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Myfreetaxes com 4. Myfreetaxes com   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. Myfreetaxes com Rent-to-own contract. Myfreetaxes com What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Myfreetaxes com MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Myfreetaxes com Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Myfreetaxes com To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. Myfreetaxes com This chapter explains how to determine which MACRS depreciation system applies to your property. Myfreetaxes com It also discusses other information you need to know before you can figure depreciation under MACRS. Myfreetaxes com This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. Myfreetaxes com It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. Myfreetaxes com Finally, it explains when and how to recapture MACRS depreciation. Myfreetaxes com Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Myfreetaxes com Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. Myfreetaxes com You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Myfreetaxes com If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Myfreetaxes com Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Myfreetaxes com If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. Myfreetaxes com Required use of ADS. Myfreetaxes com   You must use ADS for the following property. Myfreetaxes com Listed property used 50% or less in a qualified business use. Myfreetaxes com See chapter 5 for information on listed property. Myfreetaxes com Any tangible property used predominantly outside the United States during the year. Myfreetaxes com Any tax-exempt use property. Myfreetaxes com Any tax-exempt bond-financed property. Myfreetaxes com All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. Myfreetaxes com Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. Myfreetaxes com If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. Myfreetaxes com Electing ADS. Myfreetaxes com   Although your property may qualify for GDS, you can elect to use ADS. Myfreetaxes com The election generally must cover all property in the same property class that you placed in service during the year. Myfreetaxes com However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Myfreetaxes com Once you make this election, you can never revoke it. Myfreetaxes com   You make the election by completing line 20 in Part III of Form 4562. Myfreetaxes com Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. Myfreetaxes com These property classes are also listed under column (a) in section B, Part III, of Form 4562. Myfreetaxes com For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Myfreetaxes com 3-year property. Myfreetaxes com Tractor units for over-the-road use. Myfreetaxes com Any race horse over 2 years old when placed in service. Myfreetaxes com (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. Myfreetaxes com ) Any other horse (other than a race horse) over 12 years old when placed in service. Myfreetaxes com Qualified rent-to-own property (defined later). Myfreetaxes com 5-year property. Myfreetaxes com Automobiles, taxis, buses, and trucks. Myfreetaxes com Computers and peripheral equipment. Myfreetaxes com Office machinery (such as typewriters, calculators, and copiers). Myfreetaxes com Any property used in research and experimentation. Myfreetaxes com Breeding cattle and dairy cattle. Myfreetaxes com Appliances, carpets, furniture, etc. Myfreetaxes com , used in a residential rental real estate activity. Myfreetaxes com Certain geothermal, solar, and wind energy property. Myfreetaxes com 7-year property. Myfreetaxes com Office furniture and fixtures (such as desks, files, and safes). Myfreetaxes com Agricultural machinery and equipment. Myfreetaxes com Any property that does not have a class life and has not been designated by law as being in any other class. Myfreetaxes com Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Myfreetaxes com Any natural gas gathering line placed in service after April 11, 2005. Myfreetaxes com See Natural gas gathering line and electric transmission property , later. Myfreetaxes com 10-year property. Myfreetaxes com Vessels, barges, tugs, and similar water transportation equipment. Myfreetaxes com Any single purpose agricultural or horticultural structure. Myfreetaxes com Any tree or vine bearing fruits or nuts. Myfreetaxes com Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Myfreetaxes com 15-year property. Myfreetaxes com Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Myfreetaxes com Any retail motor fuels outlet (defined later), such as a convenience store. Myfreetaxes com Any municipal wastewater treatment plant. Myfreetaxes com Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Myfreetaxes com Any qualified restaurant property (defined later) placed in service before January 1, 2014. Myfreetaxes com Initial clearing and grading land improvements for gas utility property. Myfreetaxes com Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. Myfreetaxes com See Natural gas gathering line and electric transmission property , later. Myfreetaxes com Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Myfreetaxes com Any qualified retail improvement property placed in service before January 1, 2014. Myfreetaxes com 20-year property. Myfreetaxes com Farm buildings (other than single purpose agricultural or horticultural structures). Myfreetaxes com Municipal sewers not classified as 25-year property. Myfreetaxes com Initial clearing and grading land improvements for electric utility transmission and distribution plants. Myfreetaxes com 25-year property. Myfreetaxes com This class is water utility property, which is either of the following. Myfreetaxes com Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. Myfreetaxes com Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Myfreetaxes com Residential rental property. Myfreetaxes com This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. Myfreetaxes com A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Myfreetaxes com It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. Myfreetaxes com If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. Myfreetaxes com Nonresidential real property. Myfreetaxes com This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. Myfreetaxes com 5 years. Myfreetaxes com Qualified rent-to-own property. Myfreetaxes com   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. Myfreetaxes com It is tangible personal property generally used in the home for personal use. Myfreetaxes com It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Myfreetaxes com Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Myfreetaxes com   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. Myfreetaxes com However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. Myfreetaxes com Rent-to-own dealer. Myfreetaxes com   You are a rent-to-own dealer if you meet all the following requirements. Myfreetaxes com You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Myfreetaxes com A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Myfreetaxes com The property is tangible personal property of a type generally used within the home for personal use. Myfreetaxes com Rent-to-own contract. Myfreetaxes com   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. Myfreetaxes com Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). Myfreetaxes com Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Myfreetaxes com If the payments are decreasing, no payment can be less than 40% of the largest payment. Myfreetaxes com Provides for total payments that generally exceed the normal retail price of the property plus interest. Myfreetaxes com Provides for total payments that do not exceed $10,000 for each item of property. Myfreetaxes com Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. Myfreetaxes com Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. Myfreetaxes com Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. Myfreetaxes com Motorsports entertainment complex. Myfreetaxes com   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. Myfreetaxes com The events must be open to the public for the price of admission. Myfreetaxes com Qualified smart electric grid system. Myfreetaxes com   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. Myfreetaxes com Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. Myfreetaxes com Retail motor fuels outlet. Myfreetaxes com   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. Myfreetaxes com It is not larger than 1,400 square feet. Myfreetaxes com 50% or more of the gross revenues generated from the property are derived from petroleum sales. Myfreetaxes com 50% or more of the floor space in the property is devoted to petroleum marketing sales. Myfreetaxes com A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Myfreetaxes com Qualified leasehold improvement property. Myfreetaxes com    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Myfreetaxes com   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. Myfreetaxes com A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. Myfreetaxes com Examples include the following. Myfreetaxes com A complete liquidation of a subsidiary. Myfreetaxes com A transfer to a corporation