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Easy 1040

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Easy 1040

Easy 1040 3. Easy 1040   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Easy 1040 Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Easy 1040 Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Easy 1040 When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Easy 1040 Any remaining gain is a section 1231 gain. Easy 1040 Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Easy 1040 Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Easy 1040 Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Easy 1040 If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Easy 1040 Do not take that gain into account as section 1231 gain. Easy 1040 Section 1231 transactions. Easy 1040   The following transactions result in gain or loss subject to section 1231 treatment. Easy 1040 Sales or exchanges of real property or depreciable personal property. Easy 1040 This property must be used in a trade or business and held longer than 1 year. Easy 1040 Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Easy 1040 Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Easy 1040 Sales or exchanges of leaseholds. Easy 1040 The leasehold must be used in a trade or business and held longer than 1 year. Easy 1040 Sales or exchanges of cattle and horses. Easy 1040 The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Easy 1040 Sales or exchanges of other livestock. Easy 1040 This livestock does not include poultry. Easy 1040 It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Easy 1040 Sales or exchanges of unharvested crops. Easy 1040 The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Easy 1040 You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Easy 1040 Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Easy 1040 Cutting of timber or disposal of timber, coal, or iron ore. Easy 1040 The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Easy 1040 Condemnations. Easy 1040 The condemned property must have been held longer than 1 year. Easy 1040 It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Easy 1040 It cannot be property held for personal use. Easy 1040 Casualties and thefts. Easy 1040 The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Easy 1040 You must have held the property longer than 1 year. Easy 1040 However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Easy 1040 For more information on casualties and thefts, see Publication 547. Easy 1040 Property for sale to customers. Easy 1040   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Easy 1040 If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Easy 1040 Example. Easy 1040 You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Easy 1040 Customers make deposits on the reels, which you refund if the reels are returned within a year. Easy 1040 If they are not returned, you keep each deposit as the agreed-upon sales price. Easy 1040 Most reels are returned within the 1-year period. Easy 1040 You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Easy 1040 Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Easy 1040 Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Easy 1040 Copyrights. Easy 1040    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Easy 1040 The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Easy 1040 Treatment as ordinary or capital. Easy 1040   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Easy 1040 If you have a net section 1231 loss, it is ordinary loss. Easy 1040 If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Easy 1040 The rest, if any, is long-term capital gain. Easy 1040 Nonrecaptured section 1231 losses. Easy 1040   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Easy 1040 Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Easy 1040 These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Easy 1040 Example. Easy 1040 In 2013, Ben has a $2,000 net section 1231 gain. Easy 1040 To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Easy 1040 From 2008 through 2012 he had the following section 1231 gains and losses. Easy 1040 Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Easy 1040 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Easy 1040 To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Easy 1040 This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Easy 1040 On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Easy 1040 Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Easy 1040 Whether the adjusted basis was figured using depreciation or amortization another person claimed. Easy 1040 Corporate distributions. Easy 1040   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Easy 1040 General asset accounts. Easy 1040   Different rules apply to dispositions of property you depreciated using a general asset account. Easy 1040 For information on these rules, see Publication 946. Easy 1040 Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Easy 1040 See Gain Treated as Ordinary Income, later. Easy 1040 Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Easy 1040 See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Easy 1040 Section 1245 property defined. Easy 1040   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Easy 1040 Personal property (either tangible or intangible). Easy 1040 Other tangible property (except buildings and their structural components) used as any of the following. Easy 1040 See Buildings and structural components below. Easy 1040 An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Easy 1040 A research facility in any of the activities in (a). Easy 1040 A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Easy 1040 That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Easy 1040 Amortization of certified pollution control facilities. Easy 1040 The section 179 expense deduction. Easy 1040 Deduction for clean-fuel vehicles and certain refueling property. Easy 1040 Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Easy 1040 Deduction for certain qualified refinery property. Easy 1040 Deduction for qualified energy efficient commercial building property. Easy 1040 Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Easy 1040 (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Easy 1040 ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Easy 1040 Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Easy 1040 Deduction for qualified tertiary injectant expenses. Easy 1040 Certain reforestation expenditures. Easy 1040 Deduction for election to expense qualified advanced mine safety equipment property. Easy 1040 Single purpose agricultural (livestock) or horticultural structures. Easy 1040 Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Easy 1040 Any railroad grading or tunnel bore. Easy 1040 Buildings and structural components. Easy 1040   Section 1245 property does not include buildings and structural components. Easy 1040 The term building includes a house, barn, warehouse, or garage. Easy 1040 The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Easy 1040   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Easy 1040 Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Easy 1040   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Easy 1040 Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Easy 1040 Facility for bulk storage of fungible commodities. Easy 1040   This term includes oil or gas storage tanks and grain storage bins. Easy 1040 Bulk storage means the storage of a commodity in a large mass before it is used. Easy 1040 For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Easy 1040 To be fungible, a commodity must be such that one part may be used in place of another. Easy 1040   Stored materials that vary in composition, size, and weight are not fungible. Easy 1040 Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Easy 1040 For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Easy 1040 Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Easy 1040 The depreciation and amortization