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H&r Block Free 1040ez

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H&r Block Free 1040ez

H&r block free 1040ez 8. H&r block free 1040ez   Distributions and Rollovers Table of Contents DistributionsMinimum Required Distributions No Special 10-Year Tax Option Transfer of Interest in 403(b) ContractAfter-tax contributions. H&r block free 1040ez Permissive service credit. H&r block free 1040ez Tax-Free RolloversHardship exception to rollover rules. H&r block free 1040ez Eligible retirement plans. H&r block free 1040ez Nonqualifying distributions. H&r block free 1040ez Second rollover. H&r block free 1040ez Gift Tax Distributions Permissible distributions. H&r block free 1040ez   Generally, a distribution cannot be made from a 403(b) account until the employee: Reaches age 59½, Has a severance from employment, Dies, Becomes disabled, In the case of elective deferrals, encounters financial hardship, or Has a qualified reservist distribution. H&r block free 1040ez In most cases, the payments you receive or that are made available to you under your 403(b) account are taxable in full as ordinary income. H&r block free 1040ez In general, the same tax rules apply to distributions from 403(b) plans that apply to distributions from other retirement plans. H&r block free 1040ez These rules are explained in Publication 575. H&r block free 1040ez Publication 575 also discusses the additional tax on early distributions from retirement plans. H&r block free 1040ez Retired public safety officers. H&r block free 1040ez   If you are an eligible retired public safety officer, distributions of up to $3,000, made directly from your 403(b) plan to pay accident, health, or long-term care insurance, are not included in your taxable income. H&r block free 1040ez The premiums can be for you, your spouse, or your dependents. H&r block free 1040ez   A public safety officer is a law enforcement officer, fire fighter, chaplain, or member of a rescue squad or ambulance crew. H&r block free 1040ez   For additional information, see Publication 575. H&r block free 1040ez Distribution for active reservist. H&r block free 1040ez   The 10% penalty for early withdrawals will not apply to a qualified reservist distribution attributable to elective deferrals from a 403(b) plan. H&r block free 1040ez A qualified reservist distribution is a distribution that is made: To an individual who is a reservist or national guardsman and who was ordered or called to active duty for a period in excess of 179 days or for an indefinite period; and During the period beginning on the date of the order or call to duty and ending at the close of the active duty period. H&r block free 1040ez Minimum Required Distributions You must receive all, or at least a certain minimum, of your interest accruing after 1986 in the 403(b) plan by April 1 of the calendar year following the later of the calendar year in which you become age 70½, or the calendar year in which you retire. H&r block free 1040ez Check with your employer, plan administrator, or provider to find out whether this rule also applies to pre-1987 accruals. H&r block free 1040ez If not, a minimum amount of these accruals must begin to be distributed by the later of the end of the calendar year in which you reach age 75 or April 1 of the calendar year following retirement. H&r block free 1040ez For each year thereafter, the minimum distribution must be made by the last day of the year. H&r block free 1040ez If you do not receive the required minimum distribution, you are subject to a nondeductible 50% excise tax on the difference between the required minimum distribution and the amount actually distributed. H&r block free 1040ez No Special 10-Year Tax Option A distribution from a 403(b) plan does not qualify as a lump-sum distribution. H&r block free 1040ez This means you cannot use the special 10-year tax option to calculate the taxable portion of a 403(b) distribution. H&r block free 1040ez For more information, see Publication 575. H&r block free 1040ez Transfer of Interest in 403(b) Contract Contract exchanges. H&r block free 1040ez   If you transfer all or part of your interest from a 403(b) contract to another 403(b) contract (held in the same plan), the transfer is tax free, and is referred to as a contract exchange. H&r block free 1040ez This was previously known as a 90-24 transfer. H&r block free 1040ez A contract exchange is similar to a 90-24 transfer with one major difference. H&r block free 1040ez Previously, you were able to accomplish the transfer without your employer’s involvement. H&r block free 1040ez After September 24, 2007, all such transfers are accomplished through a contract exchange requiring your employer’s involvement. H&r block free 1040ez In addition, the plan must provide for the exchange and the transferred interest must be subject to the same or stricter distribution restrictions. H&r block free 1040ez Finally, your accumulated benefit after the exchange must be equal to what it was before the exchange. H&r block free 1040ez   Transfers that do not satisfy this rule are plan distributions and are generally taxable as ordinary income. H&r block free 1040ez Plan-to-plan transfers. H&r block free 1040ez   You may also transfer part or all of your interest from a 403(b) plan to another 403(b) plan if you are an employee of (or were formerly employed by) the employer of the plan to which you would like to transfer. H&r block free 1040ez Both the initial plan and the receiving plan must provide for transfers. H&r block free 1040ez Your accumulated benefit after the transfer must be at least equal to what it was before the transfer. H&r block free 1040ez The new plan’s restrictions on distributions must be the same or stricter than those of the original plan. H&r block free 1040ez Tax-free transfers for certain cash distributions. H&r block free 1040ez   A tax-free transfer may also apply to a cash distribution of your 403(b) account from an insurance company that is subject to a rehabilitation, conservatorship, insolvency, or similar state proceeding. H&r block free 1040ez To receive tax-free treatment, you must do all of the following: Withdraw all the cash to which you are entitled in full settlement of your contract rights or, if less, the maximum permitted by the state. H&r block free 1040ez Reinvest the cash distribution in a single policy or contract issued by another insurance company or in a single custodial account subject to the same or stricter distribution restrictions as the original contract not later than 60 days after you receive the cash distribution. H&r block free 1040ez Assign all future distribution rights to the new contract or account for investment in that contract or account if you received an amount that is less than what you are entitled to because of state restrictions. H&r block free 1040ez   In addition to the preceding requirements, you must