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E File A 1040x

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E File A 1040x

E file a 1040x 13. E file a 1040x   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. E file a 1040x It is divided into the following sections. E file a 1040x Cost basis. E file a 1040x Adjusted basis. E file a 1040x Basis other than cost. E file a 1040x Your basis is the amount of your investment in property for tax purposes. E file a 1040x Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. E file a 1040x Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. E file a 1040x If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. E file a 1040x Only the basis allocated to the business or investment use of the property can be depreciated. E file a 1040x Your original basis in property is adjusted (increased or decreased) by certain events. E file a 1040x For example, if you make improvements to the property, increase your basis. E file a 1040x If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. E file a 1040x Keep accurate records of all items that affect the basis of your property. E file a 1040x For more information on keeping records, see chapter 1. E file a 1040x Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. E file a 1040x The cost is the amount you pay in cash, debt obligations, other property, or services. E file a 1040x Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). E file a 1040x In addition, the basis of real estate and business assets may include other items. E file a 1040x Loans with low or no interest. E file a 1040x    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. E file a 1040x You generally have unstated interest if your interest rate is less than the applicable federal rate. E file a 1040x   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. E file a 1040x Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. E file a 1040x If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. E file a 1040x Lump sum purchase. E file a 1040x   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. E file a 1040x Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. E file a 1040x Figure the basis of each asset by multiplying the lump sum by a fraction. E file a 1040x The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. E file a 1040x    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. E file a 1040x Fair market value (FMV). E file a 1040x   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. E file a 1040x Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. E file a 1040x Assumption of mortgage. E file a 1040x   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. E file a 1040x Settlement costs. E file a 1040x   Your basis includes the settlement fees and closing costs you paid for buying the property. E file a 1040x (A fee for buying property is a cost that must be paid even if you buy the property for cash. E file a 1040x ) Do not include fees and costs for getting a loan on the property in your basis. E file a 1040x   The following are some of the settlement fees or closing costs you can include in the basis of your property. E file a 1040x Abstract fees (abstract of title fees). E file a 1040x Charges for installing utility services. E file a 1040x Legal fees (including fees for the title search and preparation of the sales contract and deed). E file a 1040x Recording fees. E file a 1040x Survey fees. E file a 1040x Transfer taxes. E file a 1040x Owner's title insurance. E file a 1040x Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. E file a 1040x   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. E file a 1040x   The following are some of the settlement fees and closing costs you cannot include in the basis of property. E file a 1040x Casualty insurance premiums. E file a 1040x Rent for occupancy of the property before closing. E file a 1040x Charges for utilities or other services related to occupancy of the property before closing. E file a 1040x Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. E file a 1040x Fees for refinancing a mortgage. E file a 1040x Real estate taxes. E file a 1040x   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. E file a 1040x You cannot deduct them as an expense. E file a 1040x    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. E file a 1040x Do not include that amount in the basis of your property. E file a 1040x If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. E file a 1040x Points. E file a 1040x   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. E file a 1040x Generally, you deduct the points over the term of the loan. E file a 1040x For more information on how to deduct points, see chapter 23. E file a 1040x Points on home mortgage. E file a 1040x   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. E file a 1040x If certain requirements are met, you can deduct the points in full for the year in which they are paid. E file a 1040x Reduce the basis of your home by any seller-paid points. E file a 1040x Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. E file a 1040x The result is the adjusted basis. E file a 1040x Increases to Basis Increase the basis of any property by all items properly added to a capital account. E file a 1040x Examples of items that increase basis are shown in Table 13-1. E file a 1040x These include the items discussed below. E file a 1040x Improvements. E file a 1040x   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. E file a 1040x For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. E file a 1040x Assessments for local improvements. E file a 1040x   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. E file a 1040x Do not deduct them as taxes. E file a 1040x However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. E file a 1040x Example. E file a 1040x Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. E file a 1040x Add the assessment to your property's basis. E file a 1040x In this example, the assessment is a depreciable asset. E file a 1040x Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. E file a 1040x Examples of items that decrease basis are shown in Table 13-1. E file a 1040x These include the items discussed below. E file a 1040x Table 13-1. E file a 1040x Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. E file a 1040x   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. E file a 1040x    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. E file a 1040x   For more information on casualty and theft losses, see chapter 25. E file a 1040x Depreciation and section 179 deduction. E file a 1040x   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. E file a 1040x   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. E file a 1040x Example. E file a 1040x You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. E file a 1040x You added an improvement to the duplex that cost $10,000. E file a 1040x In February last year, the duplex was damaged by fire. E file a 1040x Up to that time, you had been allowed depreciation of $23,000. E file a 1040x You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. E file a 1040x You deducted a casualty loss of $1,000 on your income tax return for last year. E file a 1040x You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. E file a 1040x You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. E file a 1040x Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. E file a 1040x Your basis in the land is its original cost of $5,000. E file a 1040x Easements. E file a 1040x   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. E file a 1040x It reduces the basis of the affected part of the property. E file a 1040x If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. E file a 1040x   If the gain is on a capital asset, see chapter 16 for information about how to report it. E file a 1040x If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. E file a 1040x Exclusion of subsidies for energy conservation measures. E file a 1040x   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. E file a 1040x Reduce the basis of the property for which you received the subsidy by the excluded amount. E file a 1040x For more information about this subsidy, see chapter 12. E file a 1040x Postponed gain from sale of home. E file a 1040x    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. E file a 1040x For more information on the rules for the sale of a home, see chapter 15. E file a 1040x Basis Other Than Cost There are many times when you cannot use cost as basis. E file a 1040x In these cases, the fair market value or the adjusted basis of the property can be used. E file a 1040x Fair market value (FMV) and adjusted basis were discussed earlier. E file a 1040x Property Received for Services If you receive property for your services, include the FMV of the property in income. E file a 1040x The amount you include in income becomes your basis. E file a 1040x If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. E file a 1040x Restricted property. E file a 1040x   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. E file a 1040x However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. E file a 1040x Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). E file a 1040x For more information, see Restricted Property in Publication 525. E file a 1040x Bargain purchases. E file a 1040x   A bargain purchase is a purchase of an item for less than its FMV. E file a 1040x If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. E file a 1040x Your basis in the property is its FMV (your purchase price plus the amount you include in income). E file a 1040x   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. E file a 1040x However, your basis in the property is still its FMV. E file a 1040x See Employee Discounts in Publication 15-B. E file a 1040x Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. E file a 1040x A taxable gain or deductible loss also is known as a recognized gain or loss. E file a 1040x If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. E file a 1040x Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. E file a 1040x Similar or related property. E file a 1040x   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. E file a 1040x Decrease the basis by the following. E file a 1040x Any loss you recognize on the involuntary conversion. E file a 1040x Any money you receive that you do not spend on similar property. E file a 1040x Increase the basis by the following. E file a 1040x Any gain you recognize on the involuntary conversion. E file a 1040x Any cost of acquiring the replacement property. E file a 1040x Money or property not similar or related. E file a 1040x    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. E file a 1040x Example. E file a 1040x The state condemned your property. E file a 1040x The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. E file a 1040x You realized a gain of $5,000 ($31,000 − $26,000). E file a 1040x You bought replacement property similar in use to the converted property for $29,000. E file a 1040x You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. E file a 1040x Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. E file a 1040x The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. E file a 1040x   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. E file a 1040x Basis for depreciation. E file a 1040x   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. E file a 1040x For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. E file a 1040x Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. E file a 1040x If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. E file a 1040x See Nontaxable Trades in chapter 14. E file a 1040x Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. E file a 1040x To qualify as a like-kind exchange, the property traded and the property received must be both of the following. E file a 1040x Qualifying property. E file a 1040x Like-kind property. E file a 1040x The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. E file a 1040x If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. E file a 1040x Qualifying property. E file a 1040x   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. E file a 1040x Like-kind property. E file a 1040x   There must be an exchange of like-kind property. E file a 1040x Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. E file a 1040x The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. E file a 1040x Example. E file a 1040x You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. E file a 1040x The dealer allows you $2,000 on the old truck, and you pay $4,800. E file a 1040x This is a like-kind exchange. E file a 1040x The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). E file a 1040x If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). E file a 1040x The basis of the new truck is the price you pay the dealer. E file a 1040x Partially nontaxable exchanges. E file a 1040x   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. E file a 1040x The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. E file a 1040x Decrease the basis by the following amounts. E file a 1040x Any money you receive. E file a 1040x Any loss you recognize on the exchange. E file a 1040x Increase the basis by the following amounts. E file a 1040x Any additional costs you incur. E file a 1040x Any gain you recognize on the exchange. E file a 1040x If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. E file a 1040x Allocation of basis. E file a 1040x   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. E file a 1040x The rest is the basis of the like-kind property. E file a 1040x More information. E file a 1040x   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. E file a 1040x Basis for depreciation. E