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H And R Free Tax

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H And R Free Tax

H and r free tax 28. H and r free tax   Miscellaneous Deductions Table of Contents What's New Introduction Useful Items - You may want to see: Deductions Subject to the 2% LimitUnreimbursed Employee Expenses (Line 21) Tax Preparation Fees (Line 22) Other Expenses (Line 23) Deductions Not Subject to the 2% LimitList of Deductions Nondeductible ExpensesList of Nondeductible Expenses What's New Standard mileage rate. H and r free tax  The 2013 rate for business use of a vehicle is 56½ cents per mile. H and r free tax Introduction This chapter explains which expenses you can claim as miscellaneous itemized deductions on Schedule A (Form 1040). H and r free tax You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. H and r free tax This chapter covers the following topics. H and r free tax Deductions subject to the 2% limit. H and r free tax Deductions not subject to the 2% limit. H and r free tax Expenses you cannot deduct. H and r free tax You must keep records to verify your deductions. H and r free tax You should keep receipts, canceled checks, substitute checks, financial account statements, and other documentary evidence. H and r free tax For more information on recordkeeping, get Publication 552, Record- keeping for Individuals. H and r free tax Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) 946 How To Depreciate Property Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses Deductions Subject to the 2% Limit You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040). H and r free tax You can claim the amount of expenses that is more than 2% of your adjusted gross income. H and r free tax You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. H and r free tax Your adjusted gross income is the amount on Form 1040, line 38. H and r free tax Generally, you apply the 2% limit after you apply any other deduction limit. H and r free tax For example, you apply the 50% (or 80%) limit on business-related meals and entertainment (discussed in chapter 26) before you apply the 2% limit. H and r free tax Deductions subject to the 2% limit are discussed in the three categories in which you report them on Schedule A (Form 1040). H and r free tax Unreimbursed employee expenses (line 21). H and r free tax Tax preparation fees (line 22). H and r free tax Other expenses (line 23). H and r free tax Unreimbursed Employee Expenses (Line 21) Generally, you can deduct on Schedule A (Form 1040), line 21, unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. H and r free tax An expense is ordinary if it is common and accepted in your trade, business, or profession. H and r free tax An expense is necessary if it is appropriate and helpful to your business. H and r free tax An expense does not have to be required to be considered necessary. H and r free tax Examples of unreimbursed employee expenses are listed next. H and r free tax The list is followed by discussions of additional unreimbursed employee expenses. H and r free tax Business bad debt of an employee. H and r free tax Education that is work related. H and r free tax (See chapter 27. H and r free tax ) Legal fees related to your job. H and r free tax Licenses and regulatory fees. H and r free tax Malpractice insurance premiums. H and r free tax Medical examinations required by an employer. H and r free tax Occupational taxes. H and r free tax Passport for a business trip. H and r free tax Subscriptions to professional journals and trade magazines related to your work. H and r free tax Travel, transportation, entertainment, and gifts related to your work. H and r free tax (See chapter 26. H and r free tax ) Business Liability Insurance You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job. H and r free tax Damages for Breach of Employment Contract If you break an employment contract, you can deduct damages you pay your former employer that are attributable to the pay you received from that employer. H and r free tax Depreciation on Computers You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is: For the convenience of your employer, and Required as a condition of your employment. H and r free tax For more information about the rules and exceptions to the rules affecting the allowable deductions for a home computer, see Publication 529. H and r free tax Dues to Chambers of Commerce and Professional Societies You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. H and r free tax Similar organizations include: Boards of trade, Business leagues, Civic or public service organizations, Real estate boards, and Trade associations. H and r free tax Lobbying and political activities. H and r free tax   You may not be able to deduct that part of your dues that is for certain lobbying and political activities. H and r free tax See Dues used for lobbying under Nondeductible Expenses, later. H and r free tax Educator Expenses If you were an eligible educator in 2013, you can deduct up to $250 of qualified expenses you paid in 2013 as an adjustment to gross income on Form 1040, line 23, rather than as a miscellaneous itemized deduction. H and r free tax If you file Form 1040A, you can deduct these expenses on line 16. H and r free tax If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. H and r free tax However, neither spouse can deduct more than $250 of his or her qualified expenses. H and r free tax Home Office If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. H and r free tax You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: As your principal place of business for any trade or business, As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or In the case of a separate structure not attached to your home, in connection with your trade or business. H and r free tax The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. H and r free tax See Publication 587 for more detailed information and a worksheet. H and r free tax Job Search Expenses You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. H and r free tax You cannot deduct these expenses if: You are looking for a job in a new occupation, There was a substantial break between the ending of your last job and your looking for a new one, or You are looking for a job for the first time. H and r free tax Employment and outplacement agency fees. H and r free tax   You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation. H and r free tax Employer pays you back. H and r free tax   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. H and r free tax (See Recoveries in chapter 12. H and r free tax ) Employer pays the employment agency. H and r free tax   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. H and r free tax Résumé. H and r free tax   You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation. H and r free tax Travel and transportation expenses. H and r free tax   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. H and r free tax You can deduct the travel expenses if the trip is primarily to look for a new job. H and r free tax The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. H and r free tax   Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area. H and r free tax   You can choose to use the standard mileage rate to figure your car expenses. H and r free tax The 2013 rate for business use of a vehicle is 56½ cents per mile. H and r free tax See chapter 26 for more information. H and r free tax Licenses and Regulatory Fees You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. H and r free tax Occupational Taxes You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. H and r free tax If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return. H and r free tax Repayment of Income Aid Payment An “income aid payment” is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. H and r free tax If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment. H and r free tax Research Expenses of a College Professor If you are a college professor, you can deduct research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to your teaching duties. H and r free tax You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. H and r free tax However, you cannot deduct the cost of travel as a form of education. H and r free tax Tools Used in Your Work Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. H and r free tax You can depreciate the cost of tools that have a useful life substantially beyond the tax year. H and r free tax For more information about depreciation, see Publication 946. H and r free tax Union Dues and Expenses You can deduct dues and initiation fees you pay for union membership. H and r free tax You can also deduct assessments for benefit payments to unemployed union members. H and r free tax However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. H and r free tax Also, you cannot deduct contributions to a pension fund, even if the union requires you to make the contributions. H