controlled by the transferor. Myfreetaxes com An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Myfreetaxes com Qualified restaurant property. Myfreetaxes com   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Myfreetaxes com Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. Myfreetaxes com Qualified smart electric meter. Myfreetaxes com   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. Myfreetaxes com Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. Myfreetaxes com Natural gas gathering line and electric transmission property. Myfreetaxes com   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. Myfreetaxes com The original use of the property must have begun with you after April 11, 2005. Myfreetaxes com Original use means the first use to which the property is put, whether or not by you. Myfreetaxes com Therefore, property used by any person before April 12, 2005, is not original use. Myfreetaxes com Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Myfreetaxes com However, original use does not include the cost of reconditioned or rebuilt property you acquired. Myfreetaxes com Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. Myfreetaxes com The property must not be placed in service under a binding contract in effect before April 12, 2005. Myfreetaxes com The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. Myfreetaxes com Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. Myfreetaxes com What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. Myfreetaxes com The placed in service date for your property is the date the property is ready and available for a specific use. Myfreetaxes com It is therefore not necessarily the date it is first used. Myfreetaxes com If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. Myfreetaxes com See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Myfreetaxes com What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. Myfreetaxes com For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . Myfreetaxes com Reduce that amount by any credits and deductions allocable to the property. Myfreetaxes com The following are examples of some credits and deductions that reduce basis. Myfreetaxes com Any deduction for section 179 property. Myfreetaxes com Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Myfreetaxes com Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. Myfreetaxes com Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. Myfreetaxes com Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . Myfreetaxes com Any deduction for removal of barriers to the disabled and the elderly. Myfreetaxes com Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Myfreetaxes com Any special depreciation allowance. Myfreetaxes com Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Myfreetaxes com For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Myfreetaxes com Enter the basis for depreciation under column (c) in Part III of Form 4562. Myfreetaxes com For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . Myfreetaxes com Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Myfreetaxes com It is determined based on the depreciation system (GDS or ADS) used. Myfreetaxes com Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Myfreetaxes com Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. Myfreetaxes com 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Myfreetaxes com 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Myfreetaxes com 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Myfreetaxes com 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Myfreetaxes com 431. Myfreetaxes com 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). Myfreetaxes com The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Myfreetaxes com Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Myfreetaxes com Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). Myfreetaxes com Office in the home. Myfreetaxes com   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. Myfreetaxes com 5 years if you began using it for business before May 13, 1993). Myfreetaxes com However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. Myfreetaxes com 5 years. Myfreetaxes com See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Myfreetaxes com Home changed to rental use. Myfreetaxes com   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Myfreetaxes com 5 years. Myfreetaxes com Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. Myfreetaxes com The following table shows these shorter recovery periods. Myfreetaxes com Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . Myfreetaxes com Use this chart to find the correct percentage table to use for qualified Indian reservation property. Myfreetaxes com IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. Myfreetaxes com   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Myfreetaxes com You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Myfreetaxes com The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. Myfreetaxes com   The following property is not qualified property. Myfreetaxes com Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Myfreetaxes com Property acquired directly or indirectly from a related person. Myfreetaxes com Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Myfreetaxes com These activities are defined in section 4 of the Indian Regulatory Act (25 U. Myfreetaxes com S. Myfreetaxes com C. Myfreetaxes com 2703). Myfreetaxes com Any property you must depreciate under ADS. Myfreetaxes com Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). Myfreetaxes com Qualified infrastructure property. Myfreetaxes com   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. Myfreetaxes com Qualified infrastructure property is property that meets all the following rules. Myfreetaxes com It is qualified property, as defined earlier, except that it is outside the reservation. Myfreetaxes com It benefits the tribal infrastructure. Myfreetaxes com It is available to the general public. Myfreetaxes com It is placed in service in connection with the active conduct of a trade or business within a reservation. Myfreetaxes com Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Myfreetaxes com Related person. Myfreetaxes com   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. Myfreetaxes com Indian reservation. Myfreetaxes com   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Myfreetaxes com S. Myfreetaxes com C. Myfreetaxes com 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Myfreetaxes com S. Myfreetaxes com C. Myfreetaxes com 1903(10)). Myfreetaxes com Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Myfreetaxes com For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Myfreetaxes com Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Myfreetaxes com The following table shows some of the ADS recovery periods. Myfreetaxes com Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. Myfreetaxes com Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . Myfreetaxes com Tax-exempt use property subject to a lease. Myfreetaxes com   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. Myfreetaxes com Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Myfreetaxes com See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Myfreetaxes com Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Myfreetaxes com The recovery period begins on the later of the following dates. Myfreetaxes com The date you place the addition or improvement in service. Myfreetaxes com The date you place in service the property to which you made the addition or improvement. Myfreetaxes com If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). Myfreetaxes com Example. Myfreetaxes com You own a rental home that you have been renting out since 1981. Myfreetaxes com If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. Myfreetaxes com Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Myfreetaxes com 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. Myfreetaxes com Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Myfreetaxes com The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Myfreetaxes com The mid-month convention. Myfreetaxes com   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Myfreetaxes com   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. Myfreetaxes com This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Myfreetaxes com   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Myfreetaxes com The mid-quarter convention. Myfreetaxes com   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. Myfreetaxes com   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. Myfreetaxes com This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Myfreetaxes com   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Myfreetaxes com    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. Myfreetaxes com However, it does not reflect any reduction in basis for any special depreciation allowance. Myfreetaxes com The half-year convention. Myfreetaxes com   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Myfreetaxes com   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. Myfreetaxes com This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Myfreetaxes com   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Myfreetaxes com Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Myfreetaxes