allowed or allowable on the property. Easy 1040 The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Easy 1040 A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Easy 1040 For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Easy 1040 See Gifts and Transfers at Death, later. Easy 1040 Use Part III of Form 4797 to figure the ordinary income part of the gain. Easy 1040 Depreciation taken on other property or taken by other taxpayers. Easy 1040   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Easy 1040 Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Easy 1040 Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Easy 1040 Depreciation and amortization. Easy 1040   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Easy 1040 Ordinary depreciation deductions. Easy 1040 Any special depreciation allowance you claimed. Easy 1040 Amortization deductions for all the following costs. Easy 1040 Acquiring a lease. Easy 1040 Lessee improvements. Easy 1040 Certified pollution control facilities. Easy 1040 Certain reforestation expenses. Easy 1040 Section 197 intangibles. Easy 1040 Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Easy 1040 Franchises, trademarks, and trade names acquired before August 11, 1993. Easy 1040 The section 179 deduction. Easy 1040 Deductions for all the following costs. Easy 1040 Removing barriers to the disabled and the elderly. Easy 1040 Tertiary injectant expenses. Easy 1040 Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Easy 1040 Environmental cleanup costs. Easy 1040 Certain reforestation expenses. Easy 1040 Qualified disaster expenses. Easy 1040 Any basis reduction for the investment credit (minus any basis increase for credit recapture). Easy 1040 Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Easy 1040 Example. Easy 1040 You file your returns on a calendar year basis. Easy 1040 In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Easy 1040 You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Easy 1040 You did not take the section 179 deduction. Easy 1040 You sold the truck in May 2013 for $7,000. Easy 1040 The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Easy 1040 Figure the gain treated as ordinary income as follows. Easy 1040 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Easy 1040   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Easy 1040   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Easy 1040 Depreciation allowed or allowable. Easy 1040   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Easy 1040 However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Easy 1040 If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Easy 1040   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Easy 1040 Multiple asset accounts. Easy 1040   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Easy 1040 Example. Easy 1040 In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Easy 1040 All of the depreciation was recorded in a single depreciation account. Easy 1040 After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Easy 1040 You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Easy 1040 However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Easy 1040 Normal retirement. Easy 1040   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Easy 1040 Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Easy 1040 To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Easy 1040 Section 1250 property defined. Easy 1040   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Easy 1040 It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Easy 1040 A fee simple interest in land is not included because it is not depreciable. Easy 1040   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Easy 1040 Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Easy 1040 For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Easy 1040 For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Easy 1040 If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Easy 1040 You will not have additional depreciation if any of the following conditions apply to the property disposed of. Easy 1040 You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Easy 1040 In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Easy 1040 The property was residential low-income rental property you held for 162/3 years or longer. Easy 1040 For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Easy 1040 You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Easy 1040 The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Easy 1040 These properties are depreciated using the straight line method. Easy 1040 In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Easy 1040 Depreciation taken by other taxpayers or on other property. Easy 1040   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Easy 1040 Example. Easy 1040 Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Easy 1040 Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Easy 1040 On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Easy 1040 At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Easy 1040 Depreciation allowed or allowable. Easy 1040   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Easy 1040 If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Easy 1040 Retired or demolished property. Easy 1040   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Easy 1040 Example. Easy 1040 A wing of your building is totally destroyed by fire. Easy 1040 The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Easy 1040 Figuring straight line depreciation. Easy 1040   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Easy 1040 If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Easy 1040   Salvage value and useful life are not used for the ACRS method of depreciation. Easy 1040 Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Easy 1040   The straight line method is applied without any basis reduction for the investment credit. Easy 1040 Property held by lessee. Easy 1040   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Easy 1040 This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Easy 1040 The same rule applies to the cost of acquiring a lease. Easy 1040   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Easy 1040 However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Easy 1040 Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Easy 1040 The percentages for these types of real property are as follows. Easy 1040 Nonresidential real property. Easy 1040   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Easy 1040 For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Easy 1040 Residential rental property. Easy 1040   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Easy 1040 The percentage for periods before 1976 is zero. Easy 1040 Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Easy 1040 Low-income housing. Easy 1040    Low-income housing includes all the following types of residential rental property. Easy 1040 Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Easy 1040 Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Easy 1040 Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. Easy 1040 Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Easy 1040   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Easy 1040 If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Easy 1040 Foreclosure. Easy 1040   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Easy 1040 Example. Easy 1040 On June 1, 2001, you acquired low-income housing property. Easy 1040 On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Easy 1040 The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Easy 1040 The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Easy 1040 Therefore, 70% of the additional depreciation is treated as ordinary income. Easy 1040 Holding period. Easy 1040   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Easy 1040 For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Easy 1040 If you sold it on January 2, 2013, the holding period is exactly 192 