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Form 1040 2012

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Form 1040 2012

Form 1040 2012 2. Form 1040 2012   Taxable and Nontaxable Income Table of Contents Compensation for Services Retirement Plan DistributionsIndividual Retirement Arrangements (IRAs) Pensions and Annuities Social Security and Equivalent Railroad Retirement BenefitsAre Any of Your Benefits Taxable? How Much Is Taxable? How To Report Your Benefits Lump-Sum Election Repayments More Than Gross Benefits Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Life Insurance ProceedsInstallments for life. Form 1040 2012 Surviving spouse. Form 1040 2012 Endowment Contract Proceeds Accelerated Death Benefits Sale of HomeMaximum Amount of Exclusion Ownership and Use Tests Married Persons Business Use or Rental of Home Reporting the Sale Reverse Mortgages Other ItemsWelfare benefits. Form 1040 2012 Payments from a state fund for victims of crime. Form 1040 2012 Home Affordable Modification Program (HAMP). Form 1040 2012 Mortgage assistance payments. Form 1040 2012 Payments to reduce cost of winter energy use. Form 1040 2012 Nutrition Program for the Elderly. Form 1040 2012 Reemployment Trade Adjustment Assistance (RTAA). Form 1040 2012 Generally, income is taxable unless it is specifically exempt (not taxed) by law. Form 1040 2012 Your taxable income may include compensation for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges of property, and business income of all kinds. Form 1040 2012 Under special provisions of the law, certain items are partially or fully exempt from tax. Form 1040 2012 Provisions that are of special interest to older taxpayers are discussed in this chapter. Form 1040 2012 Compensation for Services Generally, you must include in gross income everything you receive in payment for personal services. Form 1040 2012 In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Form 1040 2012 You need not receive the compensation in cash for it to be taxable. Form 1040 2012 Payments you receive in the form of goods or services generally must be included in gross income at their fair market value. Form 1040 2012 Volunteer work. Form 1040 2012   Do not include in your gross income amounts you receive for supportive services or reimbursements for out-of-pocket expenses under any of the following volunteer programs. Form 1040 2012 Retired Senior Volunteer Program (RSVP). Form 1040 2012 Foster Grandparent Program. Form 1040 2012 Senior Companion Program. Form 1040 2012 Service Corps of Retired Executives (SCORE). Form 1040 2012 Unemployment compensation. Form 1040 2012   You must include in income all unemployment compensation you or your spouse (if married filing jointly) received. Form 1040 2012 More information. Form 1040 2012   See Publication 525, Taxable and Nontaxable Income, for more detailed information on specific types of income. Form 1040 2012 Retirement Plan Distributions This section summarizes the tax treatment of amounts you receive from traditional individual retirement arrangements (IRA), employee pensions or annuities, and disability pensions or annuities. Form 1040 2012 A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. Form 1040 2012 A Roth IRA is an individual retirement plan that can be either an account or an annuity and features nondeductible contributions and tax-free distributions. Form 1040 2012 A SIMPLE IRA is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Form 1040 2012 More detailed information can be found in Publication 590, Individual Retirement Arrangements (IRAs), and Publication 575, Pension and Annuity Income. Form 1040 2012 Individual Retirement Arrangements (IRAs) In general, distributions from a traditional IRA are taxable in the year you receive them. Form 1040 2012 Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. Form 1040 2012 These are discussed in Publication 590. Form 1040 2012 If you made nondeductible contributions to a traditional IRA, you must file Form 8606, Nondeductible IRAs. Form 1040 2012 If you do not file Form 8606 with your return, you may have to pay a $50 penalty. Form 1040 2012 Also, when you receive distributions from your traditional IRA, the amounts will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Form 1040 2012 Early distributions. Form 1040 2012   Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age  59½. Form 1040 2012 You must include early distributions of taxable amounts in your gross income. Form 1040 2012 These taxable amounts are also subject to an additional 10% tax unless the distribution qualifies for an exception. Form 1040 2012 For purposes of the additional 10% tax, an IRA is a qualified retirement plan. Form 1040 2012 For more information about this tax, see Tax on Early Distributions under Pensions and Annuities, later. Form 1040 2012 After age 59½ and before age 70½. Form 1040 2012   After you reach age 59½, you can receive distributions from your traditional IRA without having to pay the 10% additional tax. Form 1040 2012 Even though you can receive distributions after you reach age 59½, distributions are not required until you reach  age 70½. Form 1040 2012 Required distributions. Form 1040 2012   If you are the owner of a traditional IRA, you generally must receive the entire balance in your IRA or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 70½. Form 1040 2012 See When Must You Withdraw Assets? (Required Minimum Distributions) in Publication 590. Form 1040 2012 If distributions from your traditional IRA(s) are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. Form 1040 2012 For purposes of the 50% excise tax, an IRA is a qualified retirement plan. Form 1040 2012 For more information about this tax, see Tax on Excess Accumulation under Pensions and Annuities, later. Form 1040 2012 See also Excess Accumulations (Insufficient Distributions) in Publication 590. Form 1040 2012 Pensions and Annuities Generally, if you did not pay any part of the cost of your employee pension or annuity, and your employer did not withhold part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. Form 1040 2012 However, see Insurance Premiums for Retired Public Safety Officers , later. Form 1040 2012 If you paid part of the cost of your pension or annuity plan (see Cost , later), you can exclude part of each annuity payment from income as a recovery of your cost (investment in the contract). Form 1040 2012 This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. Form 1040 2012 The rest of each payment is taxable. Form 1040 2012 However, see Insurance Premiums for Retired Public Safety Officers , later. Form 1040 2012 You figure the tax-free part of the payment using one of the following methods. Form 1040 2012 Simplified Method. Form 1040 2012 You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). Form 1040 2012 You cannot use this method if your annuity