file a 1040x   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. E file a 1040x For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. E file a 1040x Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. E file a 1040x The same rule applies to a transfer by your former spouse that is incident to divorce. E file a 1040x However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. E file a 1040x If the property transferred to you is a series E, series EE, or series I U. E file a 1040x S. E file a 1040x savings bond, the transferor must include in income the interest accrued to the date of transfer. E file a 1040x Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. E file a 1040x For more information on these bonds, see chapter 7. E file a 1040x At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. E file a 1040x For more information about the transfer of property from a spouse, see chapter 14. E file a 1040x Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. E file a 1040x FMV less than donor's adjusted basis. E file a 1040x   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. E file a 1040x Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. E file a 1040x Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. E file a 1040x See Adjusted Basis , earlier. E file a 1040x Example. E file a 1040x You received an acre of land as a gift. E file a 1040x At the time of the gift, the land had an FMV of $8,000. E file a 1040x The donor's adjusted basis was $10,000. E file a 1040x After you received the property, no events occurred to increase or decrease your basis. E file a 1040x If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. E file a 1040x If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. E file a 1040x If the sales price is between $8,000 and $10,000, you have neither gain nor loss. E file a 1040x Business property. E file a 1040x   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. E file a 1040x FMV equal to or greater than donor's adjusted basis. E file a 1040x   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. E file a 1040x Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. E file a 1040x   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. E file a 1040x See Adjusted Basis , earlier. E file a 1040x   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. E file a 1040x Figure the increase by multiplying the gift tax paid by a fraction. E file a 1040x The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. E file a 1040x   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. E file a 1040x The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. E file a 1040x Example. E file a 1040x In 2013, you received a gift of property from your mother that had an FMV of $50,000. E file a 1040x Her adjusted basis was $20,000. E file a 1040x The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). E file a 1040x She paid a gift tax of $7,320 on the property. E file a 1040x Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . E file a 1040x 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. E file a 1040x If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. E file a 1040x However, your basis cannot exceed the FMV of the gift at the time it was given to you. E file a 1040x Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. E file a 1040x The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. E file a 1040x The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. E file a 1040x The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. E file a 1040x If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. E file a 1040x For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. E file a 1040x Property inherited from a decedent who died in 2010. E file a 1040x   If you inherited property from a decedent who died in 2010, special rules may apply. E file a 1040x For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. E file a 1040x Community property. E file a 1040x   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. E file a 1040x When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. E file a 1040x For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. E file a 1040x Example. E file a 1040x You and your spouse owned community property that had a basis of $80,000. E file a 1040x When your spouse died, half the FMV of the community interest was includible in your spouse's estate. E file a 1040x The FMV of the community interest was $100,000. E file a 1040x The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). E file a 1040x The basis of the other half to your spouse's heirs is also $50,000. E file a 1040x For more information about community property, see Publication 555, Community Property. E file a 1040x Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. E file a 1040x To do so, you must figure its basis for depreciation at the time of the change. E file a 1040x An example of changing property held for personal use to business or rental use would be renting out your former personal residence. E file a 1040x Basis for depreciation. E file a 1040x   The basis for depreciation is the lesser of the following amounts. E file a 1040x The FMV of the property on the date of the change. E file a 1040x Your adjusted basis on the date of the change. E file a 1040x Example. E file a 1040x Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. E file a 1040x You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. E file a 1040x Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. E file a 1040x Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). E file a 1040x On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. E file a 1040x The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). E file a 1040x Sale of property. E file a 1040x   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. E file a 1040x Gain. E file a 1040x   The basis for figuring a gain is your adjusted basis in the property when you sell the property. E file a 1040x Example. E file a 1040x Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. E file a 1040x Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). E file a 1040x Loss. E file a 1040x   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. E file a 1040x Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . E file a 1040x Example. E file a 1040x Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. E file a 1040x In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. E file a 1040x Reduce that amount ($180,000) by the depreciation deductions ($37,500). E file a 1040x The basis for loss is $142,500 ($180,000 − $37,500). E file a 1040x Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. E file a 1040x If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. E file a 1040x You must adjust the basis of stocks for certain events that occur after purchase. E file a 1040x For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. E