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Efile Taxes

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Efile Taxes

Efile taxes 8. Efile taxes   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Efile taxes Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Efile taxes Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Efile taxes Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Efile taxes Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Efile taxes This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Efile taxes A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Efile taxes An exchange is a transfer of property for other property or services. Efile taxes Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Efile taxes If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Efile taxes If the adjusted basis of the property is more than the amount you realize, you will have a loss. Efile taxes Basis and adjusted basis. Efile taxes   The basis of property you buy is usually its cost. Efile taxes The adjusted basis of property is basis plus certain additions and minus certain deductions. Efile taxes See chapter 6 for more information about basis and adjusted basis. Efile taxes Amount realized. Efile taxes   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Efile taxes The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Efile taxes   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Efile taxes Amount recognized. Efile taxes   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Efile taxes A recognized gain is a gain you must include in gross income and report on your income tax return. Efile taxes A recognized loss is a loss you deduct from gross income. Efile taxes However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Efile taxes See Like-Kind Exchanges next. Efile taxes Also, a loss from the disposition of property held for personal use is not deductible. Efile taxes Like-Kind Exchanges Certain exchanges of property are not taxable. Efile taxes This means any gain from the exchange is not recognized, and any loss cannot be deducted. Efile taxes Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Efile taxes The exchange of property for the same kind of property is the most common type of nontaxable exchange. Efile taxes To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Efile taxes Qualifying property. Efile taxes Like-kind property. Efile taxes These two requirements are discussed later. Efile taxes Multiple-party transactions. Efile taxes   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Efile taxes Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Efile taxes Receipt of title from third party. Efile taxes   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Efile taxes Basis of property received. Efile taxes   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Efile taxes See chapter 6 for more information. Efile taxes Money paid. Efile taxes   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Efile taxes The basis of the property received is the basis of the property given up, increased by the money paid. Efile taxes Example. Efile taxes You traded an old tractor with an adjusted basis of $15,000 for a new one. Efile taxes The new tractor costs $300,000. Efile taxes You were allowed $80,000 for the old tractor and paid $220,000 cash. Efile taxes You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Efile taxes If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Efile taxes In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Efile taxes Reporting the exchange. Efile taxes   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Efile taxes The Instructions for Form 8824 explain how to report the details of the exchange. Efile taxes   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Efile taxes You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Efile taxes See chapter 9 for more information. Efile taxes Qualifying property. Efile taxes   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Efile taxes Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Efile taxes Nonqualifying property. Efile taxes   The rules for like-kind exchanges do not apply to exchanges of the following property. Efile taxes Property you use for personal purposes, such as your home and family car. Efile taxes Stock in trade or other property held primarily for sale, such as crops and produce. Efile taxes Stocks, bonds, or notes. Efile taxes However, see Qualifying property above. Efile taxes Other securities or evidences of indebtedness, such as accounts receivable. Efile taxes Partnership interests. Efile taxes However, you may have a nontaxable exchange under other rules. Efile taxes See Other Nontaxable Exchanges in chapter 1 of Publication 544. Efile taxes Like-kind property. Efile taxes   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Efile taxes Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Efile taxes Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Efile taxes For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Efile taxes   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Efile taxes An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Efile taxes The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Efile taxes For example, the exchange of a bull for a cow is not a like-kind exchange. Efile taxes An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Efile taxes    Note. Efile taxes Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Efile taxes Personal property. Efile taxes   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Efile taxes Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Efile taxes Property classified in any General Asset Class may not be classified within a Product Class. Efile taxes Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Efile taxes General Asset Classes. Efile taxes   General Asset Classes describe the types of property frequently used in many businesses. Efile taxes They include, but are not limited to, the following property. Efile taxes Office furniture, fixtures, and equipment (asset class 00. Efile taxes 11). Efile taxes Information systems, such as computers and peripheral equipment (asset class 00. Efile taxes 12). Efile taxes Data handling equipment except computers (asset class 00. Efile taxes 13). Efile taxes Automobiles and taxis (asset class 00. Efile