provide the new insurer with a written statement containing all of the following information: The gross amount of cash distributed under the old contract. H&r block free 1040ez The amount of cash reinvested in the new contract. H&r block free 1040ez Your investment in the old contract on the date you receive your first cash distribution. H&r block free 1040ez   Also, you must attach the following items to your timely filed income tax return in the year you receive the first distribution of cash. H&r block free 1040ez A copy of the statement you gave the new insurer. H&r block free 1040ez A statement that includes: The words ELECTION UNDER REV. H&r block free 1040ez PROC. H&r block free 1040ez 92-44, The name of the company that issued the new contract, and The new policy number. H&r block free 1040ez Direct trustee-to-trustee transfer. H&r block free 1040ez   If you make a direct trustee-to-trustee transfer, from your governmental 403(b) account to a defined benefit governmental plan, it may not be includible in gross income. H&r block free 1040ez   The transfer amount is not includible in gross income if it is made to: Purchase permissive service credits, or Repay contributions and earnings that were previously refunded under a forfeiture of service credit under the plan, or under another plan maintained by a state or local government employer within the same state. H&r block free 1040ez After-tax contributions. H&r block free 1040ez   For distributions beginning after December 31, 2006, after-tax contributions can be rolled over between a 403(b) plan and a defined benefit plan, IRA, or a defined contribution plan. H&r block free 1040ez If the rollover is to or from a 403(b) plan, it must occur through a direct trustee-to-trustee transfer. H&r block free 1040ez Permissive service credit. H&r block free 1040ez   A permissive service credit is credit for a period of service recognized by a defined benefit governmental plan only if you voluntarily contribute to the plan an amount that does not exceed the amount necessary to fund the benefit attributable to the period of service and the amount contributed is in addition to the regular employee contribution, if any, under the plan. H&r block free 1040ez   A permissive service credit may also include service credit for up to 5 years where there is no performance of service, or service credited to provide an increased benefit for service credit which a participant is receiving under the plan. H&r block free 1040ez   Check with your plan administrator as to the type and extent of service that may be purchased by this transfer. H&r block free 1040ez Tax-Free Rollovers You can generally roll over tax free all or any part of a distribution from a 403(b) plan to a traditional IRA or a non-Roth eligible retirement plan, except for any nonqualifying distributions, described later. H&r block free 1040ez You may also roll over any part of a distribution from a 403(b) plan by converting it through a direct rollover, described below, to a Roth IRA. H&r block free 1040ez Conversion amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. H&r block free 1040ez See Publication 590 for more information about conversion into a Roth IRA. H&r block free 1040ez Note. H&r block free 1040ez A participant is required to roll over distribution amounts received within 60 days in order for the amount to be treated as nontaxable. H&r block free 1040ez Distribution amounts that are rolled over within the 60 days are not subject to the 10% early distribution penalty. H&r block free 1040ez Rollovers to and from 403(b) plans. H&r block free 1040ez   You can generally roll over tax free all or any part of a distribution from an eligible retirement plan to a 403(b) plan. H&r block free 1040ez Beginning January 1, 2008, distributions from tax-qualified retirement plans and tax-sheltered annuities can be converted by making a direct rollover into a Roth IRA subject to the restrictions that currently apply to rollovers from a traditional IRA into a Roth IRA. H&r block free 1040ez Converted amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. H&r block free 1040ez See Publication 590 for more information on conversion into a Roth IRA. H&r block free 1040ez   If a distribution includes both pre-tax contributions and after-tax contributions, the portion of the distribution that is rolled over is treated as consisting first of pre-tax amounts (contributions and earnings that would be includible in income if no rollover occurred). H&r block free 1040ez This means that if you roll over an amount that is at least as much as the pre-tax portion of the distribution, you do not have to include any of the distribution in income. H&r block free 1040ez   For more information on rollovers and eligible retirement plans, see Publication 575. H&r block free 1040ez If you roll over money or other property from a 403(b) plan to an eligible retirement plan, see Publication 575 for information about possible effects on later distributions from the eligible retirement plan. H&r block free 1040ez Hardship exception to rollover rules. H&r block free 1040ez   The IRS may waive the 60-day rollover period if the failure to waive such requirement would be against equity or good conscience, including cases of casualty, disaster, or other events beyond the reasonable control of an individual. H&r block free 1040ez   To obtain a hardship exception, you must apply to the IRS for a waiver of the 60-day rollover requirement. H&r block free 1040ez You apply for the waiver by following the general instructions used in requesting a letter ruling. H&r block free 1040ez These instructions are stated in Revenue Procedure 2013-4, 2013-1 I. H&r block free 1040ez R. H&r block free 1040ez B. H&r block free 1040ez 126 available at www. H&r block free 1040ez irs. H&r block free 1040ez gov/irb/2013-01_IRB/ar09. H&r block free 1040ez html, or see the latest annual update. H&r block free 1040ez You must also pay a user fee with the application. H&r block free 1040ez The user fee for a rollover that is less than $50,000 is $500. H&r block free 1040ez For rollovers that are $50,000 or more, see Revenue Procedure 2013-8, 2013-1 I. H&r block free 1040ez R. H&r block free 1040ez B. H&r block free 1040ez 237 available at www. H&r block free 1040ez irs. H&r block free 1040ez gov/irb/2013-01_IRB/ar13. H&r block free 1040ez html, or see the latest annual update. H&r block free 1040ez   In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including: Whether errors were made by the financial institution; Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error; Whether you used the amount distributed (for example, in the case of payment by check, whether you cashed the check); and How much time has passed since the date of distribution. H&r block free 1040ez   For additional information on rollovers, see Publication 590. H&r block free 1040ez Eligible retirement plans. H&r block free 1040ez   The following