full months. Easy 1040 The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Easy 1040 Holding period for constructed, reconstructed, or erected property. Easy 1040   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Easy 1040 Property acquired by gift or received in a tax-free transfer. Easy 1040   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Easy 1040   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Easy 1040 See Low-Income Housing With Two or More Elements, next. Easy 1040 Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Easy 1040 The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Easy 1040 The following are the types of separate elements. Easy 1040 A separate improvement (defined below). Easy 1040 The basic section 1250 property plus improvements not qualifying as separate improvements. Easy 1040 The units placed in service at different times before all the section 1250 property is finished. Easy 1040 For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Easy 1040 As a result, the apartment house consists of three separate elements. Easy 1040 The 36-month test for separate improvements. Easy 1040   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Easy 1040 Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Easy 1040 Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Easy 1040 $5,000. Easy 1040 The 1-year test. Easy 1040   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Easy 1040 The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Easy 1040 In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Easy 1040 Example. Easy 1040 The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Easy 1040 During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Easy 1040 The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Easy 1040 However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Easy 1040 Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Easy 1040 Addition to the capital account. Easy 1040   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Easy 1040   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Easy 1040 For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Easy 1040 The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Easy 1040 The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Easy 1040   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Easy 1040 If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Easy 1040 Unadjusted basis. Easy 1040   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Easy 1040 However, the cost of components retired before that date is not included in the unadjusted basis. Easy 1040 Holding period. Easy 1040   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Easy 1040 The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Easy 1040 The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Easy 1040 The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Easy 1040   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Easy 1040 Use the first day of a calendar month that is closest to the middle of the tax year. Easy 1040 If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Easy 1040 Figuring ordinary income attributable to each separate element. Easy 1040   Figure ordinary income attributable to each separate element as follows. Easy 1040   Step 1. Easy 1040 Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Easy 1040   Step 2. Easy 1040 Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Easy 1040   Step 3. Easy 1040 Multiply the result in Step 2 by the applicable percentage for the element. Easy 1040 Example. Easy 1040 You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Easy 1040 The property consisted of four elements (W, X, Y, and Z). Easy 1040 Step 1. Easy 1040 The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Easy 1040 The sum of the additional depreciation for all the elements is $24,000. Easy 1040 Step 2. Easy 1040 The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Easy 1040 Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Easy 1040 $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Easy 1040 Step 3. Easy 1040 The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Easy 1040 From these facts, the sum of the ordinary income for each element is figured as follows. Easy 1040   Step 1 Step 2 Step 3 Ordinary Income W . Easy 1040 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Easy 1040 25 5,000 92% 4,600 Z . Easy 1040 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Easy 1040 In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Easy 1040 In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Easy 1040 Figure the additional depreciation for the periods after 1975. Easy 1040 Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Easy 1040 Stop here if this is residential rental property or if (2) is equal to or more than (1). Easy 1040 This is the gain treated as ordinary income because of additional depreciation. Easy 1040 Subtract (2) from (1). Easy 1040 Figure the additional depreciation for periods after 1969 but before 1976. Easy 1040 Add the lesser of (4) or (5) to the result in (3). Easy 1040 This is the gain treated as ordinary income because of additional depreciation. Easy 1040 A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Easy 1040 Use Form 4797, Part III, to figure the ordinary income part of the gain. Easy 1040 Corporations. Easy 1040   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Easy 1040 The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Easy 1040 Report this additional ordinary income on Form 4797, Part III, line 26 (f). Easy 1040 Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Easy 1040 This applies even if no payments are received in that year. Easy 1040 If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Easy 1040 For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Easy 1040 If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Easy 1040 To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Easy 1040 Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Easy 1040 For a detailed discussion of installment sales, see Publication 537. Easy 1040 Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Easy 1040 However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Easy 1040 For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Easy 1040 See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Easy 1040 Part gift and part sale or exchange. Easy 1040   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Easy 1040 If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Easy 1040 However, see Bargain sale to charity, later. Easy 1040 Example. Easy 1040 You transferred depreciable personal property to your son for $20,000. Easy 1040 When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Easy 1040 You took depreciation of $30,000. Easy 1040 You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Easy 1040 You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Easy 1040 You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Easy 1040 Gift to charitable organization. Easy 1040   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Easy 1040 Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Easy 1040   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Easy 1040 For more information, see Giving Property That Has Increased in Value in Publication 526. Easy 1040 Bargain sale to charity. Easy 1040   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Easy 1040 First, figure the ordinary income as if you had sold the property at its fair market value. Easy 1040 Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Easy 1040 See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Easy 1040 Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Easy 1040 Example. Easy 1040 You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Easy 1040 Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Easy 1040 If you had sold the property at its fair market value, your ordinary income would have been $5,000. Easy 1040 Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Easy 