is paid under a nonqualified plan. Form 1040 2012 General Rule. Form 1040 2012 You must use this method if your annuity is paid under a nonqualified plan. Form 1040 2012 You generally cannot use this method if your annuity is paid under a qualified plan. Form 1040 2012 Contact your employer or plan administrator to find out if your pension or annuity is paid under a qualified or nonqualified plan. Form 1040 2012 You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. Form 1040 2012 Exclusion limit. Form 1040 2012   If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as a recovery of the cost cannot exceed your total cost. Form 1040 2012 Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Form 1040 2012 This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Form 1040 2012   If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Form 1040 2012 If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Form 1040 2012 The total exclusion may be more than your cost. Form 1040 2012 Cost. Form 1040 2012   Before you can figure how much, if any, of your pension or annuity benefits are taxable, you must determine your cost in the plan (your investment in the contract). Form 1040 2012 Your total cost in the plan includes everything that you paid. Form 1040 2012 It also includes amounts your employer contributed that were taxable to you when paid. Form 1040 2012 However, see Foreign employment contributions , later. Form 1040 2012   From this total cost, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free amounts you received by the later of the annuity starting date or the date on which you received your first payment. Form 1040 2012   The annuity starting date is the later of the first day of the first period for which you received a payment from the plan or the date on which the plan's obligations became fixed. Form 1040 2012    The amount of your contributions to the plan may be shown in box 9b of any Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Form 1040 2012 , that you receive. Form 1040 2012 Foreign employment contributions. Form 1040 2012   If you worked abroad, certain amounts your employer paid into your retirement plan that were not includible in your gross income may be considered part of your cost. Form 1040 2012 For details, see Foreign employment contributions in Publication 575. Form 1040 2012 Withholding. Form 1040 2012   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable part of amounts paid to you. Form 1040 2012 However, you can choose not to have tax withheld on the payments you receive, unless they are eligible rollover distributions. Form 1040 2012 (These are distributions that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA. Form 1040 2012 ) See Withholding Tax and Estimated Tax and Rollovers in Publication 575 for more information. Form 1040 2012   For payments other than eligible rollover distributions, you can tell the payer how much to withhold by filing a Form W-4P, Withholding Certificate for Pension or Annuity Payments. Form 1040 2012 Simplified Method. Form 1040 2012   Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Form 1040 2012 For an annuity that is payable over the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Form 1040 2012 For any other annuity, this number is the number of monthly annuity payments under the contract. Form 1040 2012 Who must use the Simplified Method. Form 1040 2012   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive your pension or annuity payments from a qualified plan or annuity, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments (defined next). Form 1040 2012   In addition, if your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use the Simplified Method for payments from a qualified plan, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments. Form 1040 2012 If you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. Form 1040 2012 Guaranteed payments. Form 1040 2012   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Form 1040 2012 If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Form 1040 2012 Who cannot use the Simplified Method. Form 1040 2012   You cannot use the Simplified Method and must use the General Rule if you receive pension or annuity payments from: A nonqualified plan, such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan, or A qualified plan if you are age 75 or older on your annuity starting date and you are entitled to at least 5 years of guaranteed payments (defined above). Form 1040 2012   In addition, you had to use the General Rule for either circumstance described above if your annuity starting date is after July 1, 1986, and before November 19, 1996. Form 1040 2012 If you did not have to use the General Rule, you could have chosen to use it. Form 1040 2012 You also had to use the General Rule for payments from a qualified plan if your annuity starting date is before July 2, 1986, and you did not qualify to use the Three-Year Rule. Form 1040 2012   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Form 1040 2012   Unless your annuity starting date was before 1987, once you have recovered all of your non-taxable investment, all of each remaining payment you receive is fully taxable. Form 1040 2012 Once your remaining payments are fully taxable, there is no longer a concern with the General Rule or Simplified Method. Form 1040 2012   Complete information on the General Rule, including the actuarial tables you need, is contained in Publication 939, General Rule for Pensions and Annuities. Form 1040 2012 How to use the Simplified Method. Form 1040 2012   Complete the Simplified Method Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions or in Publication 575 to figure your taxable annuity for 2013. Form 1040 2012 Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. Form 1040 2012   To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. Form 1040 2012 How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. Form 1040 2012 For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. Form 1040 2012    You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. Form 1040 2012 Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. Form 1040 2012 Single-life annuity. Form 1040 2012   If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Form 1040 2012 Enter on line 3 the number shown for your age on your annuity starting date. Form 1040 2012 This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Form 1040 2012 Multiple-lives annuity. Form 1040 2012   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Form 1040 2012 Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. Form 1040 2012 For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. Form 1040 2012 For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Form 1040 2012 Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. Form 1040 2012   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Form 