are considered eligible retirement plans. H&r block free 1040ez Individual retirement arrangements. H&r block free 1040ez Roth IRA. H&r block free 1040ez 403(b) plans. H&r block free 1040ez Government eligible 457 plans. H&r block free 1040ez Qualified retirement plans. H&r block free 1040ez  If the distribution is from a designated Roth account, then the only eligible retirement plan is another designated Roth account or a Roth IRA. H&r block free 1040ez Nonqualifying distributions. H&r block free 1040ez   You cannot roll over tax free: Minimum required distributions (generally required to begin at age 70½), Substantially equal payments over your life or life expectancy, Substantially equal payments over the joint lives or life expectancies of your beneficiary and you, Substantially equal payments for a period of 10 years or more, Hardship distributions, or Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or excess annual additions and any allocable gains. H&r block free 1040ez Rollover of nontaxable amounts. H&r block free 1040ez    You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another eligible retirement plan, traditional IRA, or Roth IRA. H&r block free 1040ez The transfer must be made either through a direct rollover to an eligible plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional IRA or Roth IRA. H&r block free 1040ez   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. H&r block free 1040ez Direct rollovers of 403(b) plan distributions. H&r block free 1040ez   You have the option of having your 403(b) plan make the rollover directly to a traditional IRA, Roth IRA, or new plan. H&r block free 1040ez Before you receive a distribution, your plan will give you information on this. H&r block free 1040ez It is generally to your advantage to choose this option because your plan will not withhold tax on the distribution if you choose it. H&r block free 1040ez Distribution received by you. H&r block free 1040ez   If you receive a distribution that qualifies to be rolled over, you can roll over all or any part of the distribution. H&r block free 1040ez Generally, you will receive only 80% of the distribution because 20% must be withheld. H&r block free 1040ez If you roll over only the 80% you receive, you must pay tax on the 20% you did not roll over. H&r block free 1040ez You can replace the 20% that was withheld with other money within the 60-day period to make a 100% rollover. H&r block free 1040ez Voluntary deductible contributions. H&r block free 1040ez   For tax years 1982 through 1986, employees could make deductible contributions to a 403(b) plan under the individual retirement arrangement (IRA) rules instead of deducting contributions to a traditional IRA. H&r block free 1040ez   If you made voluntary deductible contributions to a 403(b) plan under these traditional IRA rules, the distribution of all or part of the accumulated deductible contributions may be rolled over if it otherwise qualifies as a distribution you can roll over. H&r block free 1040ez Accumulated deductible contributions are the deductible contributions: Plus Income allocable to the contributions, Gain allocable to the contributions, and Minus Expenses and losses allocable to the contributions, and Distributions from the contributions, income, or gain. H&r block free 1040ez Excess employer contributions. H&r block free 1040ez   The portion of a distribution from a 403(b) plan transferred to a traditional IRA that was previously included in income as excess employer contributions (discussed earlier) is not an eligible rollover distribution. H&r block free 1040ez   Its transfer does not affect the rollover treatment of the eligible portion of the transferred amounts. H&r block free 1040ez However, the ineligible portion is subject to the traditional IRA contribution limits and may create an excess IRA contribution subject to a 6% excise tax (see chapter 1 of Publication 590). H&r block free 1040ez Qualified domestic relations order. H&r block free 1040ez   You may be able to roll over tax free all or any part of an eligible rollover distribution from a 403(b) plan that you receive under a qualified domestic relations order (QDRO). H&r block free 1040ez If you receive the interest in the 403(b) plan as an employee's spouse or former spouse under a QDRO, all of the rollover rules apply to you as if you were the employee. H&r block free 1040ez You can roll over your interest in the plan to a traditional IRA or another 403(b) plan. H&r block free 1040ez For more information on the treatment of an interest received under a QDRO, see Publication 575. H&r block free 1040ez Spouses of deceased employees. H&r block free 1040ez   If you are the spouse of a deceased employee, you can roll over the qualifying distribution attributable to the employee. H&r block free 1040ez You can make the rollover to any eligible retirement plan. H&r block free 1040ez   After you roll money and other property over from a 403(b) plan to an eligible retirement plan, and you take a distribution from that plan, you will not be eligible to receive the capital gain treatment or the special averaging treatment for the distribution. H&r block free 1040ez Second rollover. H&r block free 1040ez   If you roll over a qualifying distribution to a traditional IRA, you can, if certain conditions are satisfied, later roll the distribution into another 403(b) plan. H&r block free 1040ez For more information, see IRA as a holding account (conduit IRA) for rollovers to other eligible plans in chapter 1 of Publication 590. H&r block free 1040ez Nonspouse beneficiary. H&r block free 1040ez   A nonspouse beneficiary may make a direct rollover of a distribution from a 403(b) plan of a deceased participant if the rollover is a direct transfer to an inherited IRA established to receive the distribution. H&r block free 1040ez If the rollover is a direct trustee-to-trustee transfer to an IRA established to receive the distribution: The transfer will be treated as an eligible rollover distribution. H&r block free 1040ez The IRA will be considered an inherited account. H&r block free 1040ez The required minimum distribution rules that apply in instances where the participant dies before the entire interest is distributed will apply to the transferred IRA. H&r block free 1040ez    For more information on IRAs, see Publication 590. H&r block free 1040ez Frozen deposits. H&r block free 1040ez   The 60-day period usually allowed for completing a rollover is extended for any time that the amount distributed is a frozen deposit in a financial institution. H&r block free 1040ez The 60-day period cannot end earlier than 10 days after the deposit ceases to be a frozen deposit. H&r block free 1040ez   A frozen deposit is any deposit that on any day during the 60-day period cannot be withdrawn because: The financial institution is bankrupt or insolvent, or The state where the institution is located has placed limits on withdrawals because one or more banks in the state are (or are about to be) bankrupt or insolvent. H&r block free 1040ez Gift Tax If, by choosing or not choosing an election, or option, you provide an annuity for your beneficiary at or after your death, you may have made a taxable gift equal to the value of the annuity. H&r block free 1040ez Joint and survivor annuity. H&r block free 1040ez   If the gift is an interest in a joint and survivor annuity where only you and your spouse have the right to receive payments, the gift will generally be treated as qualifying for the unlimited marital deduction. H&r block free 1040ez More information. H&r block free 1040ez   For information on the gift tax, see Publication 559, Survivors, Executors, and Administrators. H&r block free 1040ez Prev  Up  Next   Home   More Online Publications
