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Free File State Tax

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Free File State Tax

Free file state tax Index A Adjusted basis: Adoption tax benefits, Adoption Tax Benefits Assessment for local improvements, Assessments for Local Improvements Canceled debt, Canceled Debt Excluded From Income Casualty and theft losses, Casualties and Thefts Credit for qualified electric vehicles, Vehicle Credits Decreases to, Decreases to Basis Depreciation, Depreciation Easements, Easements Employer-provided child care, Employer-Provided Child Care Example, Adjustments to Basis Example Gain from sale of home, Postponed Gain From Sale of Home Gas-guzzler tax, Gas-Guzzler Tax Increases to, Increases to Basis Section 179 deduction, Section 179 Deduction Subsidies for energy conservation, Exclusion of Subsidies for Energy Conservation Measures Adoption tax benefits, Adoption Tax Benefits Allocating basis, Allocating the Basis Assistance (see Tax help) Assumption of mortgage, Assumption of mortgage. Free file state tax B Business acquired, Trade or Business Acquired Business assets, Business Assets Businesses exchanged, Exchange of business property. Free file state tax C Canceled debt, Canceled Debt Excluded From Income Casualty and theft losses, Casualties and Thefts Change to business use, Property Changed to Business or Rental Use Community property, Community Property Constructing assets, Constructing assets. Free file state tax Copyrights, Copyrights. Free file state tax Cost basis: Allocating basis, Allocating the Basis Assumption of mortgage, Assumption of mortgage. Free file state tax Capitalized costs, Activities subject to the rules. Free file state tax , Deducting vs. Free file state tax Capitalizing Costs Loans, low or no interest, Loans with low or no interest. Free file state tax Real estate taxes, Real estate taxes. Free file state tax Real property, Real Property Settlement costs (fees), Settlement costs. Free file state tax D Decreases to basis, Decreases to Basis Demolition of building, Demolition of building. Free file state tax Depreciation, Depreciation E Easements, Easements Employer-provided child care, Employer-Provided Child Care Exchanges: Involuntary, Involuntary Conversions Like-kind, Like-Kind Exchanges Nontaxable, Nontaxable Exchanges Partial business use of property, Partial Business Use of Property Taxable, Taxable Exchanges F Fair market value, Fair market value (FMV). Free file state tax Franchises, Franchises, trademarks, and trade names. Free file state tax Free tax services, How To Get Tax Help G Gain from sale of home, Postponed Gain From Sale of Home Gifts, property received, Property Received as a Gift Group of assets acquired, Group of Assets Acquired H Help (see Tax help) I Inherited property, Inherited Property Intangible assets, Intangible Assets Involuntary exchanges, Involuntary Conversions L Land and buildings, Land and Buildings Loans, low or no interest, Loans with low or no interest. Free file state tax M More information (see Tax help) N Nontaxable exchanges: Like-kind, Like-Kind Exchanges Partial, Partially Nontaxable Exchange P Partially nontaxable exchanges, Partially Nontaxable Exchange Patents, Patents. Free file state tax Points, Points. Free file state tax Property changed to business use, Property Changed to Business or Rental Use Property received as a gift, Property Received as a Gift Property received for services: Bargain purchases, Bargain Purchases Fair market value, Property Received for Services Restricted property, Restricted Property Property transferred from a spouse, Property Transferred From a Spouse Publications (see Tax help) R Real estate taxes, Real estate taxes. Free file state tax Real property, Real Property S Settlement costs (fees), Settlement costs. Free file state tax Special-use valuation, Special-use valuation. Free file state tax Spouse, property transferred from, Property Transferred From a Spouse Stocks and bonds, Stocks and Bonds Subdivided lots, Subdivided lots. Free file state tax T Tax help, How To Get Tax Help Taxable exchanges, Taxable Exchanges Taxpayer Advocate, Contacting your Taxpayer Advocate. Free file state tax Trade or business acquired, Trade or Business Acquired Trademarks and trade  names, Franchises, trademarks, and trade names. Free file state tax Trading property (see Exchanges), Taxable Exchanges TTY/TDD information, How To Get Tax Help U Uniform capitalization rules: Activities subject to the rules, Activities subject to the rules. Free file state tax Exceptions, Exceptions. Free file state tax Prev  Up     Home   More Online Publications
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The Free File State Tax

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