1040 2012 Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Form 1040 2012 This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Form 1040 2012 Fixed-period annuities. Form 1040 2012   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. Form 1040 2012 Line 6. Form 1040 2012   The amount on line 6 should include all amounts that could have been recovered in prior years. Form 1040 2012 If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years. Form 1040 2012    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity in later years. Form 1040 2012 Example. Form 1040 2012 Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Form 1040 2012 Bill's annuity starting date is January 1, 2013. Form 1040 2012 The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. Form 1040 2012 Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Form 1040 2012 Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Form 1040 2012 Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Form 1040 2012 See the illustrated Worksheet 2-A, Simplified Method Worksheet, later. Form 1040 2012 You can find a blank version of this worksheet in Publication 575. Form 1040 2012 (The references in the illustrated worksheet are to sections in Publication 575). Form 1040 2012 His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages, 130 (65 + 65), and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet and finds the line 3 amount to be 310. Form 1040 2012 Bill's tax-free monthly amount is $100 ($31,000 ÷ 310 as shown on line 4 of the worksheet). Form 1040 2012 Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Form 1040 2012 The full amount of any annuity payments received after 310 payments are paid must generally be included in gross income. Form 1040 2012 If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Form 1040 2012 This deduction is not subject to the 2%-of-adjusted-gross-income limit. Form 1040 2012 Worksheet 2-A. Form 1040 2012 Simplified Method Worksheet—Illustrated 1. Form 1040 2012 Enter the total pension or annuity payments received this year. Form 1040 2012 Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Form 1040 2012 $ 14,400 2. Form 1040 2012 Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion* See Cost (Investment in the Contract), earlier 2. Form 1040 2012 31,000   Note. Form 1040 2012 If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Form 1040 2012 Otherwise, go to line 3. Form 1040 2012     3. Form 1040 2012 Enter the appropriate number from Table 1 below. Form 1040 2012 But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Form 1040 2012 310 4. Form 1040 2012 Divide line 2 by the number on line 3 4. Form 1040 2012 100 5. Form 1040 2012 Multiply line 4 by the number of months for which this year's payments were made. Form 1040 2012 If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Form 1040 2012 Otherwise, go to line 6 5. Form 1040 2012 1,200 6. Form 1040 2012 Enter any amount previously recovered tax free in years after 1986. Form 1040 2012 This is the amount shown on line 10 of your worksheet for last year 6. Form 1040 2012 0 7. Form 1040 2012 Subtract line 6 from line 2 7. Form 1040 2012 31,000 8. Form 1040 2012 Enter the smaller of line 5 or line 7 8. Form 1040 2012 1,200 9. Form 1040 2012 Taxable amount for year. Form 1040 2012 Subtract line 8 from line 1. Form 1040 2012 Enter the result, but not less than zero. Form 1040 2012 Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Form 1040 2012 Note. Form 1040 2012 If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Form 1040 2012 If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers, earlier, before entering an amount on your tax return. Form 1040 2012 9. Form 1040 2012 $ 13,200 10. Form 1040 2012 Was your annuity starting date before 1987? □ Yes. Form 1040 2012 STOP. Form 1040 2012 Do not complete the rest of this worksheet. Form 1040 2012  ☑ No. Form 1040 2012 Add lines 6 and 8. Form 1040 2012 This is the amount you have recovered tax free through 2013. Form 1040 2012 You will need this number if you need to fill out this worksheet next year. Form 1040 2012 10. Form 1040 2012 1,200 11. Form 1040 2012 Balance of cost to be recovered. Form 1040 2012 Subtract line 10 from line 2. Form 1040 2012 If zero, you will not have to complete this worksheet next year. Form 1040 2012 The payments you receive next year will generally be fully taxable 11. Form 1040 2012 $ 29,800 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Form 1040 2012   Table 1 for Line 3 Above       AND your annuity starting date was—   IF your age on your annuity starting date was . Form 1040 2012 . Form 1040 2012 . Form 1040 2012   BEFORE November 19, 1996, enter on line 3 . Form 1040 2012 . Form 1040 2012 . Form 1040 2012 AFTER November 18, 1996, enter on line 3 . Form 1040 2012 . Form 1040 2012 . Form 1040 2012   55 or under 300 360   56-60 260 310   61-65 240 260   66-70 170 210   71 or over 120 160 Table 2 for Line 3 Above   IF the annuitants' combined ages on your annuity starting date were . Form 1040 2012 . Form 1040 2012 . Form 1040 2012   THEN enter on line 3 . Form 1040 2012 . Form 1040 2012 . Form 1040 2012         110 or under   410         111-120   360         121-130   310         131-140   260         141 or over   210       Survivors of retirees. Form 1040 2012   Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income in the same way the retiree would have included them in gross income. Form 1040 2012   If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total received in your income. Form 1040 2012 The retiree's cost has already been recovered tax free. Form 1040 2012   If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage the retiree used to your initial payment called for in the contract. Form 1040 2012 The resulting tax-free amount will then remain fixed. Form 1040 2012 Any increases in the survivor annuity are fully taxable. Form 1040 2012   If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Form 1040 2012 See Simplified Method , earlier. Form 1040 2012 How to report. Form 1040 2012   If you file Form 1040, report your total annuity on line 16a, and the taxable part on line 16b. Form 1040 2012 If your pension or annuity is fully taxable, enter it on line 16b. Form 1040 2012 Do not make an entry on line 16a. Form 1040 2012   If you file Form 1040A, report your total annuity on line 12a, and the taxable part on line 12b. Form 1040 2012 If your pension or annuity is fully taxable, enter it on line 12b. Form 1040 2012 Do not make an entry on line 12a. Form 1040 2012   If you file Form 1040NR, report your total annuity on line 17a, and the taxable part on line 17b. Form 1040 2012 If your pension or annuity is fully taxable, enter it on line 17b. Form 1040 2012 Do not make an entry on line 17a. Form 1040 2012 Example. Form 1040 2012 You are a Form 1040 filer and you received monthly payments