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The H&r Block Free 1040ez

H&r block free 1040ez 2. H&r block free 1040ez   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. H&r block free 1040ez Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. H&r block free 1040ez Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). H&r block free 1040ez You must do this to figure your net capital gain or loss. H&r block free 1040ez For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. H&r block free 1040ez See Capital Gains Tax Rates in chapter 4. H&r block free 1040ez Your deduction for a net capital loss may be limited. H&r block free 1040ez See Treatment of Capital Losses in chapter 4. H&r block free 1040ez Capital gain or loss. H&r block free 1040ez   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. H&r block free 1040ez You also may have a capital gain if your section 1231 transactions result in a net gain. H&r block free 1040ez Section 1231 transactions. H&r block free 1040ez   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. H&r block free 1040ez They also include certain involuntary conversions of business or investment property, including capital assets. H&r block free 1040ez See Section 1231 Gains and Losses in chapter 3 for more information. H&r block free 1040ez Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. H&r block free 1040ez Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. H&r block free 1040ez For exceptions, see Noncapital Assets, later. H&r block free 1040ez The following items are examples of capital assets. H&r block free 1040ez Stocks and bonds. H&r block free 1040ez A home owned and occupied by you and your family. H&r block free 1040ez Timber grown on your home property or investment property, even if you make casual sales of the timber. H&r block free 1040ez Household furnishings. H&r block free 1040ez A car used for pleasure or commuting. H&r block free 1040ez Coin or stamp collections. H&r block free 1040ez Gems and jewelry. H&r block free 1040ez Gold, silver, and other metals. H&r block free 1040ez Personal-use property. H&r block free 1040ez   Generally, property held for personal use is a capital asset. H&r block free 1040ez Gain from a sale or exchange of that property is a capital gain. H&r block free 1040ez Loss from the sale or exchange of that property is not deductible. H&r block free 1040ez You can deduct a loss relating to personal-use property only if it results from a casualty or theft. H&r block free 1040ez Investment property. H&r block free 1040ez   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. H&r block free 1040ez This treatment does not apply to property used to produce rental income. H&r block free 1040ez See Business assets, later, under Noncapital Assets. H&r block free 1040ez Release of restriction on land. H&r block free 1040ez   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. H&r block free 1040ez Noncapital Assets A noncapital asset is property that is not a capital asset. H&r block free 1040ez The following kinds of property are not capital assets. H&r block free 1040ez Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. H&r block free 1040ez Inventories are discussed in Publication 538, Accounting Periods and Methods. H&r block free 1040ez But, see the Tip below. H&r block free 1040ez Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. H&r block free 1040ez Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). H&r block free 1040ez Sales of this type of property are discussed in chapter 3. H&r block free 1040ez Real property used in your trade or business or as rental property, even if the property is fully depreciated. H&r block free 1040ez A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. H&r block free 1040ez But, see the Tip below. H&r block free 1040ez U. H&r block free 1040ez S. H&r block free 1040ez Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. H&r block free 1040ez Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. H&r block free 1040ez It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. H&r block free 1040ez The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. H&r block free 1040ez Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. H&r block free 1040ez Supplies of a type you regularly use or consume in the ordinary course of your trade or business. H&r block free 1040ez You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. H&r block free 1040ez See chapter 4 of Publication 550 for details. H&r block free 1040ez Property held mainly for sale to customers. H&r block free 1040ez   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. H&r block free 1040ez Inventories are discussed in Publication 538. H&r block free 1040ez Business assets. H&r block free 1040ez   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. H&r block free 1040ez The sale or disposition of business property is discussed in chapter 3. H&r block free 1040ez Letters and memoranda. H&r block free 1040ez   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. H&r block free 1040ez Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. H&r block free 1040ez For this purpose, letters and memoranda addressed to you are considered prepared for you. H&r block free 1040ez If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. H&r block free 1040ez Commodities derivative financial instrument. H&r block free 1040ez   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). H&r block free 1040ez Commodities derivative dealer. H&r block free 1040ez   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. H&r block free 1040ez Hedging transaction. H&r block free 1040ez   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. H&r block free 1040ez Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. H&r block free 1040ez Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. H&r block free 1040ez Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. H&r block free 1040ez If these rules apply, gains may be treated as ordinary income and losses may not be deductible. H&r block free 1040ez See Transfers to Spouse in chapter 1 for