com The 200% declining balance method over a GDS recovery period. Myfreetaxes com The 150% declining balance method over a GDS recovery period. Myfreetaxes com The straight line method over a GDS recovery period. Myfreetaxes com The straight line method over an ADS recovery period. Myfreetaxes com For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. Myfreetaxes com If you made this election, continue to use the same method and recovery period for that property. Myfreetaxes com Table 4–1 lists the types of property you can depreciate under each method. Myfreetaxes com It also gives a brief explanation of the method, including any benefits that may apply. Myfreetaxes com Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. Myfreetaxes com You can depreciate real property using the straight line method under either GDS or ADS. Myfreetaxes com Fruit or nut trees and vines. Myfreetaxes com   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Myfreetaxes com ADS required for some farmers. Myfreetaxes com   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Myfreetaxes com You must use ADS for all property you place in service in any year the election is in effect. Myfreetaxes com See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Myfreetaxes com Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Myfreetaxes com You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Myfreetaxes com However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Myfreetaxes com Attach the election to the amended return and write “Filed pursuant to section 301. Myfreetaxes com 9100-2” on the election statement. Myfreetaxes com File the amended return at the same address you filed the original return. Myfreetaxes com Once you make the election, you cannot change it. Myfreetaxes com If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. Myfreetaxes com However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Myfreetaxes com 150% election. Myfreetaxes com   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. Myfreetaxes com Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Myfreetaxes com Straight line election. Myfreetaxes com   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. Myfreetaxes com Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Myfreetaxes com Election of ADS. Myfreetaxes com   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. Myfreetaxes com ADS uses the straight line method of depreciation over fixed ADS recovery periods. Myfreetaxes com Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Myfreetaxes com   Make the election by completing line 20 in Part III of Form 4562. Myfreetaxes com Farm property. Myfreetaxes com   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. Myfreetaxes com The straight line method over a GDS recovery period. Myfreetaxes com The straight line method over an ADS recovery period. Myfreetaxes com Table 4-1. Myfreetaxes com Depreciation Methods Note. Myfreetaxes com The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Myfreetaxes com Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. Myfreetaxes com S. Myfreetaxes com  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. Myfreetaxes com 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Myfreetaxes com Then, you are ready to figure your depreciation deduction. Myfreetaxes com You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Myfreetaxes com Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. Myfreetaxes com These percentage tables are in Appendix A near the end of this publication. Myfreetaxes com Which table to use. Myfreetaxes com    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. Myfreetaxes com The percentage tables immediately follow the guide. Myfreetaxes com Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Myfreetaxes com You must apply the rates in the percentage tables to your property's unadjusted basis. Myfreetaxes com You cannot use the percentage tables for a short tax year. Myfreetaxes com See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Myfreetaxes com Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. Myfreetaxes com You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. Myfreetaxes com Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. Myfreetaxes com Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Myfreetaxes com   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. Myfreetaxes com For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. Myfreetaxes com See Figuring the Deduction Without Using the Tables, later. Myfreetaxes com Basis adjustment due to casualty loss. Myfreetaxes com   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Myfreetaxes com For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. Myfreetaxes com See Figuring the Deduction Without Using the Tables, later. Myfreetaxes com Example. Myfreetaxes com On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. Myfreetaxes com It cost $39,000 and she elected a section 179 deduction of $24,000. Myfreetaxes com She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Myfreetaxes com Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Myfreetaxes com She figured her MACRS depreciation deduction using the percentage tables. Myfreetaxes com For 2012, her MACRS depreciation deduction was $268. Myfreetaxes com In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Myfreetaxes com She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Myfreetaxes com Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Myfreetaxes com She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. Myfreetaxes com She must now figure her depreciation for 2013 without using the percentage tables. Myfreetaxes com Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. Myfreetaxes com Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. Myfreetaxes com However, you do reduce your original basis by other amounts, including the following. Myfreetaxes com Any amortization taken on the property. Myfreetaxes com Any section 179 deduction claimed. Myfreetaxes com Any special depreciation allowance taken on the property. Myfreetaxes com For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Myfreetaxes com If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. Myfreetaxes com MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Myfreetaxes com Use a separate worksheet for each item of property. Myfreetaxes com Then, use the information from this worksheet to prepare Form 4562. Myfreetaxes com Do not use this worksheet for automobiles. Myfreetaxes com Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Myfreetaxes com MACRS Worksheet Part I   1. Myfreetaxes com MACRS system (GDS or ADS)   2. Myfreetaxes com Property class   3. Myfreetaxes com Date placed in service   4. Myfreetaxes com Recovery period   5. Myfreetaxes com Method and convention   6. Myfreetaxes com Depreciation rate (from tables)   Part II   7. Myfreetaxes com Cost or other basis* $     8. Myfreetaxes com Business/investment use   %   9. Myfreetaxes com Multiply line 7 by line 8   $ 10. Myfreetaxes com Total claimed for section 179 deduction and other items   $ 11. Myfreetaxes com Subtract line 10 from line 9. Myfreetaxes com This is your tentative basis for depreciation   $ 12. Myfreetaxes com Multiply line 11 by . Myfreetaxes com 50 if the 50% special depreciation allowance applies. Myfreetaxes com This is your special depreciation allowance. Myfreetaxes com Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. Myfreetaxes com Subtract line 12 from line 11. Myfreetaxes com This is your basis for depreciation     14. Myfreetaxes com Depreciation rate (from line 6)     15. Myfreetaxes com Multiply line 13 by line 14. Myfreetaxes com This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Myfreetaxes com The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Myfreetaxes com Example. Myfreetaxes com You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Myfreetaxes com You use the furniture only for business. Myfreetaxes com This is the only property you placed in service this year. Myfreetaxes com You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. Myfreetaxes com You use GDS and the half-year convention to figure your depreciation. Myfreetaxes com You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Myfreetaxes com Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Myfreetaxes com You figure your depreciation deduction using the MACRS worksheet as follows. Myfreetaxes com MACRS Worksheet Part I 1. Myfreetaxes com MACRS system (GDS or ADS) GDS 2. Myfreetaxes com Property class 7-year 3. Myfreetaxes com Date placed in service 8/11/13 4. Myfreetaxes com Recovery period 7-Year 5. Myfreetaxes com Method and convention 200%DB/Half-Year 6. Myfreetaxes com Depreciation rate (from tables) . Myfreetaxes com 1429 Part II 7. Myfreetaxes com Cost or other basis* $10,000     8. Myfreetaxes com Business/investment use 100 %   9. Myfreetaxes com Multiply line 7 by line 8   $10,000 10. Myfreetaxes com Total claimed for section 179 deduction and other items   -0- 11. Myfreetaxes com Subtract line 10 from line 9. Myfreetaxes com This is your tentative basis for depreciation   $10,000 12. Myfreetaxes com Multiply line 11 by . Myfreetaxes com 50 if the 50% special depreciation allowance applies. Myfreetaxes com This is your special depreciation