file a 1040x This rule applies only when the additional stock received is identical to the stock held. E file a 1040x Also reduce your basis when you receive nontaxable distributions. E file a 1040x They are a return of capital. E file a 1040x Example. E file a 1040x In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. E file a 1040x In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. E file a 1040x In 2013 XYZ declared a 2-for-1 stock split. E file a 1040x You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. E file a 1040x Other basis. E file a 1040x   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. E file a 1040x For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. E file a 1040x Identifying stocks or bonds sold. E file a 1040x   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. E file a 1040x If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. E file a 1040x For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. E file a 1040x Mutual fund shares. E file a 1040x   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. E file a 1040x For more information, see Publication 550. E file a 1040x Bond premium. E file a 1040x   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. E file a 1040x See Bond Premium Amortization in chapter 3 of Publication 550 for more information. E file a 1040x Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. E file a 1040x Original issue discount (OID) on debt instruments. E file a 1040x   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. E file a 1040x See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. E file a 1040x Tax-exempt obligations. E file a 1040x    OID on tax-exempt obligations is generally not taxable. E file a 1040x However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. E file a 1040x The accrued OID is added to the basis of the obligation to determine your gain or loss. E file a 1040x See chapter 4 of Publication 550. E file a 1040x Prev  Up  Next   Home   More Online Publications
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The E File A 1040x

E file a 1040x 1. E file a 1040x   Bona Fide Residence Table of Contents Presence TestDays of Presence in the United States or Relevant Possession Significant Connection Tax HomeExceptions Closer ConnectionException for Year of Move Special Rules in the Year of a MoveYear of Moving to a Possession Year of Moving From a Possession Reporting a Change in Bona Fide ResidenceWho Must File Penalty for Not Filing Form 8898 In order to qualify for certain tax benefits (see chapter 3), you must be a bona fide resident of American Samoa, the CNMI, Guam, Puerto Rico, or the USVI for the entire tax year. E file a 1040x Generally, you are a bona fide resident of one of these possessions (the relevant possession) if, during the tax year, you: Meet the presence test, Do not have a tax home outside the relevant possession, and Do not have a closer connection to the United States or to a foreign country than to the relevant possession. E file a 1040x Special rule for members of the U. E file a 1040x S. E file a 1040x Armed Forces. E file a 1040x   If you are a member of the U. E file a 1040x S. E file a 1040x Armed Forces who qualified as a bona fide resident of the relevant possession in an earlier tax year, your absence from that possession during the current tax year in compliance with military orders will not affect your status as a bona fide resident. E file a 1040x Likewise, being in a possession solely in compliance with military orders will not qualify you for bona fide residency. E file a 1040x Also see the special income source rule for members of the U. E file a 1040x S. E file a 1040x Armed Forces in chapter 2, under Compensation for Labor or Personal Services . E file a 1040x Special rule for civilian spouse of active duty member of the U. E file a 1040x S. E file a 1040x Armed Forces. E file a 1040x   If you are the civilian spouse of an active duty servicemember, under Military Spouses Residency Relief Act (MSRRA) you can choose to keep your prior residence or domicile for tax purposes (tax residence) when accompanying the servicemember spouse, who is relocating under military orders, to a new military duty station in one of the 50 states, the District of Columbia, or a U. E file a 1040x S. E file a 1040x possession. E file a 1040x Before relocating, you and your spouse must have the same tax residence. E file a 1040x If you are a civilian spouse and choose to keep your prior tax residence after such relocation, the source of income for services performed (for example, wages, salaries, tips, or self-employment) by you is considered to be (the jurisdiction of) the prior tax residence. E file a 1040x As a result, the amount of income tax withholding (from Form(s) W-2, Wage and Tax Statement) that you are able to claim on your federal return, as well as the need to file a state or U. E file a 1040x S. E file a 1040x possession return, may be affected. E file a 1040x For more information, consult with state, local, or U. E file a 1040x S. E file a 1040x possession tax authorities regarding your tax obligations under MSRRA. E file a 1040x Presence Test If you are a U. E file a 1040x S. E file a 1040x citizen or resident alien, you will satisfy the presence test for the entire tax year if you meet one of the following conditions. E file a 1040x You were present in the relevant possession for at least 183 days during the tax year. E file a 1040x You were present in the relevant possession for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. E file a 1040x During each year of the 3-year period, you must be present in the relevant possession for at least 60 days. E file a 1040x You were present in the United States for no more than 90 days during the tax year. E file a 1040x You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant possession than in the United States during the tax year. E file a 1040x Earned income is pay for personal services performed, such as wages, salaries, or professional fees. E file a 1040x You had no significant connection to the United States during the tax year. E file a 1040x Special rule for nonresident aliens. E file a 1040x   Conditions (1) through (5) above do not apply to nonresident aliens of the United States. E file a 1040x Instead, nonresident aliens must meet the substantial presence test discussed in chapter 1 of Publication 519. E file a 1040x In that discussion, substitute the name of the possession for “United States” and “U. E file a 1040x S. E file a 1040x ” wherever they appear. E file a 1040x Disregard the discussion in that chapter about a Closer Connection to a Foreign Country. E file a 1040x Days of Presence in the United States or Relevant Possession Generally, you are treated as being present in the United States or in the relevant possession on any day that you are physically present in that location at any time during the day. E file a 