rules that apply to spouses. H&r block free 1040ez Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. H&r block free 1040ez It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. H&r block free 1040ez Depreciable property transaction. H&r block free 1040ez   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. H&r block free 1040ez A person and the person's controlled entity or entities. H&r block free 1040ez A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. H&r block free 1040ez An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). H&r block free 1040ez An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). H&r block free 1040ez Controlled entity. H&r block free 1040ez   A person's controlled entity is either of the following. H&r block free 1040ez A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. H&r block free 1040ez An entity whose relationship with that person is one of the following. H&r block free 1040ez A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. H&r block free 1040ez Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. H&r block free 1040ez Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. H&r block free 1040ez Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. H&r block free 1040ez Controlled partnership transaction. H&r block free 1040ez   A gain recognized in a controlled partnership transaction may be ordinary income. H&r block free 1040ez The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. H&r block free 1040ez   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. H&r block free 1040ez A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. H&r block free 1040ez Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. H&r block free 1040ez Determining ownership. H&r block free 1040ez   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. H&r block free 1040ez Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. H&r block free 1040ez (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. H&r block free 1040ez ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. H&r block free 1040ez Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. H&r block free 1040ez For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. H&r block free 1040ez But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. H&r block free 1040ez Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. H&r block free 1040ez This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. H&r block free 1040ez For the list of related persons, see Related persons next. H&r block free 1040ez If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. H&r block free 1040ez The gain on each item is taxable. H&r block free 1040ez The loss on any item is nondeductible. H&r block free 1040ez Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. H&r block free 1040ez Related persons. H&r block free 1040ez   The following is a list of related persons. H&r block free 1040ez Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. H&r block free 1040ez ), and lineal descendants (children, grandchildren, etc. H&r block free 1040ez ). H&r block free 1040ez An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. H&r block free 1040ez Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. H&r block free 1040ez A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. H&r block free 1040ez A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. H&r block free 1040ez Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. H&r block free 1040ez A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. H&r block free 1040ez A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. H&r block free 1040ez Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. H&r block free 1040ez Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. H&r block free 1040ez An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. H&r block free 1040ez Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. H&r block free 1040ez A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. H&r block free 1040ez Partnership interests. H&r block free 1040ez   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. H&r block free 1040ez Controlled groups. H&r block free 1040ez   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. H&r block free 1040ez   For more information, see section 267(f) of the Internal Revenue Code. H&r block free 1040ez Ownership of stock or partnership interests. H&r block free 1040ez   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. H&r block free 1040ez Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. H&r block free 1040ez (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. H&r block free 1040ez ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. H&r block free 1040ez Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. H&r block free 1040ez An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. H&r block free 1040ez For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. H&r block free 1040ez But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. H&r block free 1040ez Indirect transactions. H&r block free 1040ez   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. H&r block free 1040ez This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. H&r block free 1040ez Property received from a related person. H&r block free 1040ez   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. H&r block free 1040ez This rule applies only to the original transferee. H&r block free 1040ez Example 1. H&r block free 1040ez Your brother sold stock to you for $7,600. H&r block free 1040ez His cost basis was $10,000. H&r block free 1040ez His loss of $2,400 was not deductible. H&r block free 1040ez You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). H&r block free 1040ez Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. H&r block free 1040ez Example 2. H&r block free 1040ez Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. H&r block free 1040ez Your recognized loss is only $700 ($7,600 − $6,900). H&r block free 1040ez You cannot deduct the loss not allowed to your brother. H&r block free 1040ez Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. H&r block free 1040ez Sale of a Business The sale of a business usually is not a sale of one asset. H&r block free 1040ez Instead, all the assets of the business are sold. H&r block free 1040ez Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. H&r block free 1040ez A business usually has many assets. H&r block free 1040ez When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. H&r block free 1040ez The gain or loss on each asset is figured separately. H&r block free 1040ez The sale of capital assets results in capital gain or loss. H&r block free 1040ez The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). H&r block free 1040ez The sale of inventory results in ordinary income or loss. H&r block free 1040ez Partnership interests. H&r block free 1040ez   An interest in a partnership or