allowance. Myfreetaxes com Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. Myfreetaxes com Subtract line 12 from line 11. Myfreetaxes com This is your basis for depreciation   $10,000 14. Myfreetaxes com Depreciation rate (from line 6)   . Myfreetaxes com 1429 15. Myfreetaxes com Multiply line 13 by line 14. Myfreetaxes com This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Myfreetaxes com If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. Myfreetaxes com Year   Basis Percentage Deduction 2014 $ 10,000 24. Myfreetaxes com 49%   $2,449   2015   10,000 17. Myfreetaxes com 49   1,749   2016   10,000 12. Myfreetaxes com 49   1,249   2017   10,000 8. Myfreetaxes com 93   893   2018   10,000 8. Myfreetaxes com 92   892   2019   10,000 8. Myfreetaxes com 93   893   2020   10,000 4. Myfreetaxes com 46   446   Examples The following examples are provided to show you how to use the percentage tables. Myfreetaxes com In both examples, assume the following. Myfreetaxes com You use the property only for business. Myfreetaxes com You use the calendar year as your tax year. Myfreetaxes com You use GDS for all the properties. Myfreetaxes com Example 1. Myfreetaxes com You bought a building and land for $120,000 and placed it in service on March 8. Myfreetaxes com The sales contract showed that the building cost $100,000 and the land cost $20,000. Myfreetaxes com It is nonresidential real property. Myfreetaxes com The building's unadjusted basis is its original cost, $100,000. Myfreetaxes com You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Myfreetaxes com March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Myfreetaxes com Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Myfreetaxes com 033%   $2,033   2nd   100,000 2. Myfreetaxes com 564   2,564   3rd   100,000 2. Myfreetaxes com 564   2,564   Example 2. Myfreetaxes com During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. Myfreetaxes com You placed the machine in service in January, the furniture in September, and the computer in October. Myfreetaxes com You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Myfreetaxes com You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. Myfreetaxes com The total bases of all property you placed in service during the year is $10,000. Myfreetaxes com The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. Myfreetaxes com Therefore, you must use the mid-quarter convention for all three items. Myfreetaxes com You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Myfreetaxes com The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Myfreetaxes com The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Myfreetaxes com Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Myfreetaxes com Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Myfreetaxes com Year Property Basis Percentage Deduction 1st Machine $4,000 25. Myfreetaxes com 00 $1,000   2nd Machine 4,000 21. Myfreetaxes com 43 857   1st Furniture 1,000 10. Myfreetaxes com 71 107   2nd Furniture 1,000 25. Myfreetaxes com 51 255   1st Computer 5,000 5. Myfreetaxes com 00 250   2nd Computer 5,000 38. Myfreetaxes com 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. Myfreetaxes com You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. Myfreetaxes com After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Myfreetaxes com Half-year convention used. Myfreetaxes com   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. Myfreetaxes com Mid-quarter convention used. Myfreetaxes com   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. Myfreetaxes com Quarter Percentage First 12. Myfreetaxes com 5% Second 37. Myfreetaxes com 5 Third 62. Myfreetaxes com 5 Fourth 87. Myfreetaxes com 5 Example. Myfreetaxes com On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Myfreetaxes com You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Myfreetaxes com Your unadjusted basis for the property was $10,000. Myfreetaxes com You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. Myfreetaxes com Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Myfreetaxes com Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Myfreetaxes com 80% of $10,000). Myfreetaxes com You disposed of the property on April 6, 2013. Myfreetaxes com To determine your depreciation deduction for 2013, first figure the deduction for the full year. Myfreetaxes com This is $1,368 (13. Myfreetaxes com 68% of $10,000). Myfreetaxes com April is in the second quarter of the year, so you multiply $1,368 by 37. Myfreetaxes com 5% to get your depreciation deduction of $513 for 2013. Myfreetaxes com Mid-month convention used. Myfreetaxes com   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. Myfreetaxes com The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Myfreetaxes com The denominator is 12. Myfreetaxes com Example. Myfreetaxes com On July 2, 2011, you purchased and placed in service residential rental property. Myfreetaxes com The property cost $100,000, not including the cost of land. Myfreetaxes com You used Table A-6 to figure your MACRS depreciation for this property. Myfreetaxes com You sold the property on March 2, 2013. Myfreetaxes com You file your tax return based on the calendar year. Myfreetaxes com A full year of depreciation for 2013 is $3,636. Myfreetaxes com This is $100,000 multiplied by . Myfreetaxes com 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Myfreetaxes com You then apply the mid-month convention for the 2½ months of use in 2013. Myfreetaxes com Treat the month of disposition as one-half month of use. Myfreetaxes com Multiply $3,636 by the fraction, 2. Myfreetaxes com 5 over 12, to get your 2013 depreciation deduction of $757. Myfreetaxes com 50. Myfreetaxes com Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Myfreetaxes com Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Myfreetaxes com Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Myfreetaxes com Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Myfreetaxes com You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. Myfreetaxes com The straight line method is explained later. Myfreetaxes com You figure depreciation for the year you place property in service as follows. Myfreetaxes com Multiply your adjusted basis in the property by the declining balance rate. Myfreetaxes com Apply the applicable convention. Myfreetaxes com You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Myfreetaxes com Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Myfreetaxes com Multiply this new adjusted basis by the same declining balance rate used in earlier years. Myfreetaxes com If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. Myfreetaxes com Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Myfreetaxes com Declining balance rate. Myfreetaxes com   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. Myfreetaxes com For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Myfreetaxes com 00 (200%) by 3 to get 0. Myfreetaxes com 6667, or a 66. Myfreetaxes com 67% declining balance rate. Myfreetaxes com For 15-year property depreciated using the 150% declining balance method, divide 1. Myfreetaxes com 50 (150%) by 15 to get 0. Myfreetaxes com 10, or a 10% declining balance rate. Myfreetaxes com   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. Myfreetaxes com Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Myfreetaxes com 667% 3rd 5-year 200% DB 40. Myfreetaxes com 0 4th 7-year 200% DB 28. Myfreetaxes com 571 5th 10-year 200% DB 20. Myfreetaxes com 0 7th 15-year 150% DB 10. Myfreetaxes com 0 7th 20-year 150% DB 7. Myfreetaxes com 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. Myfreetaxes com You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Myfreetaxes com You figure depreciation for the year you place property in service as follows. Myfreetaxes com Multiply your adjusted basis in the property by the straight line rate. Myfreetaxes com Apply the applicable convention. Myfreetaxes com You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Myfreetaxes com Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Myfreetaxes com Determine the depreciation rate for the year. Myfreetaxes com Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Myfreetaxes com If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. Myfreetaxes com Straight line rate. Myfreetaxes com   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. Myfreetaxes com When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Myfreetaxes com If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Myfreetaxes com 0 (100%). Myfreetaxes com Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. Myfreetaxes com It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. Myfreetaxes com See Straight line rate in the previous discussion. Myfreetaxes com Use the applicable convention as explained in the following discussions. Myfreetaxes com Half-year convention. Myfreetaxes com   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Myfreetaxes com You deduct a full year of depreciation for any other year during the recovery period. Myfreetaxes com   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Myfreetaxes com If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Myfreetaxes com If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. Myfreetaxes com Mid-quarter convention. Myfreetaxes com   