totaling $1,200 (12 months x $100) during 2013 from a pension plan that was completely financed by your employer. Form 1040 2012 You had paid no tax on the payments that your employer made to the plan, and the payments were not used to pay for accident, health, or long-term care insurance premiums (as discussed later under Insurance Premiums for Retired Public Safety Officers ). Form 1040 2012 The entire $1,200 is taxable. Form 1040 2012 You include $1,200 only on Form 1040, line 16b. Form 1040 2012 Joint return. Form 1040 2012   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on line 16a of Form 1040, line 12a of Form 1040A, or line 17a of Form 1040NR. Form 1040 2012 Report the total of the taxable parts on line 16b of Form 1040, line 12b of Form 1040A, or line 17b of Form 1040NR. Form 1040 2012 Form 1099-R. Form 1040 2012   You should receive a Form 1099-R for your pension or annuity. Form 1040 2012 Form 1099-R shows your pension or annuity for the year and any income tax withheld. Form 1040 2012 You should receive a Form W-2 if you receive distributions from certain nonqualified plans. Form 1040 2012 You must attach Forms 1099-R or Forms W-2 to your 2013 tax return if federal income tax was withheld. Form 1040 2012 Generally, you should be sent these forms by January 31, 2014. Form 1040 2012 Nonperiodic Distributions If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. Form 1040 2012 Nonperiodic distributions include cash withdrawals, distributions of current earnings (dividends) on your investment, and certain loans. Form 1040 2012 For information on how to figure the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Publication 575. Form 1040 2012 The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. Form 1040 2012 See Tax on Early Distributions, later. Form 1040 2012 Lump-sum distributions. Form 1040 2012   If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Form 1040 2012 The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Form 1040 2012 The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Form 1040 2012 You may be able to use the 10-year tax option to figure tax on the ordinary income part. Form 1040 2012 Form 1099-R. Form 1040 2012   If you receive a total distribution from a plan, you should receive a Form 1099-R. Form 1040 2012 If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain part of the distribution. Form 1040 2012 The amount in box 2a, Taxable amount, minus the amount in box 3, Capital gain, is the ordinary income part. Form 1040 2012 More information. Form 1040 2012   For more detailed information on lump-sum distributions, see Publication 575 or Form 4972, Tax on Lump-Sum Distributions. Form 1040 2012 Tax on Early Distributions Most distributions you receive from your qualified retirement plan and nonqualified annuity contracts before you reach age 59½ are subject to an additional tax of 10%. Form 1040 2012 The tax applies to the taxable part of the distribution. Form 1040 2012 For this purpose, a qualified retirement plan is: A qualified employee plan (including a qualified cash or deferred arrangement (CODA) under Internal Revenue Code section 401(k)), A qualified employee annuity plan, A tax-sheltered annuity plan (403(b) plan), or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Form 1040 2012  An IRA is also a qualified retirement plan for purposes of this tax. Form 1040 2012 General exceptions to tax. Form 1040 2012   The early distribution tax does not apply to any distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Form 1040 2012 Additional exceptions. Form 1040 2012   There are additional exceptions to the early distribution tax for certain distributions from qualified retirement plans and nonqualified annuity contracts. Form 1040 2012 See Publication 575 for details. Form 1040 2012 Reporting tax. Form 1040 2012   If you owe only the tax on early distributions and distribution code 1 (early distribution, no known exception) is correctly shown in Form 1099-R, box 7, multiply the taxable part of the early distribution by 10% (. Form 1040 2012 10) and enter the result on Form 1040, line 58, or Form 1040NR, line 56. Form 1040 2012 See the instructions for line 58 of Form 1040 or line 56 of Form 1040NR for more information about reporting the early distribution tax. Form 1040 2012 Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date. Form 1040 2012 Unless the rule for 5% owners applies, this is generally April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Form 1040 2012 However, your plan may require you to begin to receive payments by April 1 of the year that follows the year in which you reach 70½, even if you have not retired. Form 1040 2012 For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986). Form 1040 2012  An IRA is also a qualified retirement plan for purposes of this tax. Form 1040 2012 An excess accumulation is the undistributed remainder of the required minimum distribution that was left in your qualified retirement plan. Form 1040 2012 5% owners. Form 1040 2012   If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified retirement plan, you must begin to receive distributions from the plan by April 1 of the year after the calendar year in which you reach age 70½. Form 1040 2012 See Publication 575 for more information. Form 1040 2012 Amount of tax. Form 1040 2012   If you do not receive the required minimum distribution, you are subject to an additional tax. Form 1040 2012 The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. Form 1040 2012 You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall. Form 1040 2012 Form 5329. Form 1040 2012   You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan. Form 1040 2012 Additional information. Form 1040 2012   For more detailed information on the tax on excess accumulation, see Publication 575. Form 1040 2012 Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. Form 1040 2012 The premiums can be for coverage for you, your spouse, or dependent(s). Form 1040 2012 The distribution must be made directly from the plan to the insurance provider. Form 1040 2012 You can exclude from income the smaller of the amount of the insurance premiums or $3,000. Form 1040 2012 You can only make this election for amounts that would otherwise be included in your income. Form 1040 2012 The amount excluded from your income cannot be used to claim a medical expense deduction. Form 1040 2012 An eligible retirement plan is a governmental plan that is a: Qualified trust, Section 403(a) plan, Section 403(b) annuity, or Section 457(b) plan. Form 1040 2012 If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. Form 1040 2012 The taxable amount shown in box 2a of any Form 1099-R that you receive does not reflect the exclusion. Form 1040 2012 Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Form 1040 2012 Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Form 1040 