taxes 22). Efile taxes Light general purpose trucks (asset class 00. Efile taxes 241). Efile taxes Heavy general purpose trucks (asset class 00. Efile taxes 242). Efile taxes Tractor units for use over-the-road (asset class 00. Efile taxes 26). Efile taxes Trailers and trailer-mounted containers (asset class 00. Efile taxes 27). Efile taxes Industrial steam and electric generation and/or distribution systems (asset class 00. Efile taxes 4). Efile taxes Product Classes. Efile taxes   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Efile taxes The latest version of the manual can be accessed at www. Efile taxes census. Efile taxes gov/eos/www/naics/. Efile taxes Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Efile taxes ntis. Efile taxes gov/products/naics. Efile taxes aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Efile taxes A CD-ROM version with search and retrieval software is also available from NTIS. Efile taxes    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Efile taxes Partially nontaxable exchange. Efile taxes   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Efile taxes You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Efile taxes A loss is not deductible. Efile taxes Example 1. Efile taxes You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Efile taxes You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Efile taxes However, only $10,000, the cash received, is recognized (included in income). Efile taxes Example 2. Efile taxes Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Efile taxes Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Efile taxes Example 3. Efile taxes Assume in Example 1 that the FMV of the land you received was only $15,000. Efile taxes Your $5,000 loss is not recognized. Efile taxes Unlike property given up. Efile taxes   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Efile taxes The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Efile taxes Like-kind exchanges between related persons. Efile taxes   Special rules apply to like-kind exchanges between related persons. Efile taxes These rules affect both direct and indirect exchanges. Efile taxes Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Efile taxes The gain or loss on the original exchange must be recognized as of the date of the later disposition. Efile taxes The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Efile taxes Related persons. Efile taxes   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Efile taxes ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Efile taxes   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Efile taxes Example. Efile taxes You used a grey pickup truck in your farming business. Efile taxes Your sister used a red pickup truck in her landscaping business. Efile taxes In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Efile taxes At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Efile taxes The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Efile taxes You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Efile taxes Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Efile taxes However, because this was a like-kind exchange, you recognized no gain. Efile taxes Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Efile taxes She recognized gain only to the extent of the money she received, $200. Efile taxes Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Efile taxes In 2013, you sold the red pickup truck to a third party for $7,000. Efile taxes Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Efile taxes On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Efile taxes You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Efile taxes In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Efile taxes Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Efile taxes Exceptions to the rules for related persons. Efile taxes   The following property dispositions are excluded from these rules. Efile taxes Dispositions due to the death of either related person. Efile taxes Involuntary conversions. Efile taxes Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Efile taxes Multiple property exchanges. Efile taxes   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Efile taxes However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Efile taxes Transfer and receive properties in two or more exchange groups. Efile taxes Transfer or receive more than one property within a single exchange group. Efile taxes   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Efile taxes Deferred exchange. Efile taxes   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Efile taxes A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Efile taxes The property you receive is replacement property. Efile taxes The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Efile taxes In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Efile taxes   For more information see Deferred Exchanges in chapter 1 of Publication 544. Efile taxes Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Efile taxes This rule does not apply if the recipient is a nonresident alien. Efile taxes Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Efile taxes Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Efile taxes The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Efile taxes This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Efile taxes This rule applies for determining loss as well as gain. Efile taxes Any gain recognized on a transfer in trust increases the basis. Efile taxes For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Efile taxes Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Efile taxes You may also have a capital gain if your section 1231 transactions result in a net gain. Efile taxes See Section 1231 Gains and Losses in  chapter 9. Efile taxes To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Efile taxes Your net capital gains may be taxed at a lower tax rate than ordinary income. Efile taxes See Capital Gains Tax Rates , later. Efile taxes Your deduction for a net capital loss may be limited. Efile taxes See Treatment of Capital Losses , later. Efile taxes Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Efile taxes The following items are examples of capital assets. Efile taxes A home owned and occupied by you and your family. Efile taxes Household furnishings. Efile taxes A car