1040x Days of presence in a possession. E file a 1040x   You are considered to be present in the relevant possession on any of the following days. E file a 1040x Any day you are physically present in that possession at any time during the day. E file a 1040x Any day you are outside of the relevant possession in order to receive, or to accompany any of the following family members to receive, qualifying medical treatment (see Qualifying Medical Treatment , later). E file a 1040x Your parent. E file a 1040x Your spouse. E file a 1040x Your child, who is your son, daughter, stepson, or stepdaughter. E file a 1040x This includes an adopted child or child lawfully placed with you for legal adoption. E file a 1040x This also includes a foster child who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. E file a 1040x Any day you are outside the relevant possession because you leave or are unable to return to the relevant possession during any: 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency (FEMA) notice of a federal declaration of a major disaster is issued in the Federal Register, or Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your main home is located. E file a 1040x   If, during a single day, you are physically present: In the United States and in the relevant possession, that day is considered a day of presence in the relevant possession; or In two possessions, that day is considered a day of presence in the possession where your tax home is located (see Tax Home , later). E file a 1040x Days of presence in the United States. E file a 1040x   You are considered to be present in the United States on any day that you are physically present in the United States at any time during the day. E file a 1040x However, do not count the following days as days of presence in the United States. E file a 1040x Any day you are temporarily present in the United States in order to receive, or to accompany a parent, spouse, or child who is receiving, qualifying medical treatment. E file a 1040x “Child” is defined under item 2c earlier. E file a 1040x “Qualifying medical treatment” is defined later. E file a 1040x Any day you are temporarily present in the United States because you leave or are unable to return to the relevant possession during any: 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency (FEMA) notice of a federal declaration of a major disaster is issued in the Federal Register, or Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your main home is located. E file a 1040x Any day you are in the United States for less than 24 hours when you are traveling between two places outside the United States. E file a 1040x Any day you are temporarily present in the United States as a professional athlete to compete in a charitable sports event (defined later). E file a 1040x Any day you are temporarily in the United States as a student (defined later). E file a 1040x Any day you are in the United States serving as an elected representative of the relevant possession, or serving full time as an elected or appointed official or employee of the government of that possession (or any of its political subdivisions). E file a 1040x Qualifying Medical Treatment Such treatment is generally provided by (or under the supervision of) a physician for an illness, injury, impairment, or physical or mental condition. E file a 1040x The treatment generally involves: Any period of inpatient care that requires an overnight stay in a hospital or hospice, and any period immediately before or after that inpatient care to the extent it is medically necessary, or Any temporary period of inpatient care in a residential medical care facility for medically necessary rehabilitation services. E file a 1040x With respect to each qualifying medical treatment, you must prepare (or obtain) and maintain documentation supporting your claim that such treatment meets the criteria to be considered days of presence in the relevant possession. E file a 1040x You must be able to produce this documentation within 30 days if requested by the IRS or tax administrator for the relevant possession. E file a 1040x You must keep the following documentation. E file a 1040x Records that provide: The patient's name and relationship to you (if the medical treatment is provided to a person you accompany); The name and address of the hospital, hospice, or residential medical care facility where the medical treatment was provided; The name, address, and telephone number of the physician who provided the medical treatment; The date(s) on which the medical treatment was provided; and Receipt(s) of payment for the medical treatment. E file a 1040x Signed certification by the providing or supervising physician that the medical treatment met the requirements for being qualified medical treatment, and setting forth: The patient's name, A reasonably detailed description of the medical treatment provided by (or under the supervision of) the physician, The dates on which the medical treatment was provided, and The medical facts that support the physician's certification and determination that the treatment was medically necessary. E file a 1040x Charitable Sports Event A charitable sports event is one that meets all of the following conditions. E file a 1040x The main purpose is to benefit a qualified charitable organization. E file a 1040x The entire net proceeds go to charity. E file a 1040x Volunteers perform substantially all the work. E file a 1040x In figuring the days of presence in the United States, you can exclude only the days on which you actually competed in the charitable sports event. E file a 1040x You cannot exclude the days on which you were in the United States to practice for the event, to perform promotional or other activities related to the event, or to travel between events. E file a 1040x Student To qualify as a student, you must be, during some part of each of any 5 calendar months during the calendar year: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by a school described in (1) above or by a state, county, or local government agency. E file a 1040x The 5 calendar months do not have to be consecutive. E file a 1040x Full-time student. E file a 1040x   A full-time student is a person who is enrolled for the number of hours or courses the school considers to be full-time attendance. E file a 1040x However, school attendance exclusively at night is not considered full-time attendance. E file a 1040x School. E file a 1040x   The term “school” includes elementary schools, middle schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. E file a 1040x It does not include on-the-job training courses, correspondence schools, and schools offering courses only through the Internet. E file a 1040x Significant Connection One way in which you can meet the presence test is to have no significant connection to the United States during the tax year. E file a 1040x This section