2012 Enter “PSO” next to the appropriate line on which you report the taxable amount. Form 1040 2012 Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. Form 1040 2012 These categories are treated differently for income tax purposes. Form 1040 2012 Social security equivalent benefits. Form 1040 2012   The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. Form 1040 2012 This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated for tax purposes like social security benefits. Form 1040 2012 (See Social Security and Equivalent Railroad Retirement Benefits , later. Form 1040 2012 ) Non-social security equivalent benefits. Form 1040 2012   The second category contains the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB). Form 1040 2012 It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Form 1040 2012 This category of benefits is treated as an amount received from a qualified employee plan. Form 1040 2012 This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Form 1040 2012 Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. Form 1040 2012 More information. Form 1040 2012   For more information about railroad retirement benefits, see Publication 575. Form 1040 2012 Military Retirement Pay Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040, lines 16a and 16b; on Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b. Form 1040 2012 But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally are not taxable. Form 1040 2012 For more information, including information about veterans' benefits and insurance, see Publication 525. Form 1040 2012 Social Security and Equivalent Railroad Retirement Benefits This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. Form 1040 2012 Social security benefits include monthly retirement, survivor, and disability benefits. Form 1040 2012 They do not include supplemental security income (SSI) payments, which are not taxable. Form 1040 2012 Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. Form 1040 2012 They commonly are called the social security equivalent benefit (SSEB) portion of tier 1 benefits. Form 1040 2012 If you received these benefits during 2013, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form RRB-1042S if you are a nonresident alien), showing the amount of the benefits. Form 1040 2012 Are Any of Your Benefits Taxable? Note. Form 1040 2012 When the term “benefits” is used in this section, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits. Form 1040 2012  To find out whether any of your benefits may be taxable, compare the base amount for your filing status (explained later) with the total of: One-half of your benefits, plus All your other income, including tax-exempt interest. Form 1040 2012 When making this comparison, do not reduce your other income by any exclusions for: Interest from qualified U. Form 1040 2012 S. Form 1040 2012 savings bonds, Employer-provided adoption benefits, Foreign earned income or foreign housing, or Income earned in American Samoa or Puerto Rico by bona fide residents. Form 1040 2012 Figuring total income. Form 1040 2012   To figure the total of one-half of your benefits plus your other income, use Worksheet 2-B. Form 1040 2012 If that total amount is more than your base amount, part of your benefits may be taxable. Form 1040 2012 If you are married and file a joint return for 2013, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Form 1040 2012 Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable. Form 1040 2012 If the only income you received during 2013 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. Form 1040 2012 If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. Form 1040 2012 Worksheet 2-B. Form 1040 2012 A Quick Way To Check if Your Benefits May Be Taxable A. Form 1040 2012 Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Form 1040 2012 Include  the full amount of any lump-sum benefit payments received in 2013, for 2013 and  earlier years. Form 1040 2012 (If you received more than one form, combine the amounts from box 5  and enter the total. Form 1040 2012 ) A. Form 1040 2012     Note. Form 1040 2012 If the amount on line A is zero or less, stop here; none of your benefits are  taxable this year. Form 1040 2012     B. Form 1040 2012 Enter one-half of the amount on line A B. Form 1040 2012   C. Form 1040 2012 Enter your taxable pensions, wages, interest, dividends, and other taxable income C. Form 1040 2012   D. Form 1040 2012 Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income for: •Interest from qualified U. Form 1040 2012 S. Form 1040 2012 savings bonds, •Employer-provided adoption benefits, •Foreign earned income or foreign housing, or •Income earned in American Samoa or Puerto Rico by bona fide residents D. Form 1040 2012   E. Form 1040 2012 Add lines B, C, and D and enter the total E. Form 1040 2012   F. Form 1040 2012 If you are: •Married filing jointly, enter $32,000 •Single, head of household, qualifying widow(er), or married filing separately and you  lived apart from your spouse for all of 2013, enter $25,000 •Married filing separately and you lived with your spouse at any time during 2013,  enter -0- F. Form 1040 2012   G. Form 1040 2012 Is the amount on line F less than or equal to the amount on line E? □ No. Form 1040 2012 None of your benefits are taxable this year. Form 1040 2012  □ Yes. Form 1040 2012 Some of your benefits may be taxable. Form 1040 2012 To figure how much of your benefits  are taxable, see Which worksheet to use under How Much Is Taxable. Form 1040 2012     Base Amount Your base amount is: $25,000 if you are single, head of household, or qualifying widow(er) with dependent child, $25,000 if you are married filing separately and lived apart from your spouse for all of 2013, $32,000 if you are married filing jointly, or $0 if you are married filing separately and lived with your spouse at any time during 2013. Form 1040 2012 Repayment of Benefits Any repayment of benefits you made during 2013 must be subtracted from the gross benefits you received in 2013. Form 1040 2012 It does not matter whether the repayment was for a benefit you received in 2013 or in an earlier year. Form 1040 2012 If you repaid more than the gross benefits you received in 2013, see Repayments More Than Gross Benefits , later. Form 1040 2012 Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Form 1040 2012 Your repayments are shown in box 4. Form 1040 2012 The amount in box 5 shows your net benefits for 2013 (box 3 minus box 4). Form 1040 2012 Use the amount in box 5 to figure whether any of your benefits are taxable. Form 1040 2012 Tax Withholding and Estimated Tax You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad retirement benefits. Form 1040 2012 If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. Form 1040 2012 If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay estimated tax during the year. Form 1040 