damages received   2. Aarp free tax preparation Enter your expenses in getting severance damages   3. Aarp free tax preparation Subtract line 2 from line 1. Aarp free tax preparation If less than zero, enter -0-   4. Aarp free tax preparation Enter any special assessment on remaining property taken out of your award   5. Aarp free tax preparation Net severance damages. Aarp free tax preparation Subtract line 4 from line 3. Aarp free tax preparation If less than zero, enter -0-   6. Aarp free tax preparation Enter the adjusted basis of the remaining property   7. Aarp free tax preparation Gain from severance damages. Aarp free tax preparation Subtract line 6 from line 5. Aarp free tax preparation If less than zero, enter -0-   8. Aarp free tax preparation Refigured adjusted basis of the remaining property. Aarp free tax preparation Subtract line 5 from line 6. Aarp free tax preparation If less than zero, enter -0-   Part 2. Aarp free tax preparation Gain or loss from condemnation award. Aarp free tax preparation   9. Aarp free tax preparation Enter the gross condemnation award received   10. Aarp free tax preparation Enter your expenses in getting the condemnation award   11. Aarp free tax preparation If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Aarp free tax preparation If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Aarp free tax preparation Otherwise, enter -0-   12. Aarp free tax preparation Add lines 10 and 11   13. Aarp free tax preparation Net condemnation award. Aarp free tax preparation Subtract line 12 from line 9   14. Aarp free tax preparation Enter the adjusted basis of the condemned property   15. Aarp free tax preparation Gain from condemnation award. Aarp free tax preparation If line 14 is more than line 13, enter -0-. Aarp free tax preparation Otherwise, subtract line 14 from  line 13 and skip line 16   16. Aarp free tax preparation Loss from condemnation award. Aarp free tax preparation Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Aarp free tax preparation )   Part 3. Aarp free tax preparation Postponed gain from condemnation. Aarp free tax preparation  (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. Aarp free tax preparation )   17. Aarp free tax preparation If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Aarp free tax preparation Otherwise, enter -0-   18. Aarp free tax preparation If line 15 is more than zero, enter the amount from line 13. Aarp free tax preparation Otherwise, enter -0-   19. Aarp free tax preparation Add lines 17 and 18. Aarp free tax preparation If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Aarp free tax preparation Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Aarp free tax preparation Subtract line 20 from line 19. Aarp free tax preparation If less than zero, enter -0-   22. Aarp free tax preparation If you completed Part 1, add lines 7 and 15. Aarp free tax preparation Otherwise, enter the amount from line 15. Aarp free tax preparation If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Aarp free tax preparation Recognized gain. Aarp free tax preparation Enter the smaller of line 21 or line 22. Aarp free tax preparation   24. Aarp free tax preparation Postponed gain. Aarp free tax preparation Subtract line 23 from line 22. Aarp free tax preparation If less than zero, enter -0-   Condemnation award. Aarp free tax preparation   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Aarp free tax preparation The award is also the amount you are paid for the sale of your property under threat of condemnation. Aarp free tax preparation Payment of your debts. Aarp free tax preparation   Amounts taken out of the award to pay your debts are considered paid to you. Aarp free tax preparation 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. Aarp free tax preparation Example. Aarp free tax preparation The state condemned your property for public use. Aarp free tax preparation The award was set at $200,000. Aarp free tax preparation The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Aarp free tax preparation You are considered to have received the entire $200,000 as a condemnation award. Aarp free tax preparation Interest on award. Aarp free tax preparation   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Aarp free tax preparation You must report the interest separately as ordinary income. Aarp free tax preparation Payments to relocate. Aarp free tax preparation   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. Aarp free tax preparation Do not include them in your income. Aarp free tax preparation Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Aarp free tax preparation Net condemnation award. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation This is discussed later under Special assessment taken out of award. Aarp free tax preparation Severance damages. Aarp free tax preparation    Severance damages are not part of the award paid for the property condemned. Aarp free tax preparation 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. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation   The contracting parties should agree on the specific amount of severance damages in writing. Aarp free tax preparation If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Aarp free tax preparation   You cannot make a completely new allocation of the total award after the transaction is completed. Aarp free tax preparation However, you can show how much of the award both parties intended for severance damages. Aarp free tax preparation The severance damages part of the award is determined from all the facts and circumstances. Aarp free tax preparation Example. Aarp free tax preparation You sold part of your property to the state under threat of condemnation. Aarp free tax preparation The contract you and the condemning authority signed showed only the total purchase price. Aarp free tax preparation It did not specify a fixed sum for severance damages. Aarp free tax preparation However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Aarp free tax preparation You may treat this part as severance damages. Aarp free tax preparation Treatment of severance damages. Aarp free tax preparation   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Aarp free tax preparation Use them to reduce the basis of the remaining property. Aarp free tax preparation 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. Aarp free tax preparation   If your net severance damages are more than the basis of your retained property, you have a gain. Aarp free tax preparation You may be able to postpone