1040 Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Easy 1040 For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Easy 1040 However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Easy 1040 Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Easy 1040 Example 1. Easy 1040 Janet Smith owned depreciable property that, upon her death, was inherited by her son. Easy 1040 No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Easy 1040 However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Easy 1040 Example 2. Easy 1040 The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Easy 1040 If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Easy 1040 Ordinary income from depreciation must be reported by the trust on the transfer. Easy 1040 Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Easy 1040 For information on like-kind exchanges and involuntary conversions, see chapter 1. Easy 1040 Depreciable personal property. Easy 1040   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Easy 1040 The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Easy 1040 The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Easy 1040 Example 1. Easy 1040 You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Easy 1040 The old machine cost you $5,000 two years ago. Easy 1040 You took depreciation deductions of $3,950. Easy 1040 Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Easy 1040 Example 2. Easy 1040 You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Easy 1040 This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Easy 1040 You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Easy 1040 Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Easy 1040 All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Easy 1040 Example 3. Easy 1040 A fire destroyed office machinery you bought for $116,000. Easy 1040 The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Easy 1040 You received a $117,000 insurance payment, realizing a gain of $92,640. Easy 1040 You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Easy 1040 $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Easy 1040 The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Easy 1040 The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Easy 1040 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Easy 1040 Depreciable real property. Easy 1040   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Easy 1040 The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Easy 1040 The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Easy 1040   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Easy 1040 Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Easy 1040 Example. Easy 1040 The state paid you $116,000 when it condemned your depreciable real property for public use. Easy 1040 You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Easy 1040 You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Easy 1040 You choose to postpone reporting the gain. Easy 1040 If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Easy 1040 The ordinary income to be reported is $6,000, which is the greater of the following amounts. Easy 1040 The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Easy 1040 The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Easy 1040   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Easy 1040 Basis of property acquired. Easy 1040   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Easy 1040   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Easy 1040 However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Easy 1040 Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Easy 1040 Add the fair market value (or cost) of the other property acquired to the result in (1). Easy 1040 Divide the result in (1) by the result in (2). Easy 1040 Multiply the total basis by the result in (3). Easy 1040 This is the basis of the depreciable real property acquired. Easy 1040 If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Easy 1040 Subtract the result in (4) from the total basis. Easy 1040 This is the basis of the other property acquired. Easy 1040 If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Easy 1040 Example 1. Easy 1040 In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Easy 1040 The property's adjusted basis was $38,400, with additional depreciation of $14,932. Easy 1040 On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Easy 1040 Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Easy 1040 You chose to postpone reporting the gain under the involuntary conversion rules. Easy 1040 Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Easy 1040 The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Easy 1040 The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Easy 1040 If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Easy 1040 Example 2. Easy 1040 John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Easy 1040 He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Easy 1040 He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Easy 1040 Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Easy 1040 The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Easy 1040 The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Easy 1040 The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Easy 1040 The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Easy 1040 4. Easy 1040 The basis of the depreciable real property is $12,000. Easy 1040 This is the $30,000 total basis multiplied by the 0. Easy 1040 4 figured in (3). Easy 1040 The basis of the other property (land) is $18,000. Easy 1040 This is the $30,000 total basis minus the $12,000 figured in (4). Easy 1040 The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Easy 1040 Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Easy 1040 Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Easy 1040 See chapter 2. Easy 1040 In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Easy 1040 In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Easy 1040 These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Easy 1040 The comparison should take into account all the following facts and circumstances. Easy 1040 The original cost and reproduction cost of construction, erection, or production. Easy 1040 The remaining economic useful life. Easy 1040 The state of obsolescence. Easy 1040 The anticipated expenditures required to maintain, renovate, or modernize the properties. Easy 1040 Like-kind exchanges and involuntary conversions. Easy 1040   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Easy 1040 The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Easy 1040 The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Easy 1040   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Easy 1040 The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Easy 1040 If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Easy 1040 Example. Easy 1040 A fire destroyed your property with a total fair market value of $50,000. Easy 1040 It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Easy 1040 You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Easy 1040 The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Easy 1040 You choose to postpone reporting your gain from the involuntary conversion. Easy 1040 You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Easy 1040 The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Easy 1040 The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Easy 1040 The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Easy 1040 Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Easy 1040 The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Easy 1040 All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Easy 1040 Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Easy 1040 However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. Easy 1040 Prev  Up  Next   Home   More Online Publications
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Contact My Local Office in Kentucky