2012 For details, see Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES, Estimated Tax for Individuals. Form 1040 2012 How Much Is Taxable? If part of your benefits is taxable, how much is taxable depends on the total amount of your benefits and other income. Form 1040 2012 Generally, the higher that total amount, the greater the taxable part of your benefits. Form 1040 2012 Maximum taxable part. Form 1040 2012   The taxable part of your benefits usually cannot be more than 50%. Form 1040 2012 However, up to 85% of your benefits can be taxable if either of the following situations applies to you. Form 1040 2012 The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly). Form 1040 2012 You are married filing separately and lived with your spouse at any time during 2013. Form 1040 2012   If you are a nonresident alien, 85% of your benefits are taxable. Form 1040 2012 However, this income is exempt under some tax treaties. Form 1040 2012 Which worksheet to use. Form 1040 2012   A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. Form 1040 2012 However, you will need to use a different worksheet(s) if any of the following situations applies to you. Form 1040 2012 You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse were covered by a retirement plan at work. Form 1040 2012 In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits. Form 1040 2012 Situation (1) does not apply and you take one or more of the following exclusions. Form 1040 2012 Interest from qualified U. Form 1040 2012 S. Form 1040 2012 savings bonds (Form 8815). Form 1040 2012 Employer-provided adoption benefits (Form 8839). Form 1040 2012 Foreign earned income or housing (Form 2555 or Form 2555-EZ). Form 1040 2012 Income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. Form 1040 2012 In these situations, you must use Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure your taxable benefits. Form 1040 2012 You received a lump-sum payment for an earlier year. Form 1040 2012 In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. Form 1040 2012 See Lump-Sum Election , later. Form 1040 2012 How To Report Your Benefits If part of your benefits are taxable, you must use Form 1040, Form 1040A, or Form 1040NR. Form 1040 2012 You cannot use Form 1040EZ. Form 1040 2012 Reporting on Form 1040. Form 1040 2012   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. Form 1040 2012 If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 20a. Form 1040 2012 Reporting on Form 1040A. Form 1040 2012   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. Form 1040 2012 If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 14a. Form 1040 2012 Reporting on Form 1040NR. Form 1040 2012   Report 85% of the total amount of your benefits (box 5 of your Form SSA-1042S or Form RRB-1042S) in the appropriate column of Form 1040NR, Schedule NEC, line 8. Form 1040 2012 Benefits not taxable. Form 1040 2012   If you are filing Form 1040EZ, do not report any benefits on your tax return. Form 1040 2012 If you are filing Form 1040 or Form 1040A, report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on Form 1040, line 20a, or Form 1040A, line 14a. Form 1040 2012 Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. Form 1040 2012 If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on Form 1040, line 20a, or Form 1040A, line 14a. Form 1040 2012 Lump-Sum Election You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2013 in your 2013 income, even if the payment includes benefits for an earlier year. Form 1040 2012 This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. Form 1040 2012 No part of the lump-sum death benefit is subject to tax. Form 1040 2012 For more information about the lump-sum death benefit, visit the Social Security Administration website at www. Form 1040 2012 SSA. Form 1040 2012 gov, and use keyword: death benefit. Form 1040 2012 Generally, you use your 2013 income to figure the taxable part of the total benefits received in 2013. Form 1040 2012 However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. Form 1040 2012 You can elect this method if it lowers your taxable benefits. Form 1040 2012 See Publication 915 for more information. Form 1040 2012 Repayments More Than Gross Benefits In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. Form 1040 2012 If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. Form 1040 2012 If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year. Form 1040 2012 If you have any questions about this negative figure, contact your local Social Security Administration office or your local U. Form 1040 2012 S. Form 1040 2012 Railroad Retirement Board field office. Form 1040 2012 Joint return. Form 1040 2012   If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5 but your spouse's does not, subtract the box 5 amount on your form from the box 5 amount on your spouse's form. Form 1040 2012 You do this to get your net benefits when figuring if your combined benefits are taxable. Form 1040 2012 Repayment of benefits received in an earlier year. Form 1040 2012   If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier year. Form 1040 2012   If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. Form 1040 2012 Claim it on Schedule A (Form 1040), line 23. Form 1040 2012   If this deduction is more than $3,000, you have to follow some special instructions. Form 1040 2012 See Publication 915 for those instructions. Form 1040 2012 Sickness and Injury Benefits Generally, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. Form 1040 2012 If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. Form 1040 2012 However, certain payments may not be taxable to you. Form 1040 2012 Some of these payments are discussed later in this section. Form 1040 2012 Also, see Military and Government Disability Pensions and Other Sickness and Injury Benefits in Publication 525. Form 1040 2012 Cost paid by you. Form 1040 2012   If you pay the entire cost of an accident or health plan, do not include any amounts you receive from the plan for personal injury or sickness as income on your tax return. Form 1040 2012 If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. Form 1040 2012 Disability Pensions If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. Form 1040 2012 You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. Form 1040 2012 Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Form 1040 2012 If you were 65 or older by the end of 2013 or you were retired on permanent and total disability and received taxable disability income, you may be able to claim the credit for the elderly or the disabled. Form 1040 2012 See Credit for the Elderly or the Disabled, later. Form 1040 2012 For more information on this credit, see Publication 524, Credit for the Elderly or the Disabled. Form 1040 2012 Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Form 1040 2012 Report the payments