and r free tax You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. H and r free tax See Lobbying Expenses under Nondeductible Expenses, later. H and r free tax Work Clothes and Uniforms You can deduct the cost and upkeep of work clothes if the following two requirements are met. H and r free tax You must wear them as a condition of your employment. H and r free tax The clothes are not suitable for everyday wear. H and r free tax It is not enough that you wear distinctive clothing. H and r free tax The clothing must be specifically required by your employer. H and r free tax Nor is it enough that you do not, in fact, wear your work clothes away from work. H and r free tax The clothing must not be suitable for taking the place of your regular clothing. H and r free tax Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc. H and r free tax ). H and r free tax Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear. H and r free tax However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. H and r free tax Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible. H and r free tax Protective clothing. H and r free tax   You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves. H and r free tax   Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers. H and r free tax Military uniforms. H and r free tax   You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. H and r free tax However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. H and r free tax In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses. H and r free tax   If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive. H and r free tax   You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school. H and r free tax Tax Preparation Fees (Line 22) You can usually deduct tax preparation fees in the year you pay them. H and r free tax Thus, on your 2013 return, you can deduct fees paid in 2013 for preparing your 2012 return. H and r free tax These fees include the cost of tax preparation software programs and tax publications. H and r free tax They also include any fee you paid for electronic filing of your return. H and r free tax Other Expenses (Line 23) You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2% limit. H and r free tax On Schedule A (Form 1040), line 23, you can deduct expenses that you pay: To produce or collect income that must be included in your gross income, To manage, conserve, or maintain property held for producing such income, or To determine, contest, pay, or claim a refund of any tax. H and r free tax You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonably and closely related to these purposes. H and r free tax Some of these other expenses are explained in the following discussions. H and r free tax If the expenses you pay produce income that is only partially taxable, see Tax-Exempt Income Expenses , later, under Nondeductible Expenses. H and r free tax Appraisal Fees You can deduct appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property. H and r free tax Casualty and Theft Losses You can deduct a casualty or theft loss as a miscellaneous itemized deduction subject to the 2% limit if you used the damaged or stolen property in performing services as an employee. H and r free tax First report the loss in Section B of Form 4684, Casualties and Thefts. H and r free tax You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. H and r free tax To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. H and r free tax For other casualty and theft losses, see chapter 25. H and r free tax Clerical Help and Office Rent You can deduct office expenses, such as rent and clerical help, that you have in connection with your investments and collecting the taxable income on them. H and r free tax Credit or Debit Card Convenience Fees You can deduct the convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. H and r free tax The fees are deductible in the year paid. H and r free tax Depreciation on Home Computer You can deduct depreciation on your home computer if you use it to produce income (for example, to manage your investments that produce taxable income). H and r free tax You generally must depreciate the computer using the straight line method over the Alternative Depreciation System (ADS) recovery period. H and r free tax But if you work as an employee and also use the computer in that work, see Publication 946. H and r free tax Excess Deductions of an Estate If an estate's total deductions in its last tax year are more than its gross income for that year, the beneficiaries succeeding to the estate's property can deduct the excess. H and r free tax Do not include deductions for the estate's personal exemption and charitable contributions when figuring the estate's total deductions. H and r free tax The beneficiaries can claim the deduction only for the tax year in which, or with which, the estate terminates, whether the year of termination is a normal year or a short tax year. H and r free tax For more information, see Termination of Estate in Publication 559, Survivors, Executors, and Administrators. H and r free tax Fees to Collect Interest and Dividends You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect your taxable bond interest or dividends on shares of stock. H and r free tax But you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or bonds. H and r free tax You must add the fee to the cost of the property. H and r free tax You cannot deduct the fee you pay to a broker to sell securities. H and r free tax You can use the fee only to figure gain or loss from the sale. H and r free tax See the Instructions for Form 8949 for information on how to report the fee. H and r free tax Hobby Expenses You can generally deduct hobby expenses, but only up to the amount of hobby income. H and r free tax A hobby is not a business because it is not carried on to make a profit. H and r free tax See Activity not for profit in chapter 12 under Other Income. H and r free tax Indirect Deductions of Pass-Through Entities Pass-through entities include partnerships, S corporations, and mutual funds that are not publicly offered. H and r free tax Deductions of pass-through entities are passed through to the partners or shareholders. H and r free tax The partners or shareholders can deduct their share of passed-through deductions for investment expenses as miscellaneous itemized deductions subject to the 2% limit. H and r free tax Example. H and r free tax You are a member of an investment club that is formed solely to invest in securities. H and r free tax The club is treated as a partnership. H and r free tax The partnership's income is solely from taxable dividends, interest, and gains from sales of securities. H and r free tax In this case, you can deduct your share of the partnership's operating expenses as miscellaneous itemized deductions subject to the 2% limit. H and r free tax However, if the investment club partnership has investments that also produce nontaxable income, you cannot deduct your share of the partnership's expenses that produce the nontaxable income. H and r free tax Publicly offered mutual funds. H and r free tax   Publicly offered mutual funds do not pass deductions for investment expenses through to shareholders. H and r free tax A mutual fund is “publicly offered” if it is: Continuously offered pursuant to a public offering, Regularly traded on an established securities market, or Held by or for at least 500 persons at all times during the tax year. H and r free tax   A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing the net amount of dividend income (gross dividends minus investment expenses). H and r free tax This net figure is the amount you report on your return as income. H and r free tax You cannot further deduct investment expenses related to publicly offered mutual funds because they are already included as part of the net income amount. H and r free tax Information returns. H and r free tax   You should receive information returns from pass-through entities. H and r free tax Partnerships and S corporations. H and r free tax   These entities issue Schedule K-1, which lists the items and amounts you must report and identifies the tax return schedules and lines to use. H and r free tax Nonpublicly offered mutual funds. H and r free tax   These funds will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing your share of gross income and investment expenses. H and r free tax You can claim the expenses only as a miscellaneous itemized deduction subject to the 2% limit. H and r free tax Investment Fees and Expenses You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income. H and r free tax Legal Expenses You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax. H and r free tax You can also deduct legal expenses that are: Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, For tax advice related to a divorce, if the bill specifies how much is for tax advice and it is determined in a reasonable way, or To collect taxable alimony. H