joint venture is treated as a capital asset when sold. H&r block free 1040ez The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. H&r block free 1040ez For more information, see Disposition of Partner's Interest in Publication 541. H&r block free 1040ez Corporation interests. H&r block free 1040ez   Your interest in a corporation is represented by stock certificates. H&r block free 1040ez When you sell these certificates, you usually realize capital gain or loss. H&r block free 1040ez For information on the sale of stock, see chapter 4 in Publication 550. H&r block free 1040ez Corporate liquidations. H&r block free 1040ez   Corporate liquidations of property generally are treated as a sale or exchange. H&r block free 1040ez Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. H&r block free 1040ez Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. H&r block free 1040ez   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. H&r block free 1040ez For more information, see section 332 of the Internal Revenue Code and the related regulations. H&r block free 1040ez Allocation of consideration paid for a business. H&r block free 1040ez   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. H&r block free 1040ez Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. H&r block free 1040ez This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. H&r block free 1040ez It also determines the buyer's basis in the business assets. H&r block free 1040ez Consideration. H&r block free 1040ez   The buyer's consideration is the cost of the assets acquired. H&r block free 1040ez The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. H&r block free 1040ez Residual method. H&r block free 1040ez   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. H&r block free 1040ez This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. H&r block free 1040ez Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. H&r block free 1040ez   A group of assets constitutes a trade or business if either of the following applies. H&r block free 1040ez Goodwill or going concern value could, under any circumstances, attach to them. H&r block free 1040ez The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. H&r block free 1040ez   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). H&r block free 1040ez The consideration remaining after this reduction must be allocated among the various business assets in a certain order. H&r block free 1040ez See Classes of assets next for the complete order. H&r block free 1040ez Classes of assets. H&r block free 1040ez   The following definitions are the classifications for deemed or actual asset acquisitions. H&r block free 1040ez Allocate the consideration among the assets in the following order. H&r block free 1040ez The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. H&r block free 1040ez The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. H&r block free 1040ez Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). H&r block free 1040ez Class II assets are certificates of deposit, U. H&r block free 1040ez S. H&r block free 1040ez Government securities, foreign currency, and actively traded personal property, including stock and securities. H&r block free 1040ez Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. H&r block free 1040ez However, see section 1. H&r block free 1040ez 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. H&r block free 1040ez Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. H&r block free 1040ez Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. H&r block free 1040ez    Note. H&r block free 1040ez Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. H&r block free 1040ez Class VI assets are section 197 intangibles (other than goodwill and going concern value). H&r block free 1040ez Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). H&r block free 1040ez   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. H&r block free 1040ez For example, if an asset is described in both Class II and Class IV, choose Class II. H&r block free 1040ez Example. H&r block free 1040ez The total paid in the sale of the assets of Company SKB is $21,000. H&r block free 1040ez No cash or deposit accounts or similar accounts were sold. H&r block free 1040ez The company's U. H&r block free 1040ez S. H&r block free 1040ez Government securities sold had a fair market value of $3,200. H&r block free 1040ez The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. H&r block free 1040ez Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. H&r block free 1040ez S. H&r block free 1040ez Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. H&r block free 1040ez Agreement. H&r block free 1040ez   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. H&r block free 1040ez This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. H&r block free 1040ez Reporting requirement. H&r block free 1040ez   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. H&r block free 1040ez Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. H&r block free 1040ez Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. H&r block free 1040ez See the Instructions for Form 8594. H&r block free 1040ez Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. H&r block free 1040ez It includes such items as patents, copyrights, and the goodwill value of a business. H&r block free 1040ez Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. H&r block free 1040ez The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. H&r block free 1040ez See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. H&r block free 1040ez Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. H&r block free 1040ez The following discussions explain special rules that apply to certain dispositions of intangible property. H&r block free 1040ez Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. H&r block free 1040ez They include the following assets. H&r block free 1040ez Goodwill. H&r block free 1040ez Going concern value. H&r block free 1040ez Workforce in place. H&r block free 1040ez Business books and records, operating systems, and other information bases. H&r block free 1040ez Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. H&r block free 1040ez Customer-based intangibles. H&r block free 1040ez Supplier-based intangibles. H&r block free 1040ez Licenses, permits, and other rights granted by a governmental unit. H&r block free 1040ez Covenants not to compete entered into in connection with the acquisition of a business. H&r block free 1040ez Franchises, trademarks, and trade names. H&r block free 1040ez See chapter 8 of Publication 535 for a description of each intangible. H&r block free 1040ez Dispositions. H&r block free 1040ez   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. H&r block free 1040ez Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. H&r block free 1040ez If you retain more than one section 197 intangible, increase each