on lines 16a and 16b of Form 1040, on lines 12a and 12b of Form 1040A, or on lines 17a and 17b of Form 1040NR. Form 1040 2012 For more information on pensions and annuities, see Publication 575. Form 1040 2012 Retirement and profit-sharing plans. Form 1040 2012   If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a disability pension. Form 1040 2012 The payments must be reported as a pension or annuity. Form 1040 2012 Accrued leave payment. Form 1040 2012   If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. Form 1040 2012 The payment is not a disability payment. Form 1040 2012 Include it in your income in the tax year you receive it. Form 1040 2012 Long-Term Care Insurance Contracts In most cases, long-term care insurance contracts generally are treated as accident and health insurance contracts. Form 1040 2012 Amounts you receive from them (other than policyholder dividends or premium refunds) generally are excludable from income as amounts received for personal injury or sickness. Form 1040 2012 However, the amount you can exclude may be limited. Form 1040 2012 Long-term care insurance contracts are discussed in more detail in Publication 525. Form 1040 2012 Workers' Compensation Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. Form 1040 2012 The exemption also applies to your survivors. Form 1040 2012 The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. Form 1040 2012 If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Form 1040 2012 For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. Form 1040 2012 Return to work. Form 1040 2012   If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. Form 1040 2012 Other Sickness and Injury Benefits In addition to disability pensions and annuities, you may receive other payments for sickness or injury. Form 1040 2012 Federal Employees' Compensation Act (FECA). Form 1040 2012   Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. Form 1040 2012 However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Form 1040 2012 Report this income on Form 1040, line 7; Form 1040A, line 7; on Form 1040EZ, line 1; or Form 1040NR, line 8. Form 1040 2012 Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages. Form 1040 2012    If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Form 1040 2012 For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. Form 1040 2012 Other compensation. Form 1040 2012   Many other amounts you receive as compensation for sickness or injury are not taxable. Form 1040 2012 These include the following amounts. Form 1040 2012 Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. Form 1040 2012 Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. Form 1040 2012 Compensation you receive for permanent loss or loss of use of a part or function of your body, for your permanent disfigurement, or for such loss or disfigurement suffered by your spouse or dependent(s). Form 1040 2012 This compensation must be based only on the injury and not on the period of your absence from work. Form 1040 2012 These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. Form 1040 2012 Life Insurance Proceeds Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. Form 1040 2012 This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. Form 1040 2012 Proceeds not received in installments. Form 1040 2012   If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. Form 1040 2012 If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death. Form 1040 2012 Proceeds received in installments. Form 1040 2012   If you receive life insurance proceeds in installments, you can exclude part of each installment from your income. Form 1040 2012   To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Form 1040 2012 Include anything over this excluded part in your income as interest. Form 1040 2012 Installments for life. Form 1040 2012   If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. Form 1040 2012 If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee. Form 1040 2012 Surviving spouse. Form 1040 2012   If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude, in any year, up to $1,000 of the interest included in the installments. Form 1040 2012 If you remarry, you can continue to take the exclusion. Form 1040 2012 Surrender of policy for cash. Form 1040 2012   If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Form 1040 2012 In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income. Form 1040 2012 You should receive a Form 1099-R showing the total proceeds and the taxable part. Form 1040 2012 Report these amounts on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or Form 1040NR, lines 17a and 17b. Form 1040 2012 Endowment Contract Proceeds An endowment contract is a policy that pays over to you a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Form 1040 2012 Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. Form 1040 2012 To determine your cost, subtract from the total premiums (or other consideration) paid for the contract any amount that you previously received under the contract and excluded from your income. Form 1040 2012 Include in your income the part of the lump-sum payment that is more than your cost. Form 1040 2012 Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity. Form 1040 2012 The tax treatment of an annuity is explained in Publication 575. Form 1040 2012 For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. Form 1040 2012 This election must be made within 60 days after the lump-sum payment first becomes payable to you. Form 1040 2012 Accelerated Death Benefits Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are generally excluded from income if the insured is terminally or chronically ill. Form 1040 2012 However, see Exception , later. Form 1040 2012 For a chronically ill individual, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Form 1040 2012 Accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit. Form 1040 2012 In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill individual is sold or assigned to a viatical settlement provider, the amount received also is excluded from income. Form 1040 2012 Generally, a viatical settlement provider is one who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill. Form 1040 2012 To report taxable accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. Form 1040 2012 Terminally or chronically ill defined. Form 1040 2012   A terminally ill person is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months from the date of the certification. Form 1040 2012 A chronically ill person is one who is not terminally ill but has been certified (within the previous 12 months) by a licensed health care practitioner as meeting either of the following conditions. Form 1040 2012 The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of 90 days or more because of a loss of functional capacity. Form 1040 2012 