and r free tax You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F), on the appropriate schedule. H and r free tax You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040). H and r free tax See Tax Preparation Fees , earlier. H and r free tax Loss on Deposits For information on whether, and if so, how, you may deduct a loss on your deposit in a qualified financial institution, see Loss on Deposits in chapter 25. H and r free tax Repayments of Income If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. H and r free tax If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. H and r free tax If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later. H and r free tax Repayments of Social Security Benefits For information on how to deduct your repayments of certain social security benefits, see Repayments More Than Gross Benefits in chapter 11. H and r free tax Safe Deposit Box Rent You can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds, or investment-related papers and documents. H and r free tax You cannot deduct the rent if you use the box only for jewelry, other personal items, or tax-exempt securities. H and r free tax Service Charges on Dividend Reinvestment Plans You can deduct service charges you pay as a subscriber in a dividend reinvestment plan. H and r free tax These service charges include payments for: Holding shares acquired through a plan, Collecting and reinvesting cash dividends, and Keeping individual records and providing detailed statements of accounts. H and r free tax Trustee's Administrative Fees for IRA Trustee's administrative fees that are billed separately and paid by you in connection with your individual retirement arrangement (IRA) are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit. H and r free tax For more information about IRAs, see chapter 17. H and r free tax Deductions Not Subject to the 2% Limit You can deduct the items listed below as miscellaneous itemized deductions. H and r free tax They are not subject to the 2% limit. H and r free tax Report these items on Schedule A (Form 1040), line 28. H and r free tax List of Deductions Each of the following items is discussed in detail after the list (except where indicated). H and r free tax Amortizable premium on taxable bonds. H and r free tax Casualty and theft losses from income- producing property. H and r free tax Federal estate tax on income in respect of a decedent. H and r free tax Gambling losses up to the amount of gambling winnings. H and r free tax Impairment-related work expenses of persons with disabilities. H and r free tax Loss from other activities from Schedule K-1 (Form 1065-B), box 2. H and r free tax Losses from Ponzi-type investment schemes. H and r free tax See Losses from Ponzi-type investment schemes under Theft in chapter 25. H and r free tax Repayments of more than $3,000 under a claim of right. H and r free tax Unrecovered investment in an annuity. H and r free tax Amortizable Premium on Taxable Bonds In general, if the amount you pay for a bond is greater than its stated principal amount, the excess is bond premium. H and r free tax You can elect to amortize the premium on taxable bonds. H and r free tax The amortization of the premium is generally an offset to interest income on the bond rather than a separate deduction item. H and r free tax Part of the premium on some bonds may be a miscellaneous deduction not subject to the 2% limit. H and r free tax For more information, see Amortizable Premium on Taxable Bonds in Publication 529, and Bond Premium Amortization in chapter 3 of Publication 550, Investment Income and Expenses. H and r free tax Casualty and Theft Losses of Income-Producing Property You can deduct a casualty or theft loss as a miscellaneous itemized deduction not subject to the 2% limit if the damaged or stolen property was income-producing property (property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art). H and r free tax First, report the loss in Form 4684, Section B. H and r free tax You may also have to include the loss on Form 4797, Sales of Business Property if you are otherwise required to file that form. H and r free tax To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. H and r free tax For more information on casualty and theft losses, see chapter 25. H and r free tax Federal Estate Tax on Income in Respect of a Decedent You can deduct the federal estate tax attributable to income in respect of a decedent that you as a beneficiary include in your gross income. H and r free tax Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. H and r free tax See Publication 559 for more information. H and r free tax Gambling Losses Up to the Amount of Gambling Winnings You must report the full amount of your gambling winnings for the year on Form 1040, line 21. H and r free tax You deduct your gambling losses for the year on Schedule A (Form 1040), line 28. H and r free tax You cannot deduct gambling losses that are more than your winnings. H and r free tax You cannot reduce your gambling winnings by your gambling losses and report the difference. H and r free tax You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. H and r free tax Therefore, your records should show your winnings separately from your losses. H and r free tax Diary of winnings and losses. H and r free tax You must keep an accurate diary or similar record of your losses and winnings. H and r free tax Your diary should contain at least the following information. H and r free tax The date and type of your specific wager or wagering activity. H and r free tax The name and address or location of the gambling establishment. H and r free tax The names of other persons present with you at the gambling establishment. H and r free tax The amount(s) you won or lost. H and r free tax See Publication 529 for more information. H and r free tax Impairment-Related Work Expenses If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. H and r free tax Impairment-related work expenses are ordinary and necessary business expenses for attendant care services at your place of work and for other expenses in connection with your place of work that are necessary for you to be able to work. H and r free tax Self-employed. H and r free tax   If you are self-employed, enter your impairment-related work expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses. H and r free tax Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2 If the amount reported in Schedule K-1 (Form 1065-B), box 2, is a loss, report it on Schedule A (Form 1040), line 28. H and r free tax It is not subject to the passive activity limitations. H and r free tax Repayments Under Claim of Right If you had to repay more than $3,000 that you included in your income in an earlier year because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount you repaid or take a credit against your tax. H and r free tax See Repayments in chapter 12 for more information. H and r free tax Unrecovered Investment in Annuity A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. H and r free tax If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return. H and r free tax See chapter 10 for more information about the tax treatment of pensions and annuities. H and r free tax Nondeductible Expenses Examples of nondeductible expenses are listed next. H and r free tax The list is followed by discussions of additional nondeductible expenses. H and r free tax List of Nondeductible Expenses Broker's commissions that you paid in connection with your IRA or other investment property. H and r free tax Burial or funeral expenses, including the cost of a cemetery lot. H and r free tax Capital expenses. H and r free tax Fees and licenses, such as car licenses, marriage licenses, and dog tags. H and r free tax Hobby losses, but see Hobby Expenses , earlier. H and r free tax Home repairs, insurance, and rent. H and r free tax Illegal bribes and kickbacks. H and r free tax See Bribes and kickbacks in chapter 11 of Publication 535. H and r free tax Losses from the sale of your home, furniture, personal car, etc. H and r free tax Personal disability insurance premiums. H and r free tax Personal, living, or family expenses. H and r free tax The value of wages never received or lost vacation time. H and r free tax Adoption Expenses You cannot deduct the expenses of adopting a child, but you may be able to take a credit for those expenses. H and r free tax See chapter 37. H and r free tax Campaign Expenses You cannot deduct campaign expenses of a candidate for any office, even if the candidate is running for reelection to the office. H and r free tax These include qualification and registration fees for primary elections. H and r free tax Legal fees. H and r free tax   You cannot deduct legal fees paid to defend charges that arise from participation in a political campaign. H and r free tax Check-Writing Fees on Personal Account If you have a personal checking account, you cannot deduct fees charged by the bank for the privilege of writing checks, even