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. Myfreetaxes com   A quarter of a full 12-month tax year is a period of 3 months. Myfreetaxes com The first quarter in a year begins on the first day of the tax year. Myfreetaxes com The second quarter begins on the first day of the fourth month of the tax year. Myfreetaxes com The third quarter begins on the first day of the seventh month of the tax year. Myfreetaxes com The fourth quarter begins on the first day of the tenth month of the tax year. Myfreetaxes com A calendar year is divided into the following quarters. Myfreetaxes com Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. Myfreetaxes com Quarter Percentage First 87. Myfreetaxes com 5% Second 62. Myfreetaxes com 5 Third 37. Myfreetaxes com 5 Fourth 12. Myfreetaxes com 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. Myfreetaxes com Quarter Percentage First 12. Myfreetaxes com 5% Second 37. Myfreetaxes com 5 Third 62. Myfreetaxes com 5 Fourth 87. Myfreetaxes com 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. Myfreetaxes com Mid-month convention. Myfreetaxes com   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Myfreetaxes com Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Myfreetaxes com The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Myfreetaxes com 5). Myfreetaxes com The denominator is 12. Myfreetaxes com   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Myfreetaxes com If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. Myfreetaxes com Example. Myfreetaxes com You use the calendar year and place nonresidential real property in service in August. Myfreetaxes com The property is in service 4 full months (September, October, November, and December). Myfreetaxes com Your numerator is 4. Myfreetaxes com 5 (4 full months plus 0. Myfreetaxes com 5). Myfreetaxes com You multiply the depreciation for a full year by 4. Myfreetaxes com 5/12, or 0. Myfreetaxes com 375. Myfreetaxes com Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Myfreetaxes com Figures are rounded for purposes of the examples. Myfreetaxes com Assume for all the examples that you use a calendar year as your tax year. Myfreetaxes com Example 1—200% DB method and half-year convention. Myfreetaxes com In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Myfreetaxes com You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Myfreetaxes com You use GDS and the 200% declining balance (DB) method to figure your depreciation. Myfreetaxes com When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Myfreetaxes com You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Myfreetaxes com First year. Myfreetaxes com You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Myfreetaxes com The result is 40%. Myfreetaxes com You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Myfreetaxes com You apply the half-year convention by dividing the result ($400) by 2. Myfreetaxes com Depreciation for the first year under the 200% DB method is $200. Myfreetaxes com You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Myfreetaxes com The result is 20%. Myfreetaxes com You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Myfreetaxes com You apply the half-year convention by dividing the result ($200) by 2. Myfreetaxes com Depreciation for the first year under the SL method is $100. Myfreetaxes com The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Myfreetaxes com Second year. Myfreetaxes com You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Myfreetaxes com You multiply the result ($800) by the DB rate (40%). Myfreetaxes com Depreciation for the second year under the 200% DB method is $320. Myfreetaxes com You figure the SL depreciation rate by dividing 1 by 4. Myfreetaxes com 5, the number of years remaining in the recovery period. Myfreetaxes com (Based on the half-year convention, you used only half a year of the recovery period in the first year. Myfreetaxes com ) You multiply the reduced adjusted basis ($800) by the result (22. Myfreetaxes com 22%). Myfreetaxes com Depreciation under the SL method for the second year is $178. Myfreetaxes com The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Myfreetaxes com Third year. Myfreetaxes com You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Myfreetaxes com You multiply the result ($480) by the DB rate (40%). Myfreetaxes com Depreciation for the third year under the 200% DB method is $192. Myfreetaxes com You figure the SL depreciation rate by dividing 1 by 3. Myfreetaxes com 5. Myfreetaxes com You multiply the reduced adjusted basis ($480) by the result (28. Myfreetaxes com 57%). Myfreetaxes com Depreciation under the SL method for the third year is $137. Myfreetaxes com The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Myfreetaxes com Fourth year. Myfreetaxes com You reduce the adjusted basis ($480) by the de
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Myfreetaxes com 1. Myfreetaxes com   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Myfreetaxes com Amount realized on a recourse debt. Myfreetaxes com Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Myfreetaxes com S. Myfreetaxes com Individual Income Tax Return 1040X Amended U. Myfreetaxes com S. Myfreetaxes com Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Myfreetaxes com However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Myfreetaxes com See chapter 5 for information about getting publications and forms. Myfreetaxes com Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Myfreetaxes com An exchange is a transfer of property for other property or services. Myfreetaxes com The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Myfreetaxes com Sale or lease. Myfreetaxes com    Some agreements that seem to be leases may really be conditional sales contracts. Myfreetaxes com The intention of the parties to the agreement can help you distinguish between a sale and a lease. Myfreetaxes com   There is no test or group of tests to prove what the parties intended when they made the agreement. Myfreetaxes com You should consider each agreement based on its own facts and circumstances. Myfreetaxes com For more information, see chapter 3 in Publication 535, Business Expenses. Myfreetaxes com Cancellation of a lease. Myfreetaxes com    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Myfreetaxes com Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Myfreetaxes com Copyright. Myfreetaxes com    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Myfreetaxes com It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Myfreetaxes com Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Myfreetaxes com   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Myfreetaxes com For more information, see Section 1231 Gains and Losses in chapter 3. Myfreetaxes com Easement. Myfreetaxes com   The amount received for granting an easement is subtracted from the basis of the property. Myfreetaxes com If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Myfreetaxes com If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Myfreetaxes com   Any amount received that is more than the basis to be reduced is a taxable gain. Myfreetaxes com The transaction is reported as a sale of property. Myfreetaxes com   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Myfreetaxes com However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Myfreetaxes com   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Myfreetaxes com Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Myfreetaxes com See Gain or Loss From Condemnations, later. Myfreetaxes com Property transferred to satisfy debt. Myfreetaxes com   A transfer of property to satisfy a debt is an exchange. Myfreetaxes com Note's maturity date extended. Myfreetaxes com   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Myfreetaxes com Also, it is not considered a closed and completed transaction that would result in a gain or loss. Myfreetaxes com However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Myfreetaxes com Each case must be determined by its own facts. Myfreetaxes com For more information, see Regulations section 1. Myfreetaxes com 1001-3. Myfreetaxes com Transfer on death. Myfreetaxes com   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Myfreetaxes com No taxable gain or deductible loss results from the transfer. Myfreetaxes com Bankruptcy. Myfreetaxes com   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Myfreetaxes com Consequently, the transfer generally does not result in gain or loss. Myfreetaxes com For more information, see Publication 908, Bankruptcy Tax Guide. Myfreetaxes com Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Myfreetaxes com A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Myfreetaxes com A loss is the adjusted basis of the property that is more than the amount you realize. Myfreetaxes com   Table 1-1. Myfreetaxes com How To Figure Whether You Have a Gain or Loss IF your. Myfreetaxes com . Myfreetaxes com . Myfreetaxes com THEN you have a. Myfreetaxes com . Myfreetaxes com . Myfreetaxes com Adjusted basis is more than the amount realized, Loss. Myfreetaxes com Amount realized is more than the adjusted basis, Gain. Myfreetaxes com Basis. Myfreetaxes com   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Myfreetaxes com The basis of property you buy is usually its cost. Myfreetaxes