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City Street Address Days/Hours of Service Telephone*
Bowling Green 200 West Professional
Park Court
Bowling Green, KY 42104

Monday-Friday 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(270) 782-7667
Hopkinsville 121 W. Tenth St.
Hopkinsville, KY 42240

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(270) 886-6625 
Lexington  1500 Leestown Rd.
Lexington, KY 40511 

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

Services Provided

(859) 244-2400 
Louisville  600 Dr. Martin Luther
King Jr. Place
Louisville, KY 40202 

Monday-Friday - 8:30 a.m.-4:30 p.m. 

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(502) 582-6700 
Owensboro  401 Frederica St.
Owensboro, KY 42301 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

   Services Provided

(270) 852-8490 
Paducah  2765 Wayne Sullivan Dr.
Paducah, KY 42003 

Monday - Friday  8:30 a.m. - 4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.) 

 

Services Provided

(270) 443-1977 
Prestonsburg  311 N. Arnold Ave.
Prestonsburg, KY 41653 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 12:00 noon - 1:00 p.m.) 

 

Services Provided

(606) 889-1590 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call (502) 582-6030 in Louisville or 1-877-777-4778 elsewhere, or see  Publication 1546, The Taxpayer Advocate Service of the IRS. For further information, see  Tax Topic 104.

