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Free Federal And State E File

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Free Federal And State E File

Free federal and state e file 34. Free federal and state e file   Child Tax Credit Table of Contents Introduction Useful Items - You may want to see: Qualifying Child Amount of CreditLimits on the Credit Claiming the Credit Additional Child Tax Credit Completing Schedule 8812 (Form 1040A or 1040)Part I Parts II–IV Introduction The child tax credit is a credit that may reduce your tax by as much as $1,000 for each of your qualifying children. Free federal and state e file The additional child tax credit is a credit you may be able to take if you are not able to claim the full amount of the child tax credit. Free federal and state e file This chapter explains the following. Free federal and state e file Who is a qualifying child. Free federal and state e file The amount of the credit. Free federal and state e file How to claim the credit. Free federal and state e file The child tax credit and the additional child tax credit should not be confused with the child and dependent care credit discussed in chapter 32. Free federal and state e file If you have no tax. Free federal and state e file   Credits, such as the child tax credit or the credit for child and dependent care expenses, are used to reduce tax. Free federal and state e file If your tax on Form 1040, line 46, or Form 1040A, line 28, is zero, do not figure the child tax credit because there is no tax to reduce. Free federal and state e file However, you may qualify for the additional child tax credit on line 65 (Form 1040) or line 39 (Form 1040A). Free federal and state e file Useful Items - You may want to see: Publication 972 Child Tax Credit Form (and Instructions) Schedule 8812 (Form 1040A or 1040) Child Tax Credit W-4 Employee's Withholding Allowance Certificate Qualifying Child A qualifying child for purposes of the child tax credit is a child who: Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild, niece, or nephew), Was under age 17 at the end of 2013, Did not provide over half of his or her own support for 2013, Lived with you for more than half of 2013 (see Exceptions to time lived with you , later), Is claimed as a dependent on your return, Does not file a joint return for the year (or files it only as a claim for refund), and Was a U. Free federal and state e file S. Free federal and state e file citizen, a U. Free federal and state e file S. Free federal and state e file national, or a resident of the United States. Free federal and state e file If the child was adopted, see Adopted child , later. Free federal and state e file For each qualifying child you must check the box on Form 1040 or Form 1040A, line 6c. Free federal and state e file Example 1. Free federal and state e file Your son turned 17 on December 30, 2013. Free federal and state e file He is a citizen of the United States and you claimed him as a dependent on your return. Free federal and state e file He is not a qualifying child for the child tax credit because he was not under age 17 at the end of 2013. Free federal and state e file Example 2. Free federal and state e file Your daughter turned 8 years old in 2013. Free federal and state e file She is not a citizen of the United States, has an ITIN, and lived in Mexico all of 2013. Free federal and state e file She is not a qualifying child for the child tax credit because she was not a resident of the United States for 2013. Free federal and state e file Filers who have certain child dependents with an Individual Taxpayer Identification Number (ITIN). Free federal and state e file   If you are claiming a child tax credit or additional child tax credit for a child you identified on your tax return with an ITIN instead of an SSN, you must complete Part I of Schedule 8812 (Form 1040A or 1040). Free federal and state e file   Although a child may be your dependent, you may only claim a child tax credit or additional child tax credit for a dependent who is a citizen, national, or resident of the United States. Free federal and state e file To be treated as a resident of the United States, a child generally will need to meet the requirements of the substantial presence test. Free federal and state e file For more information about the substantial presence test, see Publication 519, U. Free federal and state e file S. Free federal and state e file Tax Guide for Aliens. Free federal and state e file Adopted child. Free federal and state e file   An adopted child is always treated as your own child. Free federal and state e file An adopted child includes a child lawfully placed with you for legal adoption. Free federal and state e file   If you are a U. Free federal and state e file S. Free federal and state e file citizen or U. Free federal and state e file S. Free federal and state e file national and your adopted child lived with you all year as a member of your household in 2013, that child meets condition (7) above to be a qualifying child for the child tax credit. Free federal and state e file Exceptions to time lived with you. Free federal and state e file   A child is considered to have lived with you for more than half of 2013 if the child was born or died in 2013 and your home was this child's home for more than half the time he or she was alive. Free federal and state e file Temporary absences by you or the child for special circumstances, such as for school, vacation, business, medical care, military service, or detention in a juvenile facility, count as time the child lived with you. Free federal and state e file   There are also exceptions for kidnapped children and children of divorced or separated parents. Free federal and state e file For details, see Residency Test in chapter 3. Free federal and state e file Qualifying child of more than one person. Free federal and state e file   A special rule applies if your qualifying child is the qualifying child of more than one person. Free federal and state e file For details, see Special Rule for