if the account pays interest. H and r free tax Club Dues Generally, you cannot deduct the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. H and r free tax This includes business, social, athletic, luncheon, sporting, airline, hotel, golf, and country clubs. H and r free tax You cannot deduct dues paid to an organization if one of its main purposes is to: Conduct entertainment activities for members or their guests, or Provide members or their guests with access to entertainment facilities. H and r free tax Dues paid to airline, hotel, and luncheon clubs are not deductible. H and r free tax Commuting Expenses You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work). H and r free tax If you haul tools, instruments, or other items, in your car to and from work, you can deduct only the additional cost of hauling the items such as the rent on a trailer to carry the items. H and r free tax Fines or Penalties You cannot deduct fines or penalties you pay to a governmental unit for violating a law. H and r free tax This includes an amount paid in settlement of your actual or potential liability for a fine or penalty (civil or criminal). H and r free tax Fines or penalties include parking tickets, tax penalties, and penalties deducted from teachers' paychecks after an illegal strike. H and r free tax Health Spa Expenses You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer. H and r free tax Home Security System You cannot deduct the cost of a home security system as a miscellaneous deduction. H and r free tax However, you may be able to claim a deduction for a home security system as a business expense if you have a home office. H and r free tax See Home Office under Unreimbursed Employee Expenses, earlier, and Security System under Deducting Expenses in Publication 587. H and r free tax Investment-Related Seminars You cannot deduct any expenses for attending a convention, seminar, or similar meeting for investment purposes. H and r free tax Life Insurance Premiums You cannot deduct premiums you pay on your life insurance. H and r free tax You may be able to deduct, as alimony, premiums you pay on life insurance policies assigned to your former spouse. H and r free tax See chapter 18 for information on alimony. H and r free tax Lobbying Expenses You generally cannot deduct amounts paid or incurred for lobbying expenses. H and r free tax These include expenses to: Influence legislation, Participate or intervene in any political campaign for, or against, any candidate for public office, Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referendums, or Communicate directly with covered executive branch officials in any attempt to influence the official actions or positions of those officials. H and r free tax Lobbying expenses also include any amounts paid or incurred for research, preparation, planning, or coordination of any of these activities. H and r free tax Dues used for lobbying. H and r free tax   If a tax-exempt organization notifies you that part of the dues or other amounts you pay to the organization are used to pay nondeductible lobbying expenses, you cannot deduct that part. H and r free tax See Lobbying Expenses in Publication 529 for information on exceptions. H and r free tax Lost or Mislaid Cash or Property You cannot deduct a loss based on the mere disappearance of money or property. H and r free tax However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. H and r free tax See chapter 25. H and r free tax Example. H and r free tax A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. H and r free tax The diamond falls from the ring and is never found. H and r free tax The loss of the diamond is a casualty. H and r free tax Lunches with Co-workers You cannot deduct the expenses of lunches with co-workers, except while traveling away from home on business. H and r free tax See chapter 26 for information on deductible expenses while traveling away from home. H and r free tax Meals While Working Late You cannot deduct the cost of meals while working late. H and r free tax However, you may be able to claim a deduction if the cost of meals is a deductible entertainment expense, or if you are traveling away from home. H and r free tax See chapter 26 for information on deductible entertainment expenses and expenses while traveling away from home. H and r free tax Personal Legal Expenses You cannot deduct personal legal expenses such as those for the following. H and r free tax Custody of children. H and r free tax Breach of promise to marry suit. H and r free tax Civil or criminal charges resulting from a personal relationship. H and r free tax Damages for personal injury, except for certain unlawful discrimination and whistleblower claims. H and r free tax Preparation of a title (or defense or perfection of a title). H and r free tax Preparation of a will. H and r free tax Property claims or property settlement in a divorce. H and r free tax You cannot deduct these expenses even if a result of the legal proceeding is the loss of income-producing property. H and r free tax Political Contributions You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. H and r free tax Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible. H and r free tax Professional Accreditation Fees You cannot deduct professional accreditation fees such as the following. H and r free tax Accounting certificate fees paid for the initial right to practice accounting. H and r free tax Bar exam fees and incidental expenses in securing initial admission to the bar. H and r free tax Medical and dental license fees paid to get initial licensing. H and r free tax Professional Reputation You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation. H and r free tax Relief Fund Contributions You cannot deduct contributions paid to a private plan that pays benefits to any covered employee who cannot work because of any injury or illness not related to the job. H and r free tax Residential Telephone Service You cannot deduct any charge (including taxes) for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business. H and r free tax Stockholders' Meetings You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you own stock but have no other interest. H and r free tax You cannot deduct these expenses even if you are attending the meeting to get information that would be useful in making further investments. H and r free tax Tax-Exempt Income Expenses You cannot deduct expenses to produce tax-exempt income. H and r free tax You cannot deduct interest on a debt incurred or continued to buy or carry  tax-exempt securities. H and r free tax If you have expenses to produce both taxable and tax-exempt income, but you cannot identify the expenses that produce each type of income, you must divide the expenses based on the amount of each type of income to determine the amount that you can deduct. H and r free tax Example. H and r free tax During the year, you received taxable interest of $4,800 and tax-exempt interest of $1,200. H and r free tax In earning this income, you had total expenses of $500 during the year. H and r free tax You cannot identify the amount of each expense item that is for each income item. H and r free tax Therefore, 80% ($4,800/$6,000) of the expense is for the taxable interest and 20% ($1,200/$6,000) is for the tax-exempt interest. H and r free tax You can deduct, subject to the 2% limit, expenses of $400 (80% of $500). H and r free tax Travel Expenses for Another Individual You generally cannot deduct travel expenses you pay or incur for a spouse, dependent, or other individual who accompanies you (or your employee) on business or personal travel unless the spouse, dependent, or other individual is an employee of the taxpayer, the travel is for a bona fide business purpose, and such expenses would otherwise be deductible by the spouse, dependent, or other individual. H and r free tax See chapter 26 for more information on deductible travel expenses. H and r free tax Voluntary Unemployment Benefit Fund Contributions You cannot deduct voluntary unemployment benefit fund contributions you make to a union fund or a private fund. H and r free tax However, you can deduct contributions as taxes if state law requires you to make them to a state unemployment fund that covers you for the loss of wages from unemployment caused by business conditions. H and r free tax Wristwatches You cannot deduct the cost of a wristwatch, even if there is a job requirement that you know the correct time to properly perform your duties. H and r free tax Prev  Up  Next   Home   More Online Publications
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The H And R Free Tax