looks at the factors that determine if a significant connection exists. E file a 1040x You are treated as having a significant connection to the United States if you: Have a permanent home in the United States, Are currently registered to vote in any political subdivision of the United States, or Have a spouse or child (see item 2c under Days of presence in a possession , earlier) who is under age 18 whose main home is in the United States, other than: A child who is in the United States because he or she is the child of divorced or legally separated parents and is living with a custodial parent under a custodial decree or multiple support agreement, or A child who is in the United States as a student. E file a 1040x For the purpose of determining if you have a significant connection to the United States, the term “spouse” does not include a spouse from whom you are legally separated under a decree of divorce or separate maintenance. E file a 1040x Permanent home. E file a 1040x   A permanent home generally includes an accommodation such as a house, an apartment, or a furnished room that is either owned or rented by you or your spouse. E file a 1040x The dwelling unit must be available at all times, continuously, not only for short stays. E file a 1040x Exception for rental property. E file a 1040x   If you or your spouse own the dwelling unit and at any time during the tax year it is rented to someone else at fair rental value, it will be considered your permanent home only if you or your spouse use that property for personal purposes for more than the greater of: 14 days, or 10% of the number of days during that tax year that the property is rented to others at a fair rental value. E file a 1040x   You are treated as using rental property for personal purposes on any day the property is not being rented to someone else at fair rental value for the entire day. E file a 1040x   A day of personal use of a dwelling unit is also any day that the unit is used by any of the following persons. E file a 1040x You or any other person who has an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement. E file a 1040x A member of your family or a member of the family of any other person who has an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. E file a 1040x Family includes only brothers and sisters, half-brothers and half-sisters, spouses, ancestors (parents, grandparents, etc. E file a 1040x ), and lineal descendants (children, grandchildren, etc. E file a 1040x ). E file a 1040x Anyone under an arrangement that lets you use some other dwelling unit. E file a 1040x Anyone at less than a fair rental price. E file a 1040x   However, any day you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. E file a 1040x Whether your property is used mainly for this purpose is determined in light of all the facts and circumstances, such as: The amount of time you devote to repair and maintenance work, How often during the tax year you perform repair and maintenance work on this property, and The presence and activities of companions. E file a 1040x   See Publication 527, Residential Rental Property, for more information about personal use of a dwelling unit. E file a 1040x Example—significant connection. E file a 1040x Ann Green, a U. E file a 1040x S. E file a 1040x citizen, is a sales representative for a company based in Guam. E file a 1040x Ann lives with her spouse and young children in their house in Guam, where she is also registered to vote. E file a 1040x Her business travel requires her to spend 120 days in the United States and another 120 days in foreign countries. E file a 1040x When traveling on business, Ann generally stays at hotels but sometimes stays with her brother, who lives in the United States. E file a 1040x Ann's stays are always of short duration and she asks her brother's permission to stay with him. E file a 1040x Her brother's house is not her permanent home, nor does she have any other accommodations in the United States that would be considered her permanent home. E file a 1040x Ann satisfies the presence test because she has no significant connection to the United States. E file a 1040x Example—presence test. E file a 1040x Eric and Wanda Brown live for part of the year in a condominium, which they own, in the CNMI. E file a 1040x They also own a house in Maine where they live for 120 days every year to be near their grown children and grandchildren. E file a 1040x The Browns are retired and their only income is from pension payments, dividends, interest, and social security benefits. E file a 1040x In 2013, they spent only 175 days in the CNMI because of a 70-day vacation to Europe and Asia. E file a 1040x Thus, in 2013, the Browns were not present in the CNMI for at least 183 days, were present in the United States for more than 90 days, and had a significant connection to the United States because of their permanent home. E file a 1040x However, the Browns still satisfied the presence test with respect to the CNMI because they had no earned income in the United States and were physically present for more days in the CNMI than in the United States. E file a 1040x Tax Home You will have met the tax home test if you did not have a tax home outside the relevant possession during any part of the tax year. E file a 1040x Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. E file a 1040x If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. E file a 1040x If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. E file a 1040x Exceptions There are some special rules regarding tax home that provide exceptions to the general rule stated above. E file a 1040x Students and Government Officials Disregard the following days when determining whether you have a tax home outside the relevant possession. E file a 1040x Days you were temporarily in the United States as a student (see Student under Days of Presence in the United States or Relevant Possession, earlier). E file a 1040x Days you were in the United States serving as an elected representative of the relevant possession, or serving full time as an elected or appointed official or employee of the government of that possession (or any of its political subdivisions). E file a 1040x Seafarers You will not be considered to have a tax home outside the relevant possession solely because you are employed on a ship or other seafaring vessel that is predominantly used in local and international waters. E file a 1040x For this purpose, a vessel is considered to be predominantly used in local and international waters if, during the tax year, the total amount of time it is used in international waters and in the waters within 3 miles of the relevant possession exceeds the total amount of time it is used in the territorial waters of the United States, another possession, or any foreign country. E file a 1040x Example. E file a 1040x In 2013, Sean Silverman, a U. E file a 1040x