Qualifying Child of More Than One Person in chapter 3. Free federal and state e file Amount of Credit The maximum amount you can claim for the credit is $1,000 for each qualifying child. Free federal and state e file Limits on the Credit You must reduce your child tax credit if either (1) or (2) applies. Free federal and state e file The amount on Form 1040, line 46, or Form 1040A, line 28, is less than the credit. Free federal and state e file If this amount is zero, you cannot take this credit because there is no tax to reduce. Free federal and state e file But you may be able to take the additional child tax credit. Free federal and state e file See Additional Child Tax Credit , later. Free federal and state e file Your modified adjusted gross income (AGI) is more than the amount shown below for your filing status. Free federal and state e file Married filing jointly - $110,000. Free federal and state e file Single, head of household, or qualifying widow(er) - $75,000. Free federal and state e file Married filing separately - $55,000. Free federal and state e file Modified AGI. Free federal and state e file   For purposes of the child tax credit, your modified AGI is your AGI plus the following amounts that may apply to you. Free federal and state e file Any amount excluded from income because of the exclusion of income from  Puerto Rico. Free federal and state e file On the dotted line next to Form 1040, line 38, enter the amount excluded and identify it as “EPRI. Free federal and state e file ” Also attach a copy of any Form(s) 499R-2/W-2PR to your return. Free federal and state e file Any amount on line 45 or line 50 of Form 2555, Foreign Earned Income. Free federal and state e file Any amount on line 18 of Form 2555-EZ, Foreign Earned Income Exclusion. Free federal and state e file Any amount on line 15 of Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa. Free federal and state e file   If you do not have any of the above, your modified AGI is the same as your AGI. Free federal and state e file AGI. Free federal and state e file   Your AGI is the amount on Form 1040, line 38, or Form 1040A, line 22. Free federal and state e file Claiming the Credit To claim the child tax credit, you must file Form 1040 or Form 1040A. Free federal and state e file You cannot claim the child tax credit on Form 1040EZ. Free federal and state e file You must provide the name and identification number (usually a social security number) on your tax return for each qualifying child. Free federal and state e file If you claim the child tax credit with a child identified by an ITIN, you must also file Schedule 8812. Free federal and state e file To figure your credit, first review the Child Tax Credit Worksheet in your Form 1040 or 1040A instructions. Free federal and state e file If you are instructed to use Publication 972, you may not use the worksheet in your tax return instructions; instead, you must use Publication 972 to figure the credit. Free federal and state e file If you are not instructed to use Publication 972, you may use the Child Tax Credit Worksheet in your Form 1040 or 1040A instructions or Publication 972 to figure the credit. Free federal and state e file Additional Child Tax Credit This credit is for certain individuals who get less than the full amount of the child tax credit. Free federal and state e file The additional child tax credit may give you a refund even if you do not owe any tax. Free federal and state e file How to claim the additional child tax credit. Free federal and state e file   To claim the additional child tax credit, follow the steps below. Free federal and state e file Make sure you figured the amount, if any, of your child tax credit. Free federal and state e file See Claiming the Credit , earlier. Free federal and state e file If you answered “Yes” on line 9 or line 10 of the Child Tax Credit Worksheet in the Form 1040 or Form 1040A instructions, or line 13 of the Child Tax Credit Worksheet in Publication 972, use Parts II through IV of Schedule 8812 to see if you can take the additional child tax credit. Free federal and state e file If you have an additional child tax credit on line 13 of Schedule 8812, carry it to Form 1040, line 65, or Form 1040A, line 39. Free federal and state e file Completing Schedule 8812 (Form 1040A or 1040) Schedule 8812 contains four parts, but can really be thought of as two sections. Free federal and state e file Part I is distinct and separate from Parts II–IV. Free federal and state e file If all your children are identified by social security numbers or IRS adoption taxpayer identification numbers and you are not claiming the additional child tax credit, you do not need to complete or attach Schedule 8812 to your tax return. Free federal and state e file Part I You only need to complete Part I if you are claiming the child tax credit for a child identified by an IRS individual taxpayer identification number (ITIN). Free federal and state e file When completing Part I, only answer the questions with regard to children identified by an ITIN; you do not need to complete Part I of Schedule 8812 for any child that is identified by a social security number (SSN) or an IRS adoption taxpayer identification number (ATIN). Free federal and state e file If all the children for whom you checked the box in column 4 of line 6c on your Form 1040 or Form 1040A are identified by an SSN or an ATIN, you do not need to complete Part I of Schedule 8812. Free federal and state e file Parts II–IV Parts II–IV help you figure your additional child tax credit. Free federal and state e file Generally, you should only complete Parts II–IV if you are instructed to do so after completing the Child Tax Credit Worksheet in your tax return instructions or Publication 972. Free federal and state e file See How to claim the additional child tax credit , earlier. Free federal and state e file Prev  Up  Next   Home   More Online Publications
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The Free Federal And State E File

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