H and r free tax 3. H and r free tax   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. H and r free tax 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. H and r free tax Its treatment as ordinary or capital is determined under rules for section 1231 transactions. H and r free tax 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. H and r free tax Any remaining gain is a section 1231 gain. H and r free tax 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. H and r free tax Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). H and r free tax Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. H and r free tax 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). H and r free tax Do not take that gain into account as section 1231 gain. H and r free tax Section 1231 transactions. H and r free tax   The following transactions result in gain or loss subject to section 1231 treatment. H and r free tax Sales or exchanges of real property or depreciable personal property. H and r free tax This property must be used in a trade or business and held longer than 1 year. H and r free tax Generally, property held for the production of rents or royalties is considered to be used in a trade or business. H and r free tax Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). H and r free tax Sales or exchanges of leaseholds. H and r free tax The leasehold must be used in a trade or business and held longer than 1 year. H and r free tax Sales or exchanges of cattle and horses. H and r free tax The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. H and r free tax Sales or exchanges of other livestock. H and r free tax This livestock does not include poultry. H and r free tax It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. H and r free tax Sales or exchanges of unharvested crops. H and r free tax 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. H and r free tax 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). H and r free tax Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. H and r free tax Cutting of timber or disposal of timber, coal, or iron ore. H and r free tax The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. H and r free tax Condemnations. H and r free tax The condemned property must have been held longer than 1 year. H and r free tax 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. H and r free tax It cannot be property held for personal use. H and r free tax Casualties and thefts. H and r free tax 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). H and r free tax You must have held the property longer than 1 year. H and r free tax 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. H and r free tax For more information on casualties and thefts, see Publication 547. H and r free tax Property for sale to customers. H and r free tax   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. H and r free tax 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. H and r free tax Example. H and r free tax You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. H and r free tax Customers make deposits on the reels, which you refund if the reels are returned within a year. H and r free tax If they are not returned, you keep each deposit as the agreed-upon sales price. H and r free tax Most reels are returned within the 1-year period. H and r free tax You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. H and r free tax Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. H and r free tax Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. H and r free tax Copyrights. H and r free tax    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). H and r free tax The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. H and r free tax Treatment as ordinary or capital. H and r free tax   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. H and r free tax If you have a net section 1231 loss, it is ordinary loss. H and r free tax 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. H and r free tax The rest, if any, is long-term capital gain. H and r free tax Nonrecaptured section 1231 losses. H and r free tax   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. H and r free tax 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. H and r free tax These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. H and r free tax Example. H and r free tax In 2013, Ben has a $2,000 net section 1231 gain. H and r free tax 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. H and r free tax From 2008 through 2012 he had the following section 1231 gains and losses. H and r free tax 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. H and r free tax 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. H and r free tax 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. H and r free tax This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. H and r free tax On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. H and r free tax Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. H and r free tax Whether the adjusted basis was figured using depreciation or amortization another person claimed. H and r free tax Corporate distributions. H and r free tax   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. H and r free tax General asset accounts. H and r free tax   Different rules apply to dispositions of property you depreciated using a general asset account. H and r free tax For information on these rules, see Publication 946. H and r free tax 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. H and r free tax See Gain Treated as Ordinary Income, later. H and r free tax Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. H and r free tax See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. H and r free tax Section 1245 property defined. H and r free tax   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. H and r free tax Personal property (either tangible or intangible). H and r free tax Other tangible property (except buildings and their structural components) used as any of the following. H and r free tax See Buildings and structural components below. H and r free tax An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. H and r free tax A research facility in any of the activities in (a). H and r free tax A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). H and r free tax That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. H and r free tax Amortization of certified pollution control facilities. H and r free tax The section 179 expense deduction. H and r free tax Deduction for clean-fuel vehicles and certain refueling property. H and r free tax Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. H and r free tax Deduction for certain qualified refinery property. H and r free tax Deduction for qualified energy efficient commercial building property. H and r free tax Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. H and r free tax (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). H and r free tax ) 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). H and r free tax Expenditures to remove architectural and transportation barriers to the handicapped and elderly. H and r free tax Deduction for qualified tertiary injectant expenses. H and r free tax Certain reforestation expenditures. H and r free tax Deduction for election to expense qualified advanced mine safety equipment property. H and r free tax Single purpose agricultural (livestock) or horticultural structures. H and r free tax Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. H and r free tax Any railroad grading or tunnel bore. H and r free tax Buildings and structural components. H and r free tax   Section 1245 property does not include buildings and structural components. H and r free tax The term building includes a house, barn, warehouse, or garage. H and r free tax The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. H and r free tax   Do not treat a structure that is essentially machinery or equipment as a building or structural component. H and r free tax 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. H and r free tax   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. H and r free tax 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. H and r free tax Facility for bulk storage of fungible commodities. H and r free tax   This term includes oil or gas storage tanks and grain storage bins. H and r free tax Bulk storage means the storage of a commodity in a large mass before it is used. H and r free tax For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. H and r free tax To be fungible, a commodity must be such that one part may be used in place of another. H and r free tax   Stored materials that vary in composition, size, and weight are not fungible. H and r free tax 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. H and r free tax For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. H and r free tax 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. H and r free tax The depreciation and amortization allowed or allowable on the property. H and r free tax The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). H and r free tax A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. H and r free tax 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. H and r free tax See Gifts and Transfers at