used for pleasure. Efile taxes If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Efile taxes Stocks and bonds. Efile taxes However, there are special rules for gains on qualified small business stock. Efile taxes For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Efile taxes Personal-use property. Efile taxes   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Efile taxes Loss from the sale or exchange of personal-use property is not deductible. Efile taxes You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Efile taxes For information on casualties and thefts, see chapter 11. Efile taxes Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Efile taxes The time you own an asset before disposing of it is the holding period. Efile taxes If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Efile taxes Report it in Part I of Schedule D (Form 1040). Efile taxes If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Efile taxes Report it in Part II of Schedule D (Form 1040). Efile taxes Holding period. Efile taxes   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Efile taxes The day you disposed of the property is part of your holding period. Efile taxes Example. Efile taxes If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Efile taxes If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Efile taxes Inherited property. Efile taxes   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Efile taxes This rule does not apply to livestock used in a farm business. Efile taxes See Holding period under Livestock , later. Efile taxes Nonbusiness bad debt. Efile taxes   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Efile taxes See chapter 4 of Publication 550. Efile taxes Nontaxable exchange. Efile taxes   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Efile taxes That is, it begins on the same day as your holding period for the old property. Efile taxes Gift. Efile taxes   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Efile taxes Real property. Efile taxes   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Efile taxes   However, taking possession of real property under an option agreement is not enough to start the holding period. Efile taxes The holding period cannot start until there is an actual contract of sale. Efile taxes The holding period of the seller cannot end before that time. Efile taxes Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Efile taxes Net short-term capital gain or loss. Efile taxes   Combine your short-term capital gains and losses. Efile taxes Do this by adding all of your short-term capital gains. Efile taxes Then add all of your short-term capital losses. Efile taxes Subtract the lesser total from the greater. Efile taxes The difference is your net short-term capital gain or loss. Efile taxes Net long-term capital gain or loss. Efile taxes   Follow the same steps to combine your long-term capital gains and losses. Efile taxes The result is your net long-term capital gain or loss. Efile taxes Net gain. Efile taxes   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Efile taxes However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Efile taxes See Capital Gains Tax Rates , later. Efile taxes Net loss. Efile taxes   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Efile taxes But there are limits on how much loss you can deduct and when you can deduct it. Efile taxes See Treatment of Capital Losses next. Efile taxes Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Efile taxes For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Efile taxes If your other income is low, you may not be able to use the full $3,000. Efile taxes The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Efile taxes Capital loss carryover. Efile taxes   Generally, you have a capital loss carryover if either of the following situations applies to you. Efile taxes Your net loss on Schedule D (Form 1040), is more than the yearly limit. Efile taxes Your taxable income without your deduction for exemptions is less than zero. Efile taxes If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Efile taxes    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Efile taxes Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Efile taxes These lower rates are called the maximum capital gains rates. Efile taxes The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Efile taxes See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Efile taxes Also see Publication 550. Efile taxes Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Efile taxes A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Efile taxes Property held for sale in the ordinary course of your farm business. Efile taxes   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Efile taxes Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Efile taxes The treatment of this property is discussed in chapter 3. Efile taxes Land and depreciable properties. Efile taxes   Land and depreciable property you use in farming are not capital assets. Efile taxes Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Efile taxes However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Efile taxes The sales of these business assets are reported on Form 4797. Efile taxes See chapter 9 for more information. Efile taxes Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Efile taxes Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Efile taxes A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Efile taxes The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Efile taxes A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Efile taxes Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Efile taxes Hedging transactions. Efile taxes Transactions that are not hedging transactions. Efile taxes Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Efile taxes There is a limit on the amount of capital losses you can deduct each year. Efile taxes Hedging transactions are not subject to the mark-to-market rules. Efile taxes If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Efile taxes They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Efile taxes The gain or loss on the termination of these hedges is generally ordinary gain or loss. Efile taxes Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Efile taxes Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Efile taxes Examples include fuel