reporting the gain. Aarp free tax preparation See Postponement of Gain, later. Aarp free tax preparation    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. Aarp free tax preparation Net severance damages. Aarp free tax preparation   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Aarp free tax preparation 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. Aarp free tax preparation The balance is your net severance damages. Aarp free tax preparation Expenses of obtaining a condemnation award and severance damages. Aarp free tax preparation   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Aarp free tax preparation Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Aarp free tax preparation If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Aarp free tax preparation Example. Aarp free tax preparation You receive a condemnation award and severance damages. Aarp free tax preparation One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Aarp free tax preparation You had legal expenses for the entire condemnation proceeding. Aarp free tax preparation You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Aarp free tax preparation You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Aarp free tax preparation Special assessment retained out of award. Aarp free tax preparation   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. Aarp free tax preparation An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Aarp free tax preparation Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Aarp free tax preparation   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Aarp free tax preparation Example. Aarp free tax preparation To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Aarp free tax preparation You were awarded $5,000 for this and spent $300 to get the award. Aarp free tax preparation Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Aarp free tax preparation The city then paid you only $4,300. Aarp free tax preparation Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Aarp free tax preparation 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). Aarp free tax preparation The net award would not change, even if you later paid the assessment from the amount you received. Aarp free tax preparation Severance damages received. Aarp free tax preparation   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. Aarp free tax preparation Any balance of the special assessment is used to reduce the condemnation award. Aarp free tax preparation Example. Aarp free tax preparation You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Aarp free tax preparation You spent $300 to obtain the severance damages. Aarp free tax preparation A special assessment of $800 was retained out of the award. Aarp free tax preparation The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Aarp free tax preparation Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Aarp free tax preparation Part business or rental. Aarp free tax preparation   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. Aarp free tax preparation Figure your gain or loss separately because gain or loss on each part may be treated differently. Aarp free tax preparation   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. Aarp free tax preparation Example. Aarp free tax preparation You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Aarp free tax preparation You rented half the building and lived in the other half. Aarp free tax preparation You paid $25,000 for the building and spent an additional $1,000 for a new roof. Aarp free tax preparation You claimed allowable depreciation of $4,600 on the rental half. Aarp free tax preparation You spent $200 in legal expenses to obtain the condemnation award. Aarp free tax preparation Figure your gain or loss as follows. Aarp free tax preparation     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. Aarp free tax preparation 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. Aarp free tax preparation Your basis for the new property is the same as your basis for the old. Aarp free tax preparation Money or unlike property received. Aarp free tax preparation   You ordinarily must report the gain if you receive money or unlike property. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation See Controlling interest in a corporation, later. Aarp free tax preparation   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Aarp free tax preparation 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. Aarp free tax preparation   The basis of the replacement property is its cost, reduced by the postponed gain. Aarp free tax preparation 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. Aarp free tax preparation See Controlling interest in a corporation, later. Aarp free tax preparation You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Aarp free tax preparation Postponing gain on severance damages. Aarp free tax preparation   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. Aarp free tax preparation See Treatment of severance damages, earlier. Aarp free tax preparation 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). Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Aarp free tax preparation Postponing gain on the sale of related property. Aarp free tax preparation   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. Aarp free tax preparation You must meet the requirements explained earlier under Related property voluntarily sold. Aarp free tax preparation 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). Aarp free tax preparation Buying replacement property from a related person. Aarp free tax preparation   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Aarp free tax preparation For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Aarp free tax preparation   This rule applies to the following taxpayers. Aarp free tax preparation C corporations. Aarp free tax preparation Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Aarp free tax preparation 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. Aarp free tax preparation   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Aarp free tax preparation If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Aarp free tax preparation If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Aarp free tax preparation Exception. Aarp free tax preparation   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Aarp free tax preparation Advance payment. Aarp free tax preparation   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). Aarp free tax preparation Replacement