Death, later. H and r free tax Use Part III of Form 4797 to figure the ordinary income part of the gain. H and r free tax Depreciation taken on other property or taken by other taxpayers. H and r free tax   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. H and r free tax Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. H and r free tax 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). H and r free tax Depreciation and amortization. H and r free tax   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. H and r free tax Ordinary depreciation deductions. H and r free tax Any special depreciation allowance you claimed. H and r free tax Amortization deductions for all the following costs. H and r free tax Acquiring a lease. H and r free tax Lessee improvements. H and r free tax Certified pollution control facilities. H and r free tax Certain reforestation expenses. H and r free tax Section 197 intangibles. H and r free tax Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. H and r free tax Franchises, trademarks, and trade names acquired before August 11, 1993. H and r free tax The section 179 deduction. H and r free tax Deductions for all the following costs. H and r free tax Removing barriers to the disabled and the elderly. H and r free tax Tertiary injectant expenses. H and r free tax Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). H and r free tax Environmental cleanup costs. H and r free tax Certain reforestation expenses. H and r free tax Qualified disaster expenses. H and r free tax Any basis reduction for the investment credit (minus any basis increase for credit recapture). H and r free tax Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). H and r free tax Example. H and r free tax You file your returns on a calendar year basis. H and r free tax 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. H and r free tax You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. H and r free tax You did not take the section 179 deduction. H and r free tax You sold the truck in May 2013 for $7,000. H and r free tax The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). H and r free tax Figure the gain treated as ordinary income as follows. H and r free tax 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. H and r free tax   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. H and r free tax   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. H and r free tax Depreciation allowed or allowable. H and r free tax   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. H and r free tax 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. H and r free tax 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. H and r free tax   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. H and r free tax Multiple asset accounts. H and r free tax   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. H and r free tax Example. H and r free tax In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. H and r free tax All of the depreciation was recorded in a single depreciation account. H and r free tax After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. H and r free tax You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. H and r free tax 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. H and r free tax Normal retirement. H and r free tax   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. H and r free tax 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. H and r free tax To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. H and r free tax Section 1250 property defined. H and r free tax   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. H and r free tax It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. H and r free tax A fee simple interest in land is not included because it is not depreciable. H and r free tax   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. H and r free tax 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. H and r free tax For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. H and r free tax For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. H and r free tax If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. H and r free tax You will not have additional depreciation if any of the following conditions apply to the property disposed of. H and r free tax 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. H and r free tax 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. H and r free tax The property was residential low-income rental property you held for 162/3 years or longer. H and r free tax 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. H and r free tax 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. H and r free tax 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. H and r free tax These properties are depreciated using the straight line method. H and r free tax In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. H and r free tax Depreciation taken by other taxpayers or on other property. H and r free tax   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). H and r free tax Example. H and r free tax Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. H and r free tax 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. H and r free tax 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. H and r free tax At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). H and r free tax Depreciation allowed or allowable. H and r free tax   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. H and r free tax 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. H and r free tax Retired or demolished property. H and r free tax   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. H and r free tax Example. H and r free tax A wing of your building is totally destroyed by fire. H and r free tax 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. H and r free tax Figuring straight line depreciation. H and r free tax   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. H and r free tax 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. H and r free tax   Salvage value and useful life are not used for the ACRS method of depreciation. H and r free tax Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. H and r free tax   The straight line method is applied without any basis reduction for the investment credit. H and r free tax Property held by lessee. H and r free tax   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. H and r free tax 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. H and r free tax The same rule applies to the cost of acquiring a lease. H and r free tax   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. H and r free tax 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. H and r free tax 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. H and r free tax The percentages for these types of real property are as follows. H and r free tax Nonresidential real property. H and r free tax   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. H and r free tax For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. H and r free tax Residential rental property. H and r free tax   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%. H and r free tax The percentage for periods before 1976 is zero. H and r free tax Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. H and r free tax Low-income housing. H and r free tax    Low-income housing includes all the following types of residential rental property. H and r free tax 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. H and r free tax Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. H and r free tax 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. H and r free tax Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. H and r free tax   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. H and r free tax 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. H and r free tax Foreclosure. H and r free tax   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. H and r free tax Example. H and r free tax On June 1, 2001, you acquired low-income housing property. H and r free tax 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. H and r free tax The property qualifies for a reduced applicable percentage because it was held more than 100 full months. H and r free tax 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. H and r free tax Therefore, 70% of the additional depreciation is treated as ordinary income. H and r free tax Holding period. H and r free tax   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. H and r free tax For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. H and r free tax If you sold it on January 2, 2013, the holding period is exactly 192 full months. H and r free tax The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. H and r free tax Holding period for constructed, reconstructed, or erected property. H and r free tax   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. H