S. E file a 1040x citizen, was employed by a fishery and spent 250 days at sea on a fishing vessel. E file a 1040x When not at sea, Sean lived with his spouse at a house they own in American Samoa. E file a 1040x The fishing vessel on which Sean works departs and arrives at various ports in American Samoa, other possessions, and foreign countries, but was in international or American Samoa's local waters for 225 days. E file a 1040x For purposes of determining bona fide residency of American Samoa, Sean will not be considered to have a tax home outside that possession solely because of his employment on board the fishing vessel. E file a 1040x Year of Move If you are moving to or from a possession during the year, you may still be able to meet the tax home test for that year. E file a 1040x See Special Rules in the Year of a Move , later in this chapter. E file a 1040x Closer Connection You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U. E file a 1040x S. E file a 1040x possession. E file a 1040x You will be considered to have a closer connection to a possession than to the United States or to a foreign country if you have maintained more significant contacts with the possession(s) than with the United States or foreign country. E file a 1040x In determining if you have maintained more significant contacts with the relevant possession, the facts and circumstances to be considered include, but are not limited to, the following. E file a 1040x The location of your permanent home. E file a 1040x The location of your family. E file a 1040x The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family. E file a 1040x The location of social, political, cultural, professional, or religious organizations with which you have a current relationship. E file a 1040x The location where you conduct your routine personal banking activities. E file a 1040x The location where you conduct business activities (other than those that go into determining your tax home). E file a 1040x The location of the jurisdiction in which you hold a driver's license. E file a 1040x The location of the jurisdiction in which you vote. E file a 1040x The location of charitable organizations to which you contribute. E file a 1040x The country of residence you designate on forms and documents. E file a 1040x The types of official forms and documents you file, such as Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), or Form W-9, Request for Taxpayer Identification Number and Certification. E file a 1040x Your connections to the relevant possession will be compared to the total of your connections with the United States and foreign countries. E file a 1040x Your answers to the questions on Form 8898, Part III, will help establish the jurisdiction to which you have a closer connection. E file a 1040x Example—closer connection to the United States. E file a 1040x Marcos Reyes, a U. E file a 1040x S. E file a 1040x citizen, moved to Puerto Rico in 2013 to start an investment consulting and venture capital business. E file a 1040x His spouse and two teenage children remained in California to allow the children to complete high school. E file a 1040x He traveled back to the United States regularly to see his spouse and children, to engage in business activities, and to take vacations. E file a 1040x Marcos had an apartment available for his full-time use in Puerto Rico, but remained a joint owner of the residence in California where his spouse and children lived. E file a 1040x Marcos and his family had automobiles and personal belongings such as furniture, clothing, and jewelry located at both residences. E file a 1040x Although Marcos was a member of the Puerto Rico Chamber of Commerce, he also belonged to and had current relationships with social, political, cultural, and religious organizations in California. E file a 1040x Marcos received mail in California, including bank and brokerage statements and credit card bills. E file a 1040x He conducted his personal banking activities in California. E file a 1040x He held a California driver's license and was also registered to vote there. E file a 1040x Based on all of the particular facts and circumstances pertaining to Marcos, he was not a bona fide resident of Puerto Rico in 2013 because he had a closer connection to the United States than to Puerto Rico. E file a 1040x Closer connection to another possession. E file a 1040x   Generally, possessions are not treated as foreign countries. E file a 1040x Therefore, a closer connection to a possession other than the relevant possession will not be treated as a closer connection to a foreign country. E file a 1040x Example—tax home and closer connection to possession. E file a 1040x Pearl Blackmon, a U. E file a 1040x S. E file a 1040x citizen, is a permanent employee of a hotel in Guam, but works only during the tourist season. E file a 1040x For the remainder of each year, Pearl lives with her spouse and children in the CNMI, where she has no outside employment. E file a 1040x Most of Pearl's personal belongings, including her automobile, are located in the CNMI. E file a 1040x She is registered to vote in, and has a driver's license issued by, the CNMI. E file a 1040x She does her personal banking in the CNMI and routinely lists her CNMI address as her permanent address on forms and documents. E file a 1040x Pearl satisfies the presence test with respect to both Guam and the CNMI. E file a 1040x She satisfies the tax home test with respect to Guam, because her regular place of business is in Guam. E file a 1040x Pearl satisfies the closer connection test with respect to both Guam and the CNMI, because she does not have a closer connection to the United States or to any foreign country. E file a 1040x Pearl is considered a bona fide resident of Guam, the location of her tax home. E file a 1040x Exception for Year of Move If you are moving to or from a possession during the year, you may still be able to meet the closer connection test for that year. E file a 1040x See Special Rules in the Year of a Move , next. E file a 1040x Special Rules in the Year of a Move If you are moving to or from a possession during the year, you may still be able to meet the tax home and closer connection tests for that year. E file a 1040x Year of Moving to a Possession You will satisfy the tax home and closer connection tests in the tax year of changing your residence to the relevant possession if you meet all of the following. E file a 1040x You have not been a bona fide resident of the relevant possession in any of the 3 tax years immediately preceding your move. E file a 1040x In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the last 183 days of the tax year. E file a 1040x You are a bona fide resident of the relevant possession for each of the 3 tax years immediately following your move. E file a 1040x Example. E file a 1040x Dwight Wood, a U. E file a 1040x S. E file a 1040x