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Filling Out 1040x

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Filling Out 1040x

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

Filling out 1040x Publication 946 - Additional Material Table of Contents Appendix B — Table of Class Lives and Recovery PeriodsHow To Use the Tables This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Appendix A Please click here for the text description of the image. Filling out 1040x Table A-1 and A-2 Please click here for the text description of the image. Filling out 1040x Table A-3 and A-4 Please click here for the text description of the image. Filling out 1040x Table A-5 and A-6 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-7 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-8 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-8 (continued) This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-9 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-9 (continued) This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-10 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A–10 (continued) This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-11 Please click here for the text description of the image. Filling out 1040x Table A-11 (continued) This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-12 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-12 (continued) This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-13, A-14 and A-14 (continued. Filling out 1040x 1) Please click here for the text description of the image. Filling out 1040x Table A-14 (continued. Filling out 1040x 2) Please click here for the text description of the image. Filling out 1040x Table A-15 Please click here for the text description of the image. Filling out 1040x Table A-15 (continued) Please click here for the text description of the image. Filling out 1040x Table A-16 Please click here for the text description of the image. Filling out 1040x Table A-16 (continued) This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-17 Please click here for the text description of the image. Filling out 1040x Table A-17 (continued) Please click here for the text description of the image. Filling out 1040x Table A-18 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-18 (continued) This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table A-19 and Table A-20 Please click here for the text description of the image. Filling out 1040x Quality Indian Reservation Property Tables Please click here for the text description of the image. Filling out 1040x Qualified Indian Reservation Property Tables 2 Appendix B — Table of Class Lives and Recovery Periods The Table of Class Lives and Recovery Periods has two sections. Filling out 1040x The first section, Specific Depreciable Assets Used In All Business Activities, Except As Noted, generally lists assets used in all business activities. Filling out 1040x It is shown as Table B-1. Filling out 1040x The second section, Depreciable Assets Used In The Following Activities, describes assets used only in certain activities. Filling out 1040x It is shown as Table B-2. Filling out 1040x How To Use the Tables You will need to look at both Table B-1 and B-2 to find the correct recovery period. Filling out 1040x Generally, if the property is listed in Table B-1 you use the recovery period shown in that table. Filling out 1040x However, if the property is specifically listed in Table B-2 under the type of activity in which it is used, you use the recovery period listed under the activity in that table. Filling out 1040x Use the tables in the order shown below to determine the recovery period of your depreciable property. Filling out 1040x Table B-1. Filling out 1040x   Check Table B-1 for a description of the property. Filling out 1040x If it is described in Table B-1, also check Table B-2 to find the activity in which the property is being used. Filling out 1040x If the activity is described in Table B-2, read the text (if any) under the title to determine if the property is specifically included in that asset class. Filling out 1040x If it is, use the recovery period shown in the appropriate column of Table B-2 following the description of the activity. Filling out 1040x If the activity is not described in Table B-2 or if the activity is described but the property either is not specifically included in or is specifically excluded from that asset class, then use the recovery period shown in the appropriate column following the description of the property in Table B-1. Filling out 1040x Tax-exempt use property subject to a lease. Filling out 1040x   The recovery period for ADS cannot be less than 125 percent of the lease term for any property leased under a leasing arrangement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership). Filling out 1040x Table B-2. Filling out 1040x   If the property is not listed in Table B-1, check Table B-2 to find the activity in which the property is being used and use the recovery period shown in the appropriate column following the description. Filling out 1040x Property not in either table. Filling out 1040x   If the activity or the property is not included in either table, check the end of Table B-2 to find Certain Property for Which Recovery