and r free tax Property acquired by gift or received in a tax-free transfer. H and r free tax   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. H and r free tax   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. H and r free tax See Low-Income Housing With Two or More Elements, next. H and r free tax 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. H and r free tax The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. H and r free tax The following are the types of separate elements. H and r free tax A separate improvement (defined below). H and r free tax The basic section 1250 property plus improvements not qualifying as separate improvements. H and r free tax The units placed in service at different times before all the section 1250 property is finished. H and r free tax 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. H and r free tax As a result, the apartment house consists of three separate elements. H and r free tax The 36-month test for separate improvements. H and r free tax   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. H and r free tax 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. H and r free tax 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). H and r free tax $5,000. H and r free tax The 1-year test. H and r free tax   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. H and r free tax The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. H and r free tax 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. H and r free tax Example. H and r free tax The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. H and r free tax During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. H and r free tax 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. H and r free tax However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. H and r free tax Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. H and r free tax Addition to the capital account. H and r free tax   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. H and r free tax   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. H and r free tax 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. H and r free tax The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. H and r free tax 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. H and r free tax   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. H and r free tax 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. H and r free tax Unadjusted basis. H and r free tax   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. H and r free tax However, the cost of components retired before that date is not included in the unadjusted basis. H and r free tax Holding period. H and r free tax   Use the following guidelines for figuring the applicable percentage for property with two or more elements. H and r free tax 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. H and r free tax 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. H and r free tax The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. H and r free tax   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. H and r free tax Use the first day of a calendar month that is closest to the middle of the tax year. H and r free tax If there are two first days of a month that are equally close to the middle of the year, use the earlier date. H and r free tax Figuring ordinary income attributable to each separate element. H and r free tax   Figure ordinary income attributable to each separate element as follows. H and r free tax   Step 1. H and r free tax 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. H and r free tax   Step 2. H and r free tax 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). H and r free tax   Step 3. H and r free tax Multiply the result in Step 2 by the applicable percentage for the element. H and r free tax Example. H and r free tax You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. H and r free tax The property consisted of four elements (W, X, Y, and Z). H and r free tax Step 1. H and r free tax The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. H and r free tax The sum of the additional depreciation for all the elements is $24,000. H and r free tax Step 2. H and r free tax The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. H and r free tax Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). H and r free tax $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. H and r free tax Step 3. H and r free tax The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. H and r free tax From these facts, the sum of the ordinary income for each element is figured as follows. H and r free tax   Step 1 Step 2 Step 3 Ordinary Income W . H and r free tax 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . H and r free tax 25 5,000 92% 4,600 Z . H and r free tax 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. H and r free tax In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. H and r free tax In any other disposition of the property, figure the fair market value that is more than the adjusted basis. H and r free tax Figure the additional depreciation for the periods after 1975. H and r free tax Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. H and r free tax Stop here if this is residential rental property or if (2) is equal to or more than (1). H and r free tax This is the gain treated as ordinary income because of additional depreciation. H and r free tax Subtract (2) from (1). H and r free tax Figure the additional depreciation for periods after 1969 but before 1976. H and r free tax Add the lesser of (4) or (5) to the result in (3). H and r free tax This is the gain treated as ordinary income because of additional depreciation. H and r free tax A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. H and r free tax Use Form 4797, Part III, to figure the ordinary income part of the gain. H and r free tax Corporations. H and r free tax   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. H and r free tax 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. H and r free tax Report this additional ordinary income on Form 4797, Part III, line 26 (f). H and r free tax 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. H and r free tax This applies even if no payments are received in that year. H and r free tax If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. H and r free tax For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. H and r free tax 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. H and r free tax To do this, allocate the selling price and the payments you receive in the year of sale to each asset. H and r free tax Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. H and r free tax For a detailed discussion of installment sales, see Publication 537. H and r free tax Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. H and r free tax 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. H and r free tax For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. H and r free tax See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. H and r free tax Part gift and part sale or exchange. H and r free tax   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. H and r free tax 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. H and r free tax However, see Bargain sale to charity, later. H and r free tax Example. H and r free tax You transferred depreciable personal property to your son for $20,000. H and r free tax When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. H and r free tax You took depreciation of $30,000. H and r free tax 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. H and r free tax 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. H and r free tax 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. H and r free tax Gift to charitable organization. H and r free tax   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. H and r free tax Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. H and r free tax   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. H and r free tax For more information, see Giving Property That Has Increased in Value in Publication 526. H and r free tax Bargain sale to charity. H and r free tax   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. H and r free tax First, figure the ordinary income as if you had sold the property at its fair market value. H and r free tax 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. H and r free tax See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. H and r free tax Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. H and r free tax Example. H and r free tax You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. H and r free tax Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. H and r free tax If you had sold the property at its fair market value, your ordinary income would have been $5,000. H and r free tax Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). H and r