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
600 Dr. Martin Luther King, Jr. Place
Room 321
Louisville, KY 40202

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The Easy 1040

Easy 1040 5. Easy 1040   How To Get Tax Help Table of Contents Low Income Taxpayer Clinics Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Easy 1040 Free help with your tax return. Easy 1040   You can get free help preparing your return nationwide from IRS-certified volunteers. Easy 1040 The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Easy 1040 The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Easy 1040 Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Easy 1040 In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Easy 1040 To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Easy 1040 gov, download the IRS2Go app, or call 1-800-906-9887. Easy 1040   As part of the TCE program, AARP offers the Tax-Aide counseling program. Easy 1040 To find the nearest AARP Tax-Aide site, visit AARP's website at www. Easy 1040 aarp. Easy 1040 org/money/taxaide or call 1-888-227-7669. Easy 1040 For more information on these programs, go to IRS. Easy 1040 gov and enter “VITA” in the search box. Easy 1040 Internet. Easy 1040    IRS. Easy 1040 gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Easy 1040 Download the free IRS2Go app from the iTunes app store or from Google Play. Easy 1040 Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Easy 1040 Check the status of your 2013 refund with the Where's My Refund? application on IRS. Easy 1040 gov or download the IRS2Go app and select the Refund Status option. Easy 1040 The IRS issues more than 9 out of 10 refunds in less than 21 days. Easy 1040 Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Easy 1040 You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Easy 1040 The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Easy 1040 Use the Interactive Tax Assistant (ITA) to research your tax questions. Easy 1040 No need to wait on the phone or stand in line. Easy 1040 The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Easy 1040 When you reach the response screen, you can print the entire interview and the final response for your records. Easy 1040 New subject areas are added on a regular basis. Easy 1040  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Easy 1040 gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Easy 1040 You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Easy 1040 The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Easy 1040 When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Easy 1040 Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. Easy 1040 You can also ask the IRS to mail a return or an account transcript to you. Easy 1040 Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Easy 1040 gov or by calling 1-800-908-9946. Easy 1040 Tax return and tax account transcripts are generally available for the current year and the past three years. Easy 1040 Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Easy 1040 Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Easy 1040 If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Easy 1040 Check the status of your amended return using Where's My Amended Return? Go to IRS. Easy 1040 gov and enter Where's My Amended Return? in the search box. Easy 1040 You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Easy 1040 It can take up to 3 weeks from the date you mailed it to show up in our system. Easy 1040 Make a payment using one of several safe and convenient electronic payment options available on IRS. Easy 1040 gov. Easy 1040 Select the Payment tab on the front page of IRS. Easy 1040 gov for more information. Easy 1040 Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Easy 1040 Figure your income tax withholding with the IRS Withholding Calculator on IRS. Easy 1040 gov. Easy 1040 Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Easy 1040 Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Easy 1040 gov. Easy 1040 Request an Electronic Filing PIN by going to IRS. Easy 1040 gov and entering Electronic Filing PIN in the search box. Easy 1040 Download forms, instructions and publications, including accessible versions for people with disabilities. Easy 1040 Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Easy 1040 gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Easy 1040 An employee can answer questions about your tax account or help you set up a payment plan. Easy 1040 Before you visit, check the Office Locator on IRS. Easy 1040 gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Easy 1040 If you have a special need, such as a disability, you can request an appointment. Easy 1040 Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Easy 1040 Apply for an Employer Identification Number (EIN). Easy 1040 Go to IRS. Easy 1040 gov and enter Apply for an EIN in the search box. Easy 1040 Read the Internal Revenue Code, regulations, or other official guidance. Easy 1040 Read Internal Revenue Bulletins. Easy 1040 Sign up to receive local and national tax news and more by email. Easy 1040 Just click on “subscriptions” above the search box on IRS. Easy 1040 gov and choose from a variety of options. Easy 1040    Phone. Easy 1040 You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Easy 1040 Download the free IRS2Go app from the iTunes app store or from Google Play. Easy 1040 Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Easy 1040 gov, or download the IRS2Go