Periods Assigned. Filling out 1040x This property generally has a recovery period of 7 years for GDS or 12 years for ADS. Filling out 1040x See Which Property Class Applies Under GDS and Which Recovery Period Applies in chapter 4 for the class lives or the recovery periods for GDS and ADS for the following. Filling out 1040x Residential rental property and nonresidential real property (also see Appendix A, Chart 2). Filling out 1040x Qualified rent-to-own property. Filling out 1040x A motorsport entertainment complex placed in service before January 1, 2014. Filling out 1040x Any retail motor fuels outlet. Filling out 1040x Any qualified leasehold improvement property placed in service before January 1, 2014. Filling out 1040x Any qualified restaurant property placed in service before January 1, 2014. Filling out 1040x Initial clearing and grading land improvements for gas utility property and electric utility transmission and distribution plants. Filling out 1040x Any water utility property. Filling out 1040x Certain electric transmission property used in the transmission at 69 or more kilovolts of electricity for sale and placed in service after April 11, 2005. Filling out 1040x Natural gas gathering and distribution lines placed in service after April 11, 2005. Filling out 1040x Example 1. Filling out 1040x Richard Green is a paper manufacturer. Filling out 1040x During the year, he made substantial improvements to the land on which his paper plant is located. Filling out 1040x He checks Table B-1 and finds land improvements under asset class 00. Filling out 1040x 3. Filling out 1040x He then checks Table B-2 and finds his activity, paper manufacturing, under asset class 26. Filling out 1040x 1, Manufacture of Pulp and Paper. Filling out 1040x He uses the recovery period under this asset class because it specifically includes land improvements. Filling out 1040x The land improvements have a 13-year class life and a 7-year recovery period for GDS. Filling out 1040x If he elects to use ADS, the recovery period is 13 years. Filling out 1040x If Richard only looked at Table B-1, he would select asset class 00. Filling out 1040x 3, Land Improvements, and incorrectly use a recovery period of 15 years for GDS or 20 years for ADS. Filling out 1040x Example 2. Filling out 1040x Sam Plower produces rubber products. Filling out 1040x During the year, he made substantial improvements to the land on which his rubber plant is located. Filling out 1040x He checks Table B-1 and finds land improvements under asset class 00. Filling out 1040x 3. Filling out 1040x He then checks Table B-2 and finds his activity, producing rubber products, under asset class 30. Filling out 1040x 1, Manufacture of Rubber Products. Filling out 1040x Reading the headings and descriptions under asset class 30. Filling out 1040x 1, Sam finds that it does not include land improvements. Filling out 1040x Therefore, Sam uses the recovery period under asset class 00. Filling out 1040x 3. Filling out 1040x The land improvements have a 20-year class life and a 15-year recovery period for GDS. Filling out 1040x If he elects to use ADS, the recovery period is 20 years. Filling out 1040x Example 3. Filling out 1040x Pam Martin owns a retail clothing store. Filling out 1040x During the year, she purchased a desk and a cash register for use in her business. Filling out 1040x She checks Table B-1 and finds office furniture under asset class 00. Filling out 1040x 11. Filling out 1040x Cash registers are not listed in any of the asset classes in Table B-1. Filling out 1040x She then checks Table B-2 and finds her activity, retail store, under asset class 57. Filling out 1040x 0, Distributive Trades and Services, which includes assets used in wholesale and retail trade. Filling out 1040x This asset class does not specifically list office furniture or a cash register. Filling out 1040x She looks back at Table B-1 and uses asset class 00. Filling out 1040x 11 for the desk. Filling out 1040x The desk has a 10-year class life and a 7-year recovery period for GDS. Filling out 1040x If she elects to use ADS, the recovery period is 10 years. Filling out 1040x For the cash register, she uses asset class 57. Filling out 1040x 0 because cash registers are not listed in Table B-1 but it is an asset used in her retail business. Filling out 1040x The cash register has a 9-year class life and a 5-year recovery period for GDS. Filling out 1040x If she elects to use the ADS method, the recovery period is 9 years. Filling out 1040x This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-1 Please click here for the text description of the image. Filling out 1040x Table B-2 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-2 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-2 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-2 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-2 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-2 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-2 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-2 This image is too large to be displayed in the current screen. Filling out 1040x Please click the link to view the image. Filling out 1040x Table B-2 Tax Publications for Business Taxpayers Prev  Up  Next   Home   More Online Publications