com However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Myfreetaxes com See Basis Other Than Cost in Publication 551, Basis of Assets. Myfreetaxes com Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Myfreetaxes com See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Myfreetaxes com Adjusted basis. Myfreetaxes com   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Myfreetaxes com Increases include costs of any improvements having a useful life of more than 1 year. Myfreetaxes com Decreases include depreciation and casualty losses. Myfreetaxes com For more details and additional examples, see Adjusted Basis in Publication 551. Myfreetaxes com Amount realized. Myfreetaxes com   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Myfreetaxes com The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Myfreetaxes com Fair market value. Myfreetaxes com   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Myfreetaxes com If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Myfreetaxes com If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Myfreetaxes com Example. Myfreetaxes com You used a building in your business that cost you $70,000. Myfreetaxes com You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Myfreetaxes com You sold the building for $100,000 plus property having an FMV of $20,000. Myfreetaxes com The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Myfreetaxes com The selling expenses were $4,000. Myfreetaxes com Your gain on the sale is figured as follows. Myfreetaxes com Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Myfreetaxes com   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Myfreetaxes com Recognized gains must be included in gross income. Myfreetaxes com Recognized losses are deductible from gross income. Myfreetaxes com However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Myfreetaxes com See Nontaxable Exchanges, later. Myfreetaxes com Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Myfreetaxes com Interest in property. Myfreetaxes com   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Myfreetaxes com If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Myfreetaxes com Your basis in the property is disregarded. Myfreetaxes com This rule does not apply if all interests in the property are disposed of at the same time. Myfreetaxes com Example 1. Myfreetaxes com Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Myfreetaxes com You decide to sell your life interest in the farm. Myfreetaxes com The entire amount you receive is a recognized gain. Myfreetaxes com Your basis in the farm is disregarded. Myfreetaxes com Example 2. Myfreetaxes com The facts are the same as in Example 1, except that your brother joins you in selling the farm. Myfreetaxes com The entire interest in the property is sold, so your basis in the farm is not disregarded. Myfreetaxes com Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Myfreetaxes com Canceling a sale of real property. Myfreetaxes com   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Myfreetaxes com If the buyer returns the property in the year of sale, no gain or loss is recognized. Myfreetaxes com This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Myfreetaxes com If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Myfreetaxes com When the property is returned in a later year, you acquire a new basis in the property. Myfreetaxes com That basis is equal to the amount you pay to the buyer. Myfreetaxes com Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Myfreetaxes com You have a gain if the amount realized is more than your adjusted basis in the property. Myfreetaxes com However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Myfreetaxes com Bargain sales to charity. Myfreetaxes com   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Myfreetaxes com If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Myfreetaxes com The adjusted basis of the part sold is figured as follows. Myfreetaxes com Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Myfreetaxes com This allocation rule does not apply if a charitable contribution deduction is not allowable. Myfreetaxes com   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Myfreetaxes com Example. Myfreetaxes com You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Myfreetaxes com Your adjusted basis in the property is $4,000. Myfreetaxes com Your gain on the sale is $1,200, figured as follows. Myfreetaxes com Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Myfreetaxes com You must subtract depreciation you took or could have taken from the basis of the business or rental part. Myfreetaxes com However, see the special rule below for a home used partly for business or rental. Myfreetaxes com You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Myfreetaxes com Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Myfreetaxes com Any gain on the personal part of the property is a capital gain. Myfreetaxes com You cannot deduct a loss on the personal part. Myfreetaxes com Home used partly for business or rental. Myfreetaxes com    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Myfreetaxes com See Property Used Partly for Business or Rental, in Publication 523. Myfreetaxes com Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Myfreetaxes com You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Myfreetaxes com However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Myfreetaxes com Figure the loss you can deduct as follows. Myfreetaxes com Use the lesser of the property's adjusted basis or fair market value at the time of the change. Myfreetaxes com Add to (1) the cost of any improvements and other increases to basis since the change. Myfreetaxes com Subtract from (2) depreciation and any other decreases to basis since the change. Myfreetaxes com Subtract the amount you realized on the sale from the result in (3). Myfreetaxes com If the amount you realized is more than the result in (3), treat this result as zero. Myfreetaxes com The result in (4) is the loss you can deduct. Myfreetaxes com Example. Myfreetaxes com You changed your main home to rental property 5 years ago. Myfreetaxes com At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Myfreetaxes com This year, you sold the property for $55,000. Myfreetaxes com You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Myfreetaxes com Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Myfreetaxes com Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Myfreetaxes com   If you have a gain on the sale, you generally must recognize the full amount of the gain. Myfreetaxes com You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Myfreetaxes com   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Myfreetaxes com However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Myfreetaxes com   For more information, see Business Use or Rental of Home in Publication 523. Myfreetaxes com In addition, special rules apply if the home sold was acquired in a like-kind exchange. Myfreetaxes com See Special Situations in Publication 523. Myfreetaxes com Also see Like-Kind Exchanges, later. Myfreetaxes com Abandonments The abandonment of property is a disposition of property. Myfreetaxes com You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Myfreetaxes com Generally, abandonment is not treated as a sale or exchange of the property. Myfreetaxes com If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Myfreetaxes com If your adjusted basis is more than the amount you realize (if any), then you have a loss. Myfreetaxes com Loss from abandonment of business or investment property is deductible as a loss. Myfreetaxes com A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Myfreetaxes com This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Myfreetaxes com If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Myfreetaxes com The abandonment loss is deducted in the tax year in which the loss is sustained. Myfreetaxes com If the abandoned property is secured by debt, special rules apply. Myfreetaxes com The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Myfreetaxes com For more information, including examples, see chapter 3 of Publication 4681. Myfreetaxes com You cannot deduct any loss from abandonment of your home or other property held for personal use only. Myfreetaxes com Cancellation of debt. Myfreetaxes com   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Myfreetaxes com This income is separate from any loss realized from abandonment of the property. Myfreetaxes com   You must report this income on your tax return unless one of the following applies. Myfreetaxes com The cancellation is intended as a gift. Myfreetaxes com The debt is qualified farm debt. Myfreetaxes com The debt is qualified real property business debt. Myfreetaxes com You are insolvent or bankrupt. Myfreetaxes com The debt is qualified principal residence indebtedness. Myfreetaxes com File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Myfreetaxes com For more information, including other exceptions and exclusion, see Publication 4681. Myfreetaxes com Forms 1099-A and 1099-C. Myfreetaxes com   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Myfreetaxes com However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Myfreetaxes com The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Myfreetaxes