and feed. Efile taxes If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Efile taxes Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Efile taxes It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Efile taxes Retain the identification of each hedging transaction with your books and records. Efile taxes Also, identify the item(s) or aggregate risk that is being hedged in your records. Efile taxes Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Efile taxes For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Efile taxes Accounting methods for hedging transactions. Efile taxes   The accounting method you use for a hedging transaction must clearly reflect income. Efile taxes This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Efile taxes There are requirements and limits on the method you can use for certain hedging transactions. Efile taxes See Regulations section 1. Efile taxes 446-4(e) for those requirements and limits. Efile taxes   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Efile taxes Cash method. Efile taxes Farm-price method. Efile taxes Unit-livestock-price method. Efile taxes   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Efile taxes   Your books and records must describe the accounting method used for each type of hedging transaction. Efile taxes They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Efile taxes You must make the additional identification no more than 35 days after entering into the hedging transaction. Efile taxes Example of a hedging transaction. Efile taxes   You file your income tax returns on the cash method. Efile taxes On July 2 you anticipate a yield of 50,000 bushels of corn this year. Efile taxes The December futures price is $5. Efile taxes 75 a bushel, but there are indications that by harvest time the price will drop. Efile taxes To protect yourself against a drop in the price, you enter into the following hedging transaction. Efile taxes You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Efile taxes 75 a bushel. Efile taxes   The price did not drop as anticipated but rose to $6 a bushel. Efile taxes In November, you sell your crop at a local elevator for $6 a bushel. Efile taxes You also close out your futures position by buying ten December contracts for $6 a bushel. Efile taxes You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Efile taxes   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Efile taxes Your loss on the hedge is 25 cents a bushel. Efile taxes In effect, the net selling price of your corn is $5. Efile taxes 75 a bushel. Efile taxes   Report the results of your futures transactions and your sale of corn separately on Schedule F. Efile taxes See the instructions for the 2013 Schedule F (Form 1040). Efile taxes   The loss on your futures transactions is $13,900, figured as follows. Efile taxes July 2 - Sold December corn futures (50,000 bu. Efile taxes @$5. Efile taxes 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Efile taxes @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Efile taxes   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Efile taxes × $6). Efile taxes Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Efile taxes   Assume you were right and the price went down 25 cents a bushel. Efile taxes In effect, you would still net $5. Efile taxes 75 a bushel, figured as follows. Efile taxes Sold cash corn, per bushel $5. Efile taxes 50 Gain on hedge, per bushel . Efile taxes 25 Net price, per bushel $5. Efile taxes 75       The gain on your futures transactions would have been $11,100, figured as follows. Efile taxes July 2 - Sold December corn futures (50,000 bu. Efile taxes @$5. Efile taxes 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Efile taxes @$5. Efile taxes 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Efile taxes   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Efile taxes Livestock This part discusses the sale or exchange of livestock used in your farm business. Efile taxes Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Efile taxes However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Efile taxes See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Efile taxes The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Efile taxes The sale of this livestock is reported on Schedule F. Efile taxes See chapter 3. Efile taxes Also, special rules apply to sales or exchanges caused by weather-related conditions. Efile taxes See chapter 3. Efile taxes Holding period. Efile taxes   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Efile taxes Livestock. Efile taxes   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Efile taxes Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Efile taxes Livestock used in farm business. Efile taxes   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Efile taxes The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Efile taxes An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Efile taxes However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Efile taxes Example 1. Efile taxes You discover an animal that you intend to use for breeding purposes is sterile. Efile taxes You dispose of it within a reasonable time. Efile taxes This animal was held for breeding purposes. Efile taxes Example 2. Efile taxes You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Efile taxes These young animals were held for breeding or dairy purposes. Efile taxes Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Efile taxes See Sales Caused by Weather-Related Conditions in chapter 3. Efile taxes Example 3. Efile taxes You are in the business of raising hogs for slaughter. Efile taxes Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Efile taxes You sell the brood sows after obtaining the litter. Efile taxes Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Efile taxes Example 4. Efile taxes You are in the business of raising registered cattle for sale to others for use as breeding cattle. Efile taxes The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Efile taxes Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Efile taxes Such use does not demonstrate that you are holding the cattle for breeding purposes. Efile taxes However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Efile taxes The same applies to hog and sheep breeders. Efile taxes Example 5. Efile taxes You breed, raise, and train