free tax 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. H and r free tax For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. H and r free tax 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. H and r free tax 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. H and r free tax Example 1. H and r free tax Janet Smith owned depreciable property that, upon her death, was inherited by her son. H and r free tax 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. H and r free tax 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. H and r free tax Example 2. H and r free tax The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. H and r free tax 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. H and r free tax Ordinary income from depreciation must be reported by the trust on the transfer. H and r free tax 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. H and r free tax For information on like-kind exchanges and involuntary conversions, see chapter 1. H and r free tax Depreciable personal property. H and r free tax   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. H and r free tax The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. H and r free tax The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. H and r free tax Example 1. H and r free tax You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. H and r free tax The old machine cost you $5,000 two years ago. H and r free tax You took depreciation deductions of $3,950. H and r free tax 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. H and r free tax Example 2. H and r free tax You bought office machinery for $1,500 two years ago and deducted $780 depreciation. H and r free tax 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). H and r free tax You choose to postpone reporting gain, but replacement machinery cost you only $1,000. H and r free tax Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. H and r free tax All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. H and r free tax Example 3. H and r free tax A fire destroyed office machinery you bought for $116,000. H and r free tax The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. H and r free tax You received a $117,000 insurance payment, realizing a gain of $92,640. H and r free tax 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. H and r free tax $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. H and r free tax 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. H and r free tax The amount you must report as ordinary income on the transaction is $12,000, figured as follows. H and r free tax 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. H and r free tax Depreciable real property. H and r free tax   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. H and r free tax 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. H and r free tax 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. H and r free tax   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. H and r free tax Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. H and r free tax Example. H and r free tax The state paid you $116,000 when it condemned your depreciable real property for public use. H and r free tax 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). H and r free tax You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. H and r free tax You choose to postpone reporting the gain. H and r free tax 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. H and r free tax The ordinary income to be reported is $6,000, which is the greater of the following amounts. H and r free tax 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. H and r free tax 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. H and r free tax   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. H and r free tax Basis of property acquired. H and r free tax   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. H and r free tax   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). H and r free tax However, if you acquired both depreciable real property and other property, allocate the total basis as follows. H and r free tax 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. H and r free tax Add the fair market value (or cost) of the other property acquired to the result in (1). H and r free tax Divide the result in (1) by the result in (2). H and r free tax Multiply the total basis by the result in (3). H and r free tax This is the basis of the depreciable real property acquired. H and r free tax 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). H and r free tax Subtract the result in (4) from the total basis. H and r free tax This is the basis of the other property acquired. H and r free tax 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). H and r free tax Example 1. H and r free tax 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. H and r free tax The property's adjusted basis was $38,400, with additional depreciation of $14,932. H and r free tax On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. H and r free tax Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). H and r free tax You chose to postpone reporting the gain under the involuntary conversion rules. H and r free tax 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. H and r free tax The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. H and r free tax The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. H and r free tax 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. H and r free tax Example 2. H and r free tax John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. H and r free tax He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. H and r free tax He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. H and r free tax 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. H and r free tax The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. H and r free tax The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. H and r free tax The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. H and r free tax The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. H and r free tax 4. H and r free tax The basis of the depreciable real property is $12,000. H and r free tax This is the $30,000 total basis multiplied by the 0. H and r free tax 4 figured in (3). H and r free tax The basis of the other property (land) is $18,000. H and r free tax This is the $30,000 total basis minus the $12,000 figured in (4). H and r free tax 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. H and r free tax 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. H and r free tax Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. H and r free tax See chapter 2. H and r free tax 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. H and r free tax In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. H and r free tax These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. H and r free tax The comparison should take into account all the following facts and circumstances. H and r free tax The original cost and reproduction cost of construction, erection, or production. H and r free tax The remaining economic useful life. H and r free tax The state of obsolescence. H and r free tax The anticipated expenditures required to maintain, renovate, or modernize the properties. H and r free tax Like-kind exchanges and involuntary conversions. H and r free tax   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. H and r free tax 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. H and r free tax 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. H and r free tax   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. H and r free tax 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. H and r free tax 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. H and r free tax Example. H and r free tax A fire destroyed your property with a total fair market value of $50,000. H and r free tax It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. H and r free tax 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. H and r free tax The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. H and r free tax You choose to postpone reporting your gain from the involuntary conversion. H and r free tax You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. H and r free tax 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. H and r free tax The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. H and r free tax The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. H and r free tax Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. H and r free tax 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. H and r free tax 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. H and r free tax Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. H and r free tax 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. H and r free tax Prev  Up  Next   Home   More Online Publications