com For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Myfreetaxes com Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Myfreetaxes com The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Myfreetaxes com This is true even if you voluntarily return the property to the lender. Myfreetaxes com You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Myfreetaxes com Buyer's (borrower's) gain or loss. Myfreetaxes com   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Myfreetaxes com The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Myfreetaxes com See Gain or Loss From Sales and Exchanges, earlier. Myfreetaxes com You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Myfreetaxes com Amount realized on a nonrecourse debt. Myfreetaxes com   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Myfreetaxes com The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Myfreetaxes com Example 1. Myfreetaxes com Chris bought a new car for $15,000. Myfreetaxes com He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Myfreetaxes com Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Myfreetaxes com The credit company repossessed the car because he stopped making loan payments. Myfreetaxes com The balance due after taking into account the payments Chris made was $10,000. Myfreetaxes com The fair market value of the car when repossessed was $9,000. Myfreetaxes com The amount Chris realized on the repossession is $10,000. Myfreetaxes com That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Myfreetaxes com Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Myfreetaxes com He has a $5,000 nondeductible loss. Myfreetaxes com Example 2. Myfreetaxes com Abena paid $200,000 for her home. Myfreetaxes com She paid $15,000 down and borrowed the remaining $185,000 from a bank. Myfreetaxes com Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Myfreetaxes com The bank foreclosed on the loan because Abena stopped making payments. Myfreetaxes com When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Myfreetaxes com The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Myfreetaxes com She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Myfreetaxes com She has a $5,000 realized gain. Myfreetaxes com Amount realized on a recourse debt. Myfreetaxes com   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Myfreetaxes com You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Myfreetaxes com The amount realized does not include the canceled debt that is your income from cancellation of debt. Myfreetaxes com See Cancellation of debt, below. Myfreetaxes com Seller's (lender's) gain or loss on repossession. Myfreetaxes com   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Myfreetaxes com For more information, see Repossession in Publication 537. Myfreetaxes com    Table 1-2. Myfreetaxes com Worksheet for Foreclosures and Repossessions Part 1. Myfreetaxes com Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Myfreetaxes com Complete this part only  if you were personally liable for the debt. Myfreetaxes com Otherwise,  go to Part 2. Myfreetaxes com   1. Myfreetaxes com Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Myfreetaxes com Enter the fair market value of the transferred property   3. Myfreetaxes com Ordinary income from cancellation of debt upon foreclosure or    repossession. Myfreetaxes com * Subtract line 2 from line 1. Myfreetaxes com   If less than zero, enter zero   Part 2. Myfreetaxes com Figure your gain or loss from foreclosure or repossession. Myfreetaxes com   4. Myfreetaxes com If you completed Part 1, enter the smaller of line 1 or line 2. Myfreetaxes com   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Myfreetaxes com Enter any proceeds you received from the foreclosure sale   6. Myfreetaxes com Add lines 4 and 5   7. Myfreetaxes com Enter the adjusted basis of the transferred property   8. Myfreetaxes com Gain or loss from foreclosure or repossession. Myfreetaxes com Subtract line 7  from line 6   * The income may not be taxable. Myfreetaxes com See Cancellation of debt. Myfreetaxes com Cancellation of debt. Myfreetaxes com   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Myfreetaxes com This income is separate from any gain or loss realized from the foreclosure or repossession. Myfreetaxes com Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Myfreetaxes com    You can use Table 1-2 to figure your income from cancellation of debt. Myfreetaxes com   You must report this income on your tax return unless one of the following applies. Myfreetaxes com The cancellation is intended as a gift. Myfreetaxes com The debt is qualified farm debt. Myfreetaxes com The debt is qualified real property business debt. Myfreetaxes com You are insolvent or bankrupt. Myfreetaxes com The debt is qualified principal residence indebtedness. Myfreetaxes com File Form 982 to report the income exclusion. Myfreetaxes com Example 1. Myfreetaxes com Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Myfreetaxes com In this case, the amount he realizes is $9,000. Myfreetaxes com This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Myfreetaxes com Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Myfreetaxes com He has a $6,000 nondeductible loss. Myfreetaxes com He also is treated as receiving ordinary income from cancellation of debt. Myfreetaxes com That income is $1,000 ($10,000 − $9,000). Myfreetaxes com This is the part of the canceled debt not included in the amount realized. Myfreetaxes com Example 2. Myfreetaxes com Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Myfreetaxes com In this case, the amount she realizes is $170,000. Myfreetaxes com This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Myfreetaxes com Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Myfreetaxes com She has a $5,000 nondeductible loss. Myfreetaxes com She also is treated as receiving ordinary income from cancellation of debt. Myfreetaxes com (The debt is not exempt from tax as discussed under Cancellation of debt, above. Myfreetaxes com ) That income is $10,000 ($180,000 − $170,000). Myfreetaxes com This is the part of the canceled debt not included in the amount realized. Myfreetaxes com Forms 1099-A and 1099-C. Myfreetaxes com   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Myfreetaxes com However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Myfreetaxes com The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Myfreetaxes com For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Myfreetaxes com Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Myfreetaxes com Involuntary conversions are also called involuntary exchanges. Myfreetaxes com Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Myfreetaxes com You report the gain or deduct the loss on your tax return for the year you realize it. Myfreetaxes com You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Myfreetaxes com However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Myfreetaxes com Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Myfreetaxes com Your basis for the new property is the same as your basis for the converted property. Myfreetaxes com This means that the gain is deferred until a taxable sale or exchange occurs. Myfreetaxes com If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Myfreetaxes com This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Myfreetaxes com If you have a gain or loss from the destruction or theft of property, see Publication 547. Myfreetaxes com Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Myfreetaxes com The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Myfreetaxes com The owner receives a condemnation award (money or property) in exchange for the property taken. Myfreetaxes com A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Myfreetaxes com Example. Myfreetaxes com A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Myfreetaxes com After the local government took action to condemn your property, you went to court to keep it. Myfreetaxes com But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Myfreetaxes com This is a condemnation of private property for public use. Myfreetaxes com Threat of condemnation. Myfreetaxes com   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Myfreetaxes com You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Myfreetaxes com   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Myfreetaxes com If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Myfreetaxes com Reports of condemnation. Myfreetaxes com   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Myfreetaxes com You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Myfreetaxes com If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Myfreetaxes com Example. Myfreetaxes com Your property lies along public utility lines. Myfreetaxes com The utility company has the authority to condemn your property. Myfreetaxes com The company informs you that it intends to acquire your property by negotiation or condemnation. Myfreetaxes com A threat of condemnation exists when you receive the notice. Myfreetaxes com Related property voluntarily sold. Myfreetaxes com   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Myfreetaxes com A substantial economic relationship exists if together the properties were one economic unit. Myfreetaxes com You also must