horses for racing purposes. Efile taxes Every year you cull horses from your racing stable. Efile taxes In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Efile taxes These horses are all considered held for sporting purposes. Efile taxes Figuring gain or loss on the cash method. Efile taxes   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Efile taxes Raised livestock. Efile taxes   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Efile taxes Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Efile taxes The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Efile taxes However, see Uniform Capitalization Rules in chapter 6. Efile taxes Purchased livestock. Efile taxes   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Efile taxes Example. Efile taxes A farmer sold a breeding cow on January 8, 2013, for $1,250. Efile taxes Expenses of the sale were $125. Efile taxes The cow was bought July 2, 2009, for $1,300. Efile taxes Depreciation (not less than the amount allowable) was $867. Efile taxes Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Efile taxes Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Efile taxes Any loss on the disposition of such property is treated as a long-term capital loss. Efile taxes Converted wetland. Efile taxes   This is generally land that was drained or filled to make the production of agricultural commodities possible. Efile taxes It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Efile taxes   A wetland (before conversion) is land that meets all the following conditions. Efile taxes It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Efile taxes It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Efile taxes It supports, under normal circumstances, mostly plants that grow in saturated soil. Efile taxes Highly erodible cropland. Efile taxes   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Efile taxes Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Efile taxes Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Efile taxes Successor. Efile taxes   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Efile taxes Timber Standing timber you held as investment property is a capital asset. Efile taxes Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Efile taxes If you held the timber primarily for sale to customers, it is not a capital asset. Efile taxes Gain or loss on its sale is ordinary business income or loss. Efile taxes It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Efile taxes See the Instructions for Schedule F (Form 1040). Efile taxes Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Efile taxes Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Efile taxes , are ordinary farm income and expenses reported on Schedule F. Efile taxes Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Efile taxes Timber considered cut. Efile taxes   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Efile taxes This is true whether the timber is cut under contract or whether you cut it yourself. Efile taxes Christmas trees. Efile taxes   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Efile taxes They qualify for both rules discussed below. Efile taxes Election to treat cutting as a sale or exchange. Efile taxes   Under the general rule, the cutting of timber results in no gain or loss. Efile taxes It is not until a sale or exchange occurs that gain or loss is realized. Efile taxes But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Efile taxes Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Efile taxes Any later sale results in ordinary business income or loss. Efile taxes See the example below. Efile taxes   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Efile taxes Making the election. Efile taxes   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Efile taxes You do not have to make the election in the first year you cut the timber. Efile taxes You can make it in any year to which the election would apply. Efile taxes If the timber is partnership property, the election is made on the partnership return. Efile taxes This election cannot be made on an amended return. Efile taxes   Once you have made the election, it remains in effect for all later years unless you revoke it. Efile taxes Election under section 631(a) may be revoked. Efile taxes   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Efile taxes The prior election (and revocation) is disregarded for purposes of making a subsequent election. Efile taxes See Form T (Timber), Forest Activities Schedule, for more information. Efile taxes Gain or loss. Efile taxes   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Efile taxes   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Efile taxes Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Efile taxes 611-3. Efile taxes   Depletion of timber is discussed in chapter 7. Efile taxes Example. Efile taxes   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Efile taxes It had an adjusted basis for depletion of $40 per MBF. Efile taxes You are a calendar year taxpayer. Efile taxes On January 1, 2013, the timber had a FMV of $350 per MBF. Efile taxes It was cut in April for sale. Efile taxes On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Efile taxes You report the difference between the FMV and your adjusted basis for depletion as a gain. Efile taxes This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Efile taxes You figure your gain as follows. Efile taxes FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Efile taxes Outright sales of timber. Efile taxes   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Efile taxes However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Efile taxes Cutting contract. Efile taxes   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Efile taxes You are the owner of the timber. Efile taxes You held the timber longer than 1 year before its disposal. Efile taxes You kept an economic interest in the timber. Efile taxes   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Efile taxes   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Efile taxes Include this amount on Form 4797 along with your other section 1231 gains or losses. Efile taxes Date of disposal. Efile taxes   The date of disposal is the date the timber is cut. Efile taxes However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Efile taxes   This election applies