app. Easy 1040 Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Easy 1040 The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Easy 1040 Most VITA and TCE sites offer free electronic filing. Easy 1040 Some VITA and TCE sites provide IRS-certified volunteers who can help prepare your tax return. Easy 1040 Through the TCE program, AARP offers the Tax-Aide counseling program; call 1-888-227-7669 to find the nearest Tax-Aide location. Easy 1040 Call the automated Where's My Refund? information hotline to check the status of your 2013 refund 24 hours a day, 7 days a week at 1-800-829-1954. Easy 1040 If you e-file, you can start checking on the status of your return within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. Easy 1040 The IRS issues more than 9 out of 10 refunds in less than 21 days. Easy 1040 Where's My Refund? will give you a personalized refund date as soon as the IRS processes your tax return and approves your refund. Easy 1040 Before you call this automated hotline, have your 2013 tax return handy so you can enter your social security number, your filing status, and the exact whole dollar amount of your refund. Easy 1040 The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Easy 1040 Note, the above information is for our automated hotline. Easy 1040 Our live phone and walk-in assistors can research the status of your refund only if it's been 21 days or more since you filed electronically or more than 6 weeks since you mailed your paper return. Easy 1040 Call the Amended Return Hotline, 1-866-464-2050, to check the status of your amended return. Easy 1040 You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Easy 1040 It can take up to 3 weeks from the date you mailed it to show up in our system. Easy 1040 Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, publications, and prior-year forms and instructions (limited to 5 years). Easy 1040 You should receive your order within 10 business days. Easy 1040 Call TeleTax, 1-800-829-4477, to listen to pre-recorded messages covering general and business tax information. Easy 1040 If, between January and April 15, you still have questions about the Form 1040, 1040A, or 1040EZ (like filing requirements, dependents, credits, Schedule D, pensions and IRAs or self-employment taxes), call 1-800-829-1040. Easy 1040 Call using TTY/TDD equipment, 1-800-829-4059 to ask tax questions or order forms and publications. Easy 1040 The TTY/TDD telephone number is for people who are deaf, hard of hearing, or have a speech disability. Easy 1040 These individuals can also contact the IRS through relay services such as the Federal Relay Service. Easy 1040    Walk-in. Easy 1040 You can find a selection of forms, publications and services — in-person. Easy 1040 Products. Easy 1040 You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Easy 1040 Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. Easy 1040 Services. Easy 1040 You can walk in to your local TAC for face-to-face tax help. Easy 1040 An employee can answer questions about your tax account or help you set up a payment plan. Easy 1040 Before visiting, use the Office Locator tool on IRS. Easy 1040 gov, or choose the Contact Us option on the IRS2Go app and search Local Offices for days and hours of operation, and services provided. Easy 1040    Mail. Easy 1040 You can send your order for forms, instructions, and publications to the address below. Easy 1040 You should receive a response within 10 business days after your request is received. Easy 1040 Internal Revenue Service 1201 N. Easy 1040 Mitsubishi Motorway Bloomington, IL 61705-6613    The Taxpayer Advocate Service Is Here to Help You. Easy 1040 The Taxpayer Advocate Service (TAS) is your voice at the IRS. Easy 1040 Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights. Easy 1040   What can TAS do for you? We can offer you free help with IRS problems that you can't resolve on your own. Easy 1040 We know this process can be confusing, but the worst thing you can do is nothing at all! TAS can help if you can't resolve your tax problem and: Your problem is causing financial difficulties for you, your family, or your business. Easy 1040 You face (or your business is facing) an immediate threat of adverse action. Easy 1040 You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised. Easy 1040   If you qualify for our help, you'll be assigned to one advocate who'll be with you at every turn and will do everything possible to resolve your problem. Easy 1040 Here's why we can help: TAS is an independent organization within the IRS. Easy 1040 Our advocates know how to work with the IRS. Easy 1040 Our services are free and tailored to meet your needs. Easy 1040 We have offices in every state, the District of Columbia, and Puerto Rico. Easy 1040   How can you reach us? If you think TAS can help you, call your local advocate, whose number is in your local directory and at Taxpayer Advocate, or call us toll-free at 1-877-777-4778. Easy 1040   How else does TAS help taxpayers?  TAS also works to resolve large-scale, systemic problems that affect many taxpayers. Easy 1040 If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System. Easy 1040 Low Income Taxpayer Clinics Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals and tax collection disputes. Easy 1040 Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Easy 1040 Visit Taxpayer Advocate or see IRS Publication 4134, Low Income Taxpayer Clinic List. Easy 1040 Prev  Up  Next   Home   More Online Publications