The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment. Form 1040 2012 Exception. Form 1040 2012   The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable interest in the life of the insured because the insured: Is a director, officer, or employee of the other person, or Has a financial interest in the business of the other person. Form 1040 2012 Sale of Home You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your main home. Form 1040 2012 Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return. Form 1040 2012 You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Form 1040 2012 Main home. Form 1040 2012   Usually, your main home is the home you live in most of the time and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Form 1040 2012 Repaying the first-time homebuyer credit because you sold your home. Form 1040 2012   If you claimed a first-time homebuyer credit for your main home and you sell it, you may have to repay the credit. Form 1040 2012 For a home purchased in 2008 and used as your main home until sold in 2013, you must file Form 5405 and repay the balance of the unpaid credit on your 2013 tax return. Form 1040 2012   For a home purchased after 2008, you generally must repay the entire credit if the home was sold (or otherwise ceased to be your main home) within 36 months of the purchase date. Form 1040 2012 If you purchased your home in 2009 and used it as your main home until sold in 2013, you do not have to repay the credit or file Form 5405. Form 1040 2012 If you purchased your home in 2010 and used it as your main home until sold in 2013, you may have to file Form 5405 and repay the entire credit on your 2013 tax return. Form 1040 2012   See the Instructions for Form 5405 for more information about repaying the credit and exceptions to repayment that may apply to you. Form 1040 2012 Maximum Amount of Exclusion You can generally exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Form 1040 2012 You meet the ownership test. Form 1040 2012 You meet the use test. Form 1040 2012 During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Form 1040 2012 You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Form 1040 2012 Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Form 1040 2012 This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Form 1040 2012 Exception to ownership and use tests. Form 1040 2012   If you owned and lived in the property as your main home for less than 2 years, you still can claim an exclusion in some cases. Form 1040 2012 Generally, you must have sold the home due to a change in place of employment, health, or unforeseen circumstances. Form 1040 2012 The maximum amount you can exclude will be reduced. Form 1040 2012 See Publication 523, Selling Your Home, for more information. Form 1040 2012 Exception to use test for individuals with a disability. Form 1040 2012   There is an exception to the use test if, during the 5-year period before the sale of your home: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year. Form 1040 2012 Under this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition. Form 1040 2012   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Form 1040 2012 Exception to ownership test for property acquired in a like-kind exchange. Form 1040 2012   You must have owned your main home for at least 5 years to qualify for the exclusion if you acquired your main home in a like-kind exchange. Form 1040 2012 This special 5-year ownership rule continues to apply to a home you acquired in a like-kind exchange and gave to another person. Form 1040 2012 A like-kind exchange is an exchange of property held for productive use in a trade or business or for investment. Form 1040 2012 See Publication 523 for more information. Form 1040 2012 Period of nonqualified use. Form 1040 2012   Generally, the gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gain is allocated to periods of nonqualified use. Form 1040 2012 Nonqualified use is any period after December 31, 2008, during which the property is not used as the main home. Form 1040 2012 See Publication 523 for more information. Form 1040 2012 Married Persons In the special situations discussed below, if you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use test, you can exclude up to $250,000 of gain. Form 1040 2012 However, see Special rules for joint returns , next. Form 1040 2012 Special rules for joint returns. Form 1040 2012   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Form 1040 2012 You are married and file a joint return for the year. Form 1040 2012 Either you or your spouse meets the ownership test. Form 1040 2012 Both you and your spouse meet the use test. Form 1040 2012 During the 2-year period ending on the date of the sale, neither you nor your spouse exclude gain from the sale of another home. Form 1040 2012 Sale of home by surviving spouse. Form 1040 2012   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Form 1040 2012   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home in 2013. Form 1040 2012 The sale or exchange took place no more than 2 years after the date of death of your spouse. Form 1040 2012 You have not remarried. Form 1040 2012 You and your spouse met the use test at the time of your spouse's death. Form 1040 2012 You or your spouse met the ownership test at the time of your spouse's death. Form 1040 2012 Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Form 1040 2012 Home transferred from spouse. Form 1040 2012   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Form 1040 2012 Use of home after divorce. Form 1040 2012   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Form 1040 2012 Business Use or Rental of Home You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. Form 1040 2012 However, you must meet the ownership and use tests. Form 1040 2012 See Publication 523 for more information. Form 1040 2012 Depreciation after May 6, 1997. Form 1040 2012   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Form 1040 2012 See Publication 523 for more information. Form 1040 2012 Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and you do not qualify to exclude all of it, You have a gain and you choose not to exclude it, or You received Form 1099-S. Form 1040 2012 If you have a gain that you cannot or choose not to exclude, if you received a Form 1099-S, or if you have a deductible loss, report the sale on your tax return. Form 1040 2012 Report the sale on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home. Form 1040 2012 If you used your home for business or to produce rental income, you may have to use Form 4797, Sales of Business Property, to report the sale of the business or rental part. Form 1040 2012 See Publication 523 for more information. Form 1040 2012 Reverse Mortgages A revers
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The Form 1040 2012

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