only to figure the holding period of the timber. Efile taxes It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Efile taxes   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Efile taxes The statement must identify the advance payments subject to the election and the contract under which they were made. Efile taxes   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Efile taxes Attach the statement to the amended return and write “Filed pursuant to section 301. Efile taxes 9100-2” at the top of the statement. Efile taxes File the amended return at the same address the original return was filed. Efile taxes Owner. Efile taxes   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Efile taxes You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Efile taxes Tree stumps. Efile taxes   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Efile taxes Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Efile taxes However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Efile taxes Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Efile taxes   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Efile taxes Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Efile taxes If you have a gain from the sale, you may be allowed to exclude the gain on your home. Efile taxes For more information, see Publication 523, Selling Your Home. Efile taxes The gain on the sale of your business property is taxable. Efile taxes A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Efile taxes Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Efile taxes See chapter 9. Efile taxes Losses from personal-use property, other than casualty or theft losses, are not deductible. Efile taxes If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Efile taxes See chapter 10 for information about installment sales. Efile taxes When you sell your farm, the gain or loss on each asset is figured separately. Efile taxes The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Efile taxes Each of the assets sold must be classified as one of the following. Efile taxes Capital asset held 1 year or less. Efile taxes Capital asset held longer than 1 year. Efile taxes Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Efile taxes Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Efile taxes Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Efile taxes Allocation of consideration paid for a farm. Efile taxes   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Efile taxes The residual method is required only if the group of assets sold constitutes a trade or business. Efile taxes This method determines gain or loss from the transfer of each asset. Efile taxes It also determines the buyer's basis in the business assets. Efile taxes For more information, see Sale of a Business in chapter 2 of Publication 544. Efile taxes Property used in farm operation. Efile taxes   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Efile taxes Recognized gains and losses on business property must be reported on your return for the year of the sale. Efile taxes If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Efile taxes Example. Efile taxes You sell your farm, including your main home, which you have owned since December 2001. Efile taxes You realize gain on the sale as follows. Efile taxes   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Efile taxes All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Efile taxes Treat the balance as section 1231 gain. Efile taxes The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Efile taxes Partial sale. Efile taxes   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Efile taxes You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Efile taxes For a detailed discussion on installment sales, see Publication 544. Efile taxes Adjusted basis of the part sold. Efile taxes   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Efile taxes , on the part sold. Efile taxes If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Efile taxes Example. Efile taxes You bought a 600-acre farm for $700,000. Efile taxes The farm included land and buildings. Efile taxes The purchase contract designated $600,000 of the purchase price to the land. Efile taxes You later sold 60 acres of land on which you had installed a fence. Efile taxes Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Efile taxes Use this amount to determine your gain or loss on the sale of the 60 acres. Efile taxes Assessed values for local property taxes. Efile taxes   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Efile taxes Example. Efile taxes Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Efile taxes However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Efile taxes The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Efile taxes Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Efile taxes The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Efile taxes Sale of your home. Efile taxes   Your home is a capital asset and not property used in the trade or business of farming. Efile taxes If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Efile taxes Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Efile taxes   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Efile taxes For more information on basis, see chapter 6. Efile taxes More information. Efile taxes   For more information on selling your home, see Publication 523. Efile taxes Gain from condemnation. Efile taxes   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Efile taxes However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Efile taxes Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Efile taxes The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Efile taxes This is true even if you voluntarily return the property to the lender. Efile taxes You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Efile taxes Buyer's (borrower's) gain or loss. Efile taxes   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Efile taxes The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Efile taxes See Determining Gain or Loss , earlier. Efile taxes Worksheet 8-1. Efile taxes Worksheet for Foreclosures andRepossessions Part 1. Efile taxes Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Efile taxes Complete this part only if you were personally liable for the debt. Efile taxes Otherwise, go to Part 2. Efile taxes   