citizen, files returns on a calendar year basis. E file a 1040x He lived in the United States from January 2007 through May 2013. E file a 1040x In June 2013 he moved to the USVI, purchased a house, and accepted a permanent job with a local employer. E file a 1040x From July 1 through December 31, 2013 (more than 183 days), Dwight's principal place of business was in the USVI and, during that time, he did not have a closer connection to the United States or a foreign country than to the USVI. E file a 1040x If he is a bona fide resident of the USVI during all of 2014 through 2016, he will satisfy the tax home and closer connection tests for 2013. E file a 1040x If Dwight also satisfies the presence test in 2013, he will be considered a bona fide resident of the USVI for the entire 2013 tax year. E file a 1040x Year of Moving From a Possession In the year you cease to be a bona fide resident of American Samoa, the CNMI, Guam, or the USVI, you will satisfy the tax home and closer connection tests with respect to the relevant possession if you meet all of the following. E file a 1040x You have been a bona fide resident of the relevant possession for each of the 3 tax years immediately preceding your change of residence. E file a 1040x In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the first 183 days of the tax year. E file a 1040x You are not a bona fide resident of the relevant possession for any of the 3 tax years immediately following your move. E file a 1040x Example. E file a 1040x Jean Aspen, a U. E file a 1040x S. E file a 1040x citizen, files returns on a calendar year basis. E file a 1040x From January 2010 through December 2012, Jean was a bona fide resident of American Samoa. E file a 1040x Jean continued to live there until September 6, 2013, when she accepted new employment and moved to Hawaii. E file a 1040x Jean's principal place of business from January 1 through September 5, 2013 (more than 183 days), was in American Samoa, and during that period Jean did not have a closer connection to the United States or a foreign country than to American Samoa. E file a 1040x If Jean continues to live and work in Hawaii for the rest of 2013 and throughout years 2014 through 2016, she will satisfy the tax home and closer connection tests for 2013 with respect to American Samoa. E file a 1040x If Jean also satisfies the presence test in 2013, she will be considered a bona fide resident for the entire 2013 tax year. E file a 1040x Puerto Rico You will be considered a bona fide resident of Puerto Rico for the part of the tax year preceding the date on which you move if you: Are a U. E file a 1040x S. E file a 1040x citizen, Are a bona fide resident of Puerto Rico for at least 2 tax years immediately preceding the tax year of the move, Cease to be a bona fide resident of Puerto Rico during the tax year, Cease to have a tax home in Puerto Rico during the tax year, and Have a closer connection to Puerto Rico than to the United States or a foreign country throughout the part of the tax year preceding the date on which you cease to have a tax home in Puerto Rico. E file a 1040x Example. E file a 1040x Randy White, a U. E file a 1040x S. E file a 1040x citizen, files returns on a calendar year basis. E file a 1040x For all of 2011 and 2012, Randy was a bona fide resident of Puerto Rico. E file a 1040x From January through April 2013, Randy continued to reside and maintain his principal place of business in and closer connection to Puerto Rico. E file a 1040x On May 5, 2013, Randy moved and changed his tax home to Nevada. E file a 1040x Later that year he established a closer connection to the United States than to Puerto Rico. E file a 1040x Randy did not satisfy the presence test for 2013 with respect to Puerto Rico, nor the tax home or closer connection tests. E file a 1040x However, because Randy was a bona fide resident of Puerto Rico for at least 2 tax years before he moved to Nevada in 2013, he was a bona fide resident of Puerto Rico from January 1 through May 4, 2013. E file a 1040x Reporting a Change in Bona Fide Residence If you became or ceased to be a bona fide resident of a U. E file a 1040x S. E file a 1040x possession, you may need to file Form 8898. E file a 1040x This applies to the U. E file a 1040x S. E file a 1040x possessions of American Samoa, the CNMI, Guam, Puerto Rico, and the USVI. E file a 1040x Who Must File You must file Form 8898 for the tax year in which you meet both of the following conditions. E file a 1040x Your worldwide gross income (defined below) in that tax year is more than $75,000. E file a 1040x You meet one of the following. E file a 1040x You take a position for U. E file a 1040x S. E file a 1040x tax purposes that you became a bona fide resident of a U. E file a 1040x S. E file a 1040x possession after a tax year for which you filed a U. E file a 1040x S. E file a 1040x income tax return as a citizen or resident alien of the United States but not as a bona fide resident of the possession. E file a 1040x You are a citizen or resident alien of the United States who takes the position for U. E file a 1040x S. E file a 1040x tax purposes that you ceased to be a bona fide resident of a U. E file a 1040x S. E file a 1040x possession after a tax year for which you filed an income tax return (with the IRS, the possession tax authority, or both) as a bona fide resident of the possession. E file a 1040x You take the position for U. E file a 1040x S. E file a 1040x tax purposes that you became a bona fide resident of Puerto Rico or American Samoa after a tax year for which you were required to file an income tax return as a bona fide resident of the CNMI, Guam, or the USVI. E file a 1040x Worldwide gross income. E file a 1040x   Worldwide gross income means all income you received in the form of money, goods, property, and services, including any income from sources outside the United States (even if you can exclude part or all of it) and before any deductions, credits, or rebates. E file a 1040x Example. E file a 1040x You are a U. E file a 1040x S. E file a 1040x citizen who moved to the CNMI in December 2012, but did not become a bona fide resident of that possession until the 2013 tax year. E file a 1040x You must file Form 8898 for the 2013 tax year if your worldwide gross income for that year was more than $75,000. E file a 1040x Penalty for Not Filing Form 8898 If you are required to file Form 8898 for any tax year and you fail to file it, you may owe a penalty of $1,000. E file a 1040x You may also owe this penalty if you do not include all the information required by the form or the form includes incorrect information. E file a 1040x In either case, you will not owe this penalty if you can show that such failure is due to reasonable cause and not willful neglect. E file a 1040x This is in addition to any criminal penalty that may be imposed. E file a 1040x Prev  Up  Next   Home   More Online Publications