property. Aarp free tax preparation   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Aarp free tax preparation You do not have to use the actual funds from the condemnation award to acquire the replacement property. Aarp free tax preparation Property you acquire by gift or inheritance does not qualify as replacement property. Aarp free tax preparation Similar or related in service or use. Aarp free tax preparation   Your replacement property must be similar or related in service or use to the property it replaces. Aarp free tax preparation   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. Aarp free tax preparation For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Aarp free tax preparation Owner-user. Aarp free tax preparation   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. Aarp free tax preparation Example. Aarp free tax preparation Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Aarp free tax preparation Your replacement property is not similar or related in service or use to the condemned property. Aarp free tax preparation To be similar or related in service or use, your replacement property must also be used by you as your home. Aarp free tax preparation Owner-investor. Aarp free tax preparation   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. Aarp free tax preparation You decide this by determining all the following information. Aarp free tax preparation Whether the properties are of similar service to you. Aarp free tax preparation The nature of the business risks connected with the properties. Aarp free tax preparation What the properties demand of you in the way of management, service, and relations to your tenants. Aarp free tax preparation Example. Aarp free tax preparation You owned land and a building you rented to a manufacturing company. Aarp free tax preparation The building was condemned. Aarp free tax preparation During the replacement period, you had a new building built on other land you already owned. Aarp free tax preparation You rented out the new building for use as a wholesale grocery warehouse. Aarp free tax preparation 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. Aarp free tax preparation Your management activities. Aarp free tax preparation The amount and kind of services you provide to your tenants. Aarp free tax preparation The nature of your business risks connected with the properties. Aarp free tax preparation Leasehold replaced with fee simple property. Aarp free tax preparation   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. Aarp free tax preparation   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. Aarp free tax preparation A leasehold is property held under a lease, usually for a term of years. Aarp free tax preparation Outdoor advertising display replaced with real property. Aarp free tax preparation   You can elect to treat an outdoor advertising display as real property. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation   You can make this election only if you did not claim a section 179 deduction for the display. Aarp free tax preparation You cannot cancel this election unless you get the consent of the IRS. Aarp free tax preparation   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. Aarp free tax preparation Substituting replacement property. Aarp free tax preparation   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Aarp free tax preparation But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Aarp free tax preparation Controlling interest in a corporation. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation Basis adjustment to corporation's property. Aarp free tax preparation   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Aarp free tax preparation 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). Aarp free tax preparation   Allocate this reduction to the following classes of property in the order shown below. Aarp free tax preparation Property that is similar or related in service or use to the condemned property. Aarp free tax preparation Depreciable property not reduced in (1). Aarp free tax preparation All other property. Aarp free tax preparation 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. Aarp free tax preparation The reduced basis of any single property cannot be less than zero. Aarp free tax preparation Main home replaced. Aarp free tax preparation   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. Aarp free tax preparation The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Aarp free tax preparation   You must reduce the basis of your replacement property by the postponed gain. Aarp free tax preparation 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. Aarp free tax preparation Example. Aarp free tax preparation City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Aarp free tax preparation The city paid you a condemnation award of $400,000. Aarp free tax preparation Your adjusted basis in the property was $80,000. Aarp free tax preparation You realize a gain of $320,000 ($400,000 − $80,000). Aarp free tax preparation You purchased a new home for $100,000. Aarp free tax preparation You can exclude $250,000 of the realized gain from your gross income. Aarp free tax preparation 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). Aarp free tax preparation You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Aarp free tax preparation The remaining $20,000 of realized gain is postponed. Aarp free tax preparation Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Aarp free tax preparation Replacement period. Aarp free tax preparation   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Aarp free tax preparation This is the replacement period. Aarp free tax preparation   The replacement period for a condemnation begins on the earlier of the following dates. Aarp free tax preparation The date on which you disposed of the condemned property. Aarp free tax preparation The date on which the threat of condemnation began. Aarp free tax preparation   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. Aarp free tax preparation However, see the exceptions below. Aarp free tax preparation Three-year replacement period for certain property. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation Five-year replacement period for certain property. Aarp free tax preparation   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. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation 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. Aarp free tax preparation Extended replacement period for taxpayers affected by other federally declared disasters. Aarp free tax preparation    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. Aarp free tax preparation For more information visit www. Aarp free tax preparation irs. Aarp free tax preparation gov/uac/Tax-Relief-in-Disaster-Situations. Aarp free tax preparation Weather-related sales of livestock in an area eligible for federal assistance. Aarp free tax preparation   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. Aarp free tax preparation    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. Aarp free tax preparation See Notice 2006-82. Aarp free tax preparation You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Aarp free tax preparation irs. Aarp free tax preparation gov/irb/2006-39_IRB/ar13. Aarp free tax preparation html. Aarp free tax preparation    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. Aarp free tax preparation 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. Aarp free tax preparation You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Aarp free tax preparation irs. Aarp free tax preparation gov/irb/2013-45_IRB/ar04. Aarp free tax preparation html. Aarp free tax preparation The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Aarp free tax preparation Determining when gain is realized. Aarp free tax preparation   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Aarp free tax preparation 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. Aarp free tax preparation   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Aarp free tax preparation 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. Aarp free tax preparation   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Aarp free tax preparation All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Aarp free tax preparation All or part of the award is actually or constructively received. Aarp free tax preparation 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. Aarp free tax preparation Replacement property bought before the condemnation. Aarp free tax preparation   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. Aarp free tax preparation Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Aarp free tax preparation Example. Aarp free tax preparation On April 3, 2012, city authorities notified you that your property would be condemned. Aarp free tax preparation On June 5, 2012, you acquired property to replace the property to be condemned. Aarp free tax preparation You still had the new property when the city took possession of your old property on September 4, 2013. Aarp free tax preparation You have made a replacement within the replacement period. Aarp free tax preparation Extension. Aarp free tax preparation   You can request an extension of the replacement period from the IRS director for your area. Aarp free tax preparation You should apply before the end of the replacement period. Aarp free tax preparation Your request should explain in detail why you need an extension. Aarp free tax preparation The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Aarp free tax preparation An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Aarp free tax preparation   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Aarp free tax preparation Extensions are usually limited to a period of 1 year or less. Aarp free tax preparation The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Aarp free tax preparation 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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The Aarp Free Tax Preparation

Aarp free tax preparation Publication 524 - Introductory Material Table of Contents Reminders IntroductionOrdering forms and publications. Aarp free tax preparation Tax questions. Aarp free tax preparation Useful Items - You may want to see: Reminders Future developments. Aarp free tax preparation  For the latest information about developments related to Publication 524, such as legislation enacted after it was published, go to www. Aarp free tax preparation irs. Aarp free tax preparation gov/pub524. Aarp free tax preparation Photographs of missing children. Aarp free tax preparation  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Aarp free tax preparation Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Aarp free tax preparation You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Aarp free tax preparation Introduction If you qualify, you may be able to reduce the tax you owe by taking the credit for the elderly or the disabled. Aarp free tax preparation This publication explains: Who qualifies for the credit for the elderly or the disabled, and How to figure the credit. Aarp free tax preparation You may be able to take the credit for the elderly or the disabled if: You are age 65 or older at the end of 2013, or You retired on permanent and total disability and have taxable disability income. Aarp free tax preparation Comments and suggestions. Aarp free tax preparation   We welcome your comments about this publication and your suggestions for future editions. Aarp free tax preparation   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Aarp free tax preparation NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Aarp free tax preparation Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Aarp free tax preparation   You can send your comments from www. Aarp free tax preparation irs. Aarp free tax preparation gov/formspubs/. Aarp free tax preparation Click on “More Information” and then on “Comment on Tax Forms and Publications”. Aarp free tax preparation   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Aarp free tax preparation Ordering forms and publications. Aarp free tax preparation   Visit www. Aarp free tax preparation irs. Aarp free tax preparation gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Aarp free tax preparation Internal Revenue Service 1201 N. Aarp free tax preparation Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Aarp free tax preparation   If you have a tax question, check the information available on IRS. Aarp free tax preparation gov or call 1-800-829-1040. Aarp free tax preparation We cannot answer tax questions sent to either of the above addresses. Aarp free tax preparation Useful Items - You may want to see: Publication 554 Tax Guide for Seniors Form (and instruction) Schedule R (Form 1040A or 1040) Credit for the Elderly or the Disabled See How To Get Tax Help , near the end of this publication, for information about getting this publication and form. Aarp free tax preparation Prev  Up  Next   Home   More Online Publications