1. Efile taxes Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Efile taxes Enter the Fair Market Value of the transferred property   3. Efile taxes Ordinary income from cancellation of debt upon foreclosure or repossession. Efile taxes * Subtract line 2 from line 1. Efile taxes If zero or less, enter -0-   Part 2. Efile taxes Figure your gain or loss from foreclosure or repossession. Efile taxes   4. Efile taxes If you completed Part 1, enter the smaller of line 1 or line 2. Efile taxes If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Efile taxes Enter any proceeds you received from the foreclosure sale   6. Efile taxes Add lines 4 and 5   7. Efile taxes Enter the adjusted basis of the transferred property   8. Efile taxes Gain or loss from foreclosure or repossession. Efile taxes Subtract line 7  from line 6   * The income may not be taxable. Efile taxes See Cancellation of debt . Efile taxes    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Efile taxes Amount realized on a nonrecourse debt. Efile taxes   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Efile taxes The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Efile taxes Example 1. Efile taxes Ann paid $200,000 for land used in her farming business. Efile taxes She paid $15,000 down and borrowed the remaining $185,000 from a bank. Efile taxes Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Efile taxes The bank foreclosed on the loan 2 years after Ann stopped making payments. Efile taxes When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Efile taxes The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Efile taxes She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Efile taxes She has a $20,000 deductible loss. Efile taxes Example 2. Efile taxes Assume the same facts as in Example 1 except the FMV of the land was $210,000. Efile taxes The result is the same. Efile taxes The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Efile taxes Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Efile taxes Amount realized on a recourse debt. Efile taxes   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Efile taxes   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Efile taxes The amount realized does not include the canceled debt that is your income from cancellation of debt. Efile taxes See Cancellation of debt , later. Efile taxes Example 3. Efile taxes Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Efile taxes In this case, the amount she realizes is $170,000. Efile taxes This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Efile taxes Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Efile taxes She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Efile taxes She is also treated as receiving ordinary income from cancellation of debt. Efile taxes That income is $10,000 ($180,000 − $170,000). Efile taxes This is the part of the canceled debt not included in the amount realized. Efile taxes She reports this as other income on Schedule F, line 8. Efile taxes Seller's (lender's) gain or loss on repossession. Efile taxes   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Efile taxes For more information, see Repossession in Publication 537, Installment Sales. Efile taxes Cancellation of debt. Efile taxes   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Efile taxes This income is separate from any gain or loss realized from the foreclosure or repossession. Efile taxes Report the income from cancellation of a business debt on Schedule F, line 8. Efile taxes Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Efile taxes    You can use Worksheet 8-1 to figure your income from cancellation of debt. Efile taxes   However, income from cancellation of debt is not taxed if any of the following apply. Efile taxes The cancellation is intended as a gift. Efile taxes The debt is qualified farm debt (see chapter 3). Efile taxes The debt is qualified real property business debt (see chapter 5 of Publication 334). Efile taxes You are insolvent or bankrupt (see  chapter 3). Efile taxes The debt is qualified principal residence indebtedness (see chapter 3). Efile taxes   Use Form 982 to report the income exclusion. Efile taxes Abandonment The abandonment of property is a disposition of property. Efile taxes You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Efile taxes Business or investment property. Efile taxes   Loss from abandonment of business or investment property is deductible as a loss. Efile taxes Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Efile taxes If your adjusted basis is more than the amount you realize (if any), then you have a loss. Efile taxes If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Efile taxes This rule also applies to leasehold improvements the lessor made for the lessee. Efile taxes However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Efile taxes   If the abandoned property is secured by debt, special rules apply. Efile taxes The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Efile taxes For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Efile taxes The abandonment loss is deducted in the tax year in which the loss is sustained. Efile taxes Report the loss on Form 4797, Part II, line 10. Efile taxes Personal-use property. Efile taxes   You cannot deduct any loss from abandonment of your home or other property held for personal use. Efile taxes Canceled debt. Efile taxes   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Efile taxes This income is separate from any loss realized from abandonment of the property. Efile taxes Report income from cancellation of a debt related to a business or rental activity as business or rental income. Efile taxes Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Efile taxes   However, income from cancellation of debt is not taxed in certain circumstances. Efile taxes See Cancellation of debt earlier under Foreclosure or Repossession . Efile taxes Forms 1099-A and 1099-C. Efile taxes   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Efile taxes However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Efile taxes The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Efile taxes For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Efile taxes Prev  Up  Next   Home   More Online Publications
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Understanding Your CP188 Notice