intangible's adjusted basis. H&r block free 1040ez Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. H&r block free 1040ez   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. H&r block free 1040ez For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. H&r block free 1040ez Covenant not to compete. H&r block free 1040ez   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. H&r block free 1040ez Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. H&r block free 1040ez Anti-churning rules. H&r block free 1040ez   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. H&r block free 1040ez However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. H&r block free 1040ez Recognize gain on the transfer of the property. H&r block free 1040ez Pay income tax on the gain at the highest tax rate. H&r block free 1040ez   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. H&r block free 1040ez But each partner or shareholder must pay the tax on his or her share of gain. H&r block free 1040ez   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. H&r block free 1040ez You must file the tax return by the due date (including extensions). H&r block free 1040ez You must also notify the transferee of the election in writing by the due date of the return. H&r block free 1040ez   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). H&r block free 1040ez Attach the statement to the amended return and write “Filed pursuant to section 301. H&r block free 1040ez 9100-2” at the top of the statement. H&r block free 1040ez File the amended return at the same address the original return was filed. H&r block free 1040ez For more information about making the election, see Regulations section 1. H&r block free 1040ez 197-2(h)(9). H&r block free 1040ez For information about reporting the tax on your income tax return, see the Instructions for Form 4797. H&r block free 1040ez Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. H&r block free 1040ez This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. H&r block free 1040ez For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. H&r block free 1040ez This treatment applies to your transfer of a patent if you meet all the following conditions. H&r block free 1040ez You are the holder of the patent. H&r block free 1040ez You transfer the patent other than by gift, inheritance, or devise. H&r block free 1040ez You transfer all substantial rights to the patent or an undivided interest in all such rights. H&r block free 1040ez You do not transfer the patent to a related person. H&r block free 1040ez Holder. H&r block free 1040ez   You are the holder of a patent if you are either of the following. H&r block free 1040ez The individual whose effort created the patent property and who qualifies as the original and first inventor. H&r block free 1040ez The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. H&r block free 1040ez All substantial rights. H&r block free 1040ez   All substantial rights to patent property are all rights that have value when they are transferred. H&r block free 1040ez A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. H&r block free 1040ez   All substantial rights to a patent are not transferred if any of the following apply to the transfer. H&r block free 1040ez The rights are limited geographically within a country. H&r block free 1040ez The rights are limited to a period less than the remaining life of the patent. H&r block free 1040ez The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. H&r block free 1040ez The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. H&r block free 1040ez Related persons. H&r block free 1040ez   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. H&r block free 1040ez Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. H&r block free 1040ez Substitute “25% or more” ownership for “more than 50%. H&r block free 1040ez ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. H&r block free 1040ez For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. H&r block free 1040ez The brother-sister exception does not apply because the trust relationship is independent of family status. H&r block free 1040ez Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. H&r block free 1040ez A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. H&r block free 1040ez Significant power, right, or continuing interest. H&r block free 1040ez   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. H&r block free 1040ez   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. H&r block free 1040ez A right to disapprove any assignment of the interest, or any part of it. H&r block free 1040ez A right to end the agreement at will. H&r block free 1040ez A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. H&r block free 1040ez A right to make the recipient sell or advertise only your products or services. H&r block free 1040ez A right to make the recipient buy most supplies and equipment from you. H&r block free 1040ez A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. H&r block free 1040ez Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. H&r block free 1040ez However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. H&r block free 1040ez See section 1237 of the Internal Revenue Code. H&r block free 1040ez Timber Standing timber held as investment property is a capital asset. H&r block free 1040ez Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. H&r block free 1040ez If you held the timber primarily for sale to customers, it is not a capital asset. H&r block free 1040ez Gain or loss on its sale is ordinary business income or loss. H&r block free 1040ez It is reported in the gross receipts or sales and cost of goods sold items of your return. H&r block free 1040ez Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. H&r block free 1040ez These sales constitute a very minor part of their farm businesses. H&r block free 1040ez In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. H&r block free 1040ez , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. H&r block free 1040ez Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. H&r block free 1040ez Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. H&r block free 1040ez This is true whether the timber is cut under contract or whether you cut it yourself. H&r block free 1040ez Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. H&r block free 1040ez See chapter 3. H&r block free 1040ez Gain or loss is reported on Form 4797. H&r block free 1040ez Christmas trees. H&r block free 1040ez   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. H&r block free 1040ez They qualify for both rules discussed below. H&r block free 1040ez Election to treat cutting as a sale or exchange. H&r block free 1040ez   Under the general rule, the cutting of timber results in no gain or loss. H&r block free 1040ez It is not until a sale or exchange occurs that gain or loss is realized. H&r block free 1040ez