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H&r Block Military

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H&r Block Military

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

H&r block military Publication 544 - Additional Material Table of Contents Tax Publications for Business TaxpayersSee How To Get Tax Help for a variety of ways to get publications, including by computer, phone, and mail. H&r block military General Guides 1 Your Rights as a Taxpayer 17 Your Federal Income Tax (For Individuals) 334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) 509 Tax Calendars 910 IRS Guide to Free Tax Services Employer's Guides 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits 51 (Circular A), Agricultural Employer's Tax Guide 80 (Circular SS), Federal Tax Guide For Employers in the U. H&r block military S. H&r block military Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands 926 Household Employer's Tax Guide Specialized Publications 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car Expenses 505 Tax Withholding and Estimated Tax 510 Excise Taxes (Including Fuel Tax Credits and Refunds) 515 Withholding of Tax on Nonresident Aliens and Foreign Entities 517 Social Security and Other Information for Members of the Clergy and Religious Workers 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 537 Installment Sales 538 Accounting Periods and Methods 541 Partnerships 542 Corporations 544 Sales and Other Dispositions of Assets 551 Basis of Assets 556 Examination of Returns, Appeal Rights, and Claims for Refund 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) 561 Determining the Value of Donated Property 583 Starting a Business and Keeping Records 587 Business Use of Your Home (Including Use by Daycare Providers) 594 What You Should Know About The IRS Collection Process 595 Capital Construction Fund for Commercial Fishermen 597 Information on the United States-Canada Income Tax Treaty 598 Tax on Unrelated Business Income of Exempt Organizations 686 Certification for Reduced Tax Rates in Tax Treaty Countries 901 U. H&r block military S. H&r block military Tax Treaties 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property 947 Practice Before the IRS and Power of Attorney 1544 Reporting Cash Payments of Over $10,000 (Received in a Trade or Business) 1546 Taxpayer Advocate Service - Your Voice at the IRS Spanish Language Publications 1SP Derechos del Contribuyente 179 (Circular PR), Guía Contributiva Federal Para Patronos Puertorriqueños 579SP Cómo Preparar la Declaración de Impuesto Federal 594SP Qué es lo Debemos Saber Sobre El Proceso de Cobro del IRS 850 English-Spanish Glossary of Words and Phrases Used in Publications Issued by the Internal Revenue Service 1544SP Informe de Pagos en Efectivo en Exceso de $10,000 (Recibidos en una Ocupación o Negocio) Commonly Used Tax FormsSee How To Get Tax Help for a variety of ways to get forms, including by computer, phone, and mail. H&r block military Form Number and Form Title W-2 Wage and Tax Statement W-4 Employee's Withholding Allowance Certificate 940 Employer's Annual Federal Unemployment (FUTA) Tax Return 941 Employer's QUARTERLY Federal Tax Return 944 Employer's ANNUAL Federal Tax Return 1040 U. H&r block military S. H&r block military Individual Income Tax Return Sch. H&r block military A & B Itemized Deductions & Interest and Ordinary Dividends Sch. H&r block military C Profit or Loss From Business Sch. H&r block military C-EZ Net Profit From Business Sch. H&r block military D Capital Gains and Losses Sch. H&r block military E Supplemental Income and Loss Sch. H&r block military F Profit or Loss From Farming Sch. H&r block military H Household Employment Taxes Sch. H&r block military J Income Averaging for Farmers and Fishermen Sch. H&r block military R Credit for the Elderly or the Disabled Sch. H&r block military SE Self-Employment Tax 1040-ES Estimated Tax for Individuals 1040X Amended U. H&r block military S. H&r block military Individual Income Tax Return 1065 U. H&r block military S. H&r block military Return of Partnership Income Sch. H&r block military D Capital Gains and Losses Sch. H&r block military K-1 Partner's Share of Income, Deductions, Credits, etc. H&r block military 1120 U. H&r block military S. H&r block military Corporation Income Tax Return Sch. H&r block military D Capital Gains and Losses 1120S U. H&r block military S. H&r block military Income Tax Return for an S Corporation Sch. H&r block military D Capital Gains and Losses and Built-In Gains Sch. H&r block military K-1 Shareholder's Share of Income, Deductions, Credits, etc. H&r block military 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts 2441 Child and Dependent Care Expenses 2848 Power of Attorney and Declaration of Representative 3800 General Business Credit 3903 Moving Expenses 4562 Depreciation and Amortization 4797 Sales of Business Property 4868 Application for Automatic Extension of Time To File U. H&r block military S. H&r block military Individual Income Tax Return 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 6252 Installment Sale Income 7004 Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns 8283 Noncash Charitable Contributions 8300 Report of Cash Payments Over $10,000 Received in a Trade or Business 8582 Passive Activity Loss Limitations 8606 Nondeductible IRAs 8822 Change of Address 8829 Expenses for Business Use of Your Home 8949 Sales and Other Dispositions of Capital Assets Prev  Up  Next   Home   More Online Publications