We are holding your refund until we determine you owe no other taxes.


What you need to do

  • You need not take any action at this time.
  • Review your notice carefully; it will explain the time frames necessary to review your account.

You may want to...


Understanding your notice

Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

Notice CP188, Page 1

Page Last Reviewed or Updated: 25-Jul-2013

Printable samples of this notice (PDF)

 

 

How to get help

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  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Efile Taxes

Efile taxes Part Six -   Figuring Your Taxes and Credits The eight chapters in this part explain how to figure your tax and how to figure the tax of certain children who have more than $2,000 of unearned income. Efile taxes They also discuss tax credits that, unlike deductions, are subtracted directly from your tax and reduce your tax dollar for dollar. Efile taxes Chapter 36 discusses the earned income credit. Efile taxes Chapter 37 discusses a wide variety of other credits, such as the adoption credit. Efile taxes Table of Contents 30. Efile taxes   How To Figure Your TaxIntroduction Figuring Your Tax Alternative Minimum Tax (AMT) Tax Figured by IRSFiling the Return 31. Efile taxes   Tax on Unearned Income of Certain ChildrenWhat's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. Efile taxes Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Efile taxes Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Efile taxes Figuring the Child's Tax (Form 8615, Part III) 32. Efile taxes   Child and Dependent Care CreditReminders Introduction Useful Items - You may want to see: Tests To Claim the CreditQualifying Person Test Earned Income Test Work-Related Expense Test Joint Return Test Provider Identification Test How To Figure the CreditFiguring Total Work-Related Expenses Earned Income Limit Dollar Limit Amount of Credit How To Claim the CreditTax credit not refundable. Efile taxes Employment Taxes for Household Employers 33. Efile taxes   Credit for the Elderly or the DisabledIntroduction Useful Items - You may want to see: Are You Eligible for the Credit?Qualified Individual Income Limits How to Claim the CreditCredit Figured for You Credit Figured by You 34. Efile taxes   Child Tax CreditIntroduction Useful Items - You may want to see: Qualifying Child Amount of CreditLimits on the Credit Claiming the Credit Additional Child Tax Credit Completing Schedule 8812 (Form 1040A or 1040)Part I Parts II–IV 35. Efile taxes   Education CreditsIntroduction Useful Items - You may want to see: Who Can Claim an Education Credit Qualified Education ExpensesNo Double Benefit Allowed Adjustments to Qualified Education Expenses 36. Efile taxes   Earned Income Credit (EIC)What's New Reminders Introduction Useful Items - You may want to see: Do You Qualify for the Credit?If Improper Claim Made in Prior Year Part A. Efile taxes Rules for EveryoneRule 1. Efile taxes Your AGI Must Be Less Than: Rule 2. Efile taxes You Must Have a Valid Social Security Number (SSN) Rule 3. Efile taxes Your Filing Status Cannot Be Married Filing Separately Rule 4. Efile taxes You Must Be a U. Efile taxes S. Efile taxes Citizen or Resident Alien All Year Rule 5. Efile taxes You Cannot File Form 2555 or Form 2555-EZ Rule 6. Efile taxes Your Investment Income Must Be $3,300 or Less Rule 7. Efile taxes You Must Have Earned Income Part B. Efile taxes Rules If You Have a Qualifying ChildRule 8. Efile taxes Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Rule 9. Efile taxes Your Qualifying Child Cannot Be Used By More Than One Person To Claim the EIC Rule 10. Efile taxes You Cannot Be a Qualifying Child of Another Taxpayer Part C. Efile taxes Rules If You Do Not Have a Qualifying ChildRule 11. Efile taxes You Must Be at Least Age 25 but Under Age 65 Rule 12. Efile taxes You Cannot Be the Dependent of Another Person Rule 13. Efile taxes You Cannot Be a Qualifying Child of Another Taxpayer Rule 14. Efile taxes You Must Have Lived in the United States More Than Half of the Year Part D. Efile taxes Figuring and Claiming the EICRule 15. Efile taxes Your Earned Income Must Be Less Than: IRS Will Figure the EIC for You How To Figure the EIC Yourself ExamplesExample 1. Efile taxes John and Janet Smith (Form 1040A) Example 2. Efile taxes Kelly Green (Form 1040EZ) 37. Efile taxes   Other CreditsWhat's New Introduction Useful Items - You may want to see: Nonrefundable CreditsAdoption Credit Alternative Motor Vehicle Credit Alternative Fuel Vehicle Refueling Property Credit Credit to Holders of Tax Credit Bonds Foreign Tax Credit Mortgage Interest Credit Nonrefundable Credit for Prior Year Minimum Tax Plug-in Electric Drive Motor Vehicle Credit Residential Energy Credits Retirement Savings Contributions Credit (Saver's Credit) Refundable CreditsCredit for Tax on Undistributed Capital Gain Health Coverage Tax Credit Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld Prev  Up  Next   Home   More Online Publications