But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. H&r block free 1040ez Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. H&r block free 1040ez Any later sale results in ordinary business income or loss. H&r block free 1040ez See Example, later. H&r block free 1040ez   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. H&r block free 1040ez Making the election. H&r block free 1040ez   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. H&r block free 1040ez You do not have to make the election in the first year you cut timber. H&r block free 1040ez You can make it in any year to which the election would apply. H&r block free 1040ez If the timber is partnership property, the election is made on the partnership return. H&r block free 1040ez This election cannot be made on an amended return. H&r block free 1040ez   Once you have made the election, it remains in effect for all later years unless you cancel it. H&r block free 1040ez   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. H&r block free 1040ez The prior election (and revocation) is disregarded for purposes of making a subsequent election. H&r block free 1040ez See Form T (Timber), Forest Activities Schedule, for more information. H&r block free 1040ez Gain or loss. H&r block free 1040ez   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. H&r block free 1040ez   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. H&r block free 1040ez Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. H&r block free 1040ez   Timber depletion is discussed in chapter 9 of Publication 535. H&r block free 1040ez Example. H&r block free 1040ez In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. H&r block free 1040ez It had an adjusted basis for depletion of $40 per MBF. H&r block free 1040ez You are a calendar year taxpayer. H&r block free 1040ez On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. H&r block free 1040ez It was cut in April for sale. H&r block free 1040ez On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. H&r block free 1040ez You report the difference between the fair market value and your adjusted basis for depletion as a gain. H&r block free 1040ez This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. H&r block free 1040ez You figure your gain as follows. H&r block free 1040ez FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. H&r block free 1040ez Outright sales of timber. H&r block free 1040ez   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). H&r block free 1040ez However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). H&r block free 1040ez Cutting contract. H&r block free 1040ez   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. H&r block free 1040ez You are the owner of the timber. H&r block free 1040ez You held the timber longer than 1 year before its disposal. H&r block free 1040ez You kept an economic interest in the timber. H&r block free 1040ez   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. H&r block free 1040ez   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. H&r block free 1040ez Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. H&r block free 1040ez Date of disposal. H&r block free 1040ez   The date of disposal is the date the timber is cut. H&r block free 1040ez However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. H&r block free 1040ez   This election applies only to figure the holding period of the timber. H&r block free 1040ez It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). H&r block free 1040ez   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. H&r block free 1040ez The statement must identify the advance payments subject to the election and the contract under which they were made. H&r block free 1040ez   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). H&r block free 1040ez Attach the statement to the amended return and write “Filed pursuant to section 301. H&r block free 1040ez 9100-2” at the top of the statement. H&r block free 1040ez File the amended return at the same address the original return was filed. H&r block free 1040ez Owner. H&r block free 1040ez   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. H&r block free 1040ez You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. H&r block free 1040ez Tree stumps. H&r block free 1040ez   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. H&r block free 1040ez Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. H&r block free 1040ez However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. H&r block free 1040ez Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. H&r block free 1040ez   See Form T (Timber) and its separate instructions for more information about dispositions of timber. H&r block free 1040ez Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. H&r block free 1040ez , are capital assets except when they are held for sale by a dealer. H&r block free 1040ez Any gain or loss from their sale or exchange generally is a capital gain or loss. H&r block free 1040ez If you are a dealer, the amount received from the sale is ordinary business income. H&r block free 1040ez Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. H&r block free 1040ez You owned the coal or iron ore longer than 1 year before its disposal. H&r block free 1040ez You kept an economic interest in the coal or iron ore. H&r block free 1040ez For this rule, the date the coal or iron ore is mined is considered the date of its disposal. H&r block free 1040ez Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). H&r block free 1040ez This amount is included on Form 4797 along with your other section 1231 gains and losses. H&r block free 1040ez You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. H&r block free 1040ez If you own only an option to buy the coal in place, you do not qualify as an owner. H&r block free 1040ez In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. H&r block free 1040ez The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. H&r block free 1040ez Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. H&r block free 1040ez If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. H&r block free 1040ez Special rule. H&r block free 1040ez   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. H&r block free 1040ez A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). H&r block free 1040ez An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. H&r block free 1040ez Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. H&r block free 1040ez This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. H&r block free 1040ez An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). H&r block free 1040ez A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. H&r block free 1040ez Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. H&r block free 1040ez For more information, see chapter 4 of Publication 550. H&r block free 1040ez Prev  Up  Next   Home   More Online Publications