show that the condemned property could not reasonably or adequately be replaced. Myfreetaxes com You can elect to postpone reporting the gain by buying replacement property. Myfreetaxes com See Postponement of Gain, later. Myfreetaxes com Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Myfreetaxes com If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Myfreetaxes com You can postpone reporting gain from a condemnation if you buy replacement property. Myfreetaxes com If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Myfreetaxes com See Postponement of Gain, later. Myfreetaxes com If your net condemnation award is less than your adjusted basis, you have a loss. Myfreetaxes com If your loss is from property you held for personal use, you cannot deduct it. Myfreetaxes com You must report any deductible loss in the tax year it happened. Myfreetaxes com You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Myfreetaxes com Main home condemned. Myfreetaxes com   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Myfreetaxes com You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Myfreetaxes com For information on this exclusion, see Publication 523. Myfreetaxes com If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Myfreetaxes com See Postponement of Gain, later. Myfreetaxes com Table 1-3. Myfreetaxes com Worksheet for Condemnations Part 1. Myfreetaxes com Gain from severance damages. Myfreetaxes com  If you did not receive severance damages, skip Part 1 and go to Part 2. Myfreetaxes com   1. Myfreetaxes com Enter gross severance damages received   2. Myfreetaxes com Enter your expenses in getting severance damages   3. Myfreetaxes com Subtract line 2 from line 1. Myfreetaxes com If less than zero, enter -0-   4. Myfreetaxes com Enter any special assessment on remaining property taken out of your award   5. Myfreetaxes com Net severance damages. Myfreetaxes com Subtract line 4 from line 3. Myfreetaxes com If less than zero, enter -0-   6. Myfreetaxes com Enter the adjusted basis of the remaining property   7. Myfreetaxes com Gain from severance damages. Myfreetaxes com Subtract line 6 from line 5. Myfreetaxes com If less than zero, enter -0-   8. Myfreetaxes com Refigured adjusted basis of the remaining property. Myfreetaxes com Subtract line 5 from line 6. Myfreetaxes com If less than zero, enter -0-   Part 2. Myfreetaxes com Gain or loss from condemnation award. Myfreetaxes com   9. Myfreetaxes com Enter the gross condemnation award received   10. Myfreetaxes com Enter your expenses in getting the condemnation award   11. Myfreetaxes com If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Myfreetaxes com If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Myfreetaxes com Otherwise, enter -0-   12. Myfreetaxes com Add lines 10 and 11   13. Myfreetaxes com Net condemnation award. Myfreetaxes com Subtract line 12 from line 9   14. Myfreetaxes com Enter the adjusted basis of the condemned property   15. Myfreetaxes com Gain from condemnation award. Myfreetaxes com If line 14 is more than line 13, enter -0-. Myfreetaxes com Otherwise, subtract line 14 from  line 13 and skip line 16   16. Myfreetaxes com Loss from condemnation award. Myfreetaxes com Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Myfreetaxes com )   Part 3. Myfreetaxes com Postponed gain from condemnation. Myfreetaxes com  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Myfreetaxes com )   17. Myfreetaxes com If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Myfreetaxes com Otherwise, enter -0-   18. Myfreetaxes com If line 15 is more than zero, enter the amount from line 13. Myfreetaxes com Otherwise, enter -0-   19. Myfreetaxes com Add lines 17 and 18. Myfreetaxes com If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Myfreetaxes com Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Myfreetaxes com Subtract line 20 from line 19. Myfreetaxes com If less than zero, enter -0-   22. Myfreetaxes com If you completed Part 1, add lines 7 and 15. Myfreetaxes com Otherwise, enter the amount from line 15. Myfreetaxes com If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Myfreetaxes com Recognized gain. Myfreetaxes com Enter the smaller of line 21 or line 22. Myfreetaxes com   24. Myfreetaxes com Postponed gain. Myfreetaxes com Subtract line 23 from line 22. Myfreetaxes com If less than zero, enter -0-   Condemnation award. Myfreetaxes com   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Myfreetaxes com The award is also the amount you are paid for the sale of your property under threat of condemnation. Myfreetaxes com Payment of your debts. Myfreetaxes com   Amounts taken out of the award to pay your debts are considered paid to you. Myfreetaxes com Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Myfreetaxes com Example. Myfreetaxes com The state condemned your property for public use. Myfreetaxes com The award was set at $200,000. Myfreetaxes com The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Myfreetaxes com You are considered to have received the entire $200,000 as a condemnation award. Myfreetaxes com Interest on award. Myfreetaxes com   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Myfreetaxes com You must report the interest separately as ordinary income. Myfreetaxes com Payments to relocate. Myfreetaxes com   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Myfreetaxes com Do not include them in your income. Myfreetaxes com Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Myfreetaxes com Net condemnation award. Myfreetaxes com   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Myfreetaxes com If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Myfreetaxes com This is discussed later under Special assessment taken out of award. Myfreetaxes com Severance damages. Myfreetaxes com    Severance damages are not part of the award paid for the property condemned. Myfreetaxes com They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Myfreetaxes com   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Myfreetaxes com Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Myfreetaxes com   The contracting parties should agree on the specific amount of severance damages in writing. Myfreetaxes com If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Myfreetaxes com   You cannot make a completely new allocation of the total award after the transaction is completed. Myfreetaxes com However, you can show how much of the award both parties intended for severance damages. Myfreetaxes com The severance damages part of the award is determined from all the facts and circumstances. Myfreetaxes com Example. Myfreetaxes com You sold part of your property to the state under threat of condemnation. Myfreetaxes com The contract you and the condemning authority signed showed only the total purchase price. Myfreetaxes com It did not specify a fixed sum for severance damages. Myfreetaxes com However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Myfreetaxes com You may treat this part as severance damages. Myfreetaxes com Treatment of severance damages. Myfreetaxes com   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Myfreetaxes com Use them to reduce the basis of the remaining property. Myfreetaxes com If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Myfreetaxes com   If your net severance damages are more than the basis of your retained property, you have a gain. Myfreetaxes com You may be able to postpone reporting the gain. Myfreetaxes com See Postponement of Gain, later. Myfreetaxes com    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Myfreetaxes com Net severance damages. Myfreetaxes com   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Myfreetaxes com You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Myfreetaxes com The balance is your net severance damages. Myfreetaxes com Expenses of obtaining a condemnation award and severance damages. Myfreetaxes com   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Myfreetaxes com Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Myfreetaxes com If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Myfreetaxes com Example. Myfreetaxes com You receive a condemnation award and severance damages. Myfreetaxes com One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Myfreetaxes com You had legal expenses for the entire condemnation proceeding. Myfreetaxes com You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Myfreetaxes com You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Myfreetaxes com Special assessment retained out of award. Myfreetaxes com   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Myfreetaxes com An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Myfreetaxes com Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Myfreetaxes com   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Myfreetaxes com Example. Myfreetaxes com To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Myfreetaxes com You were awarded $5,000 for this and spent $300 to get the award. Myfreetaxes com Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Myfreetaxes com The city then paid you only $4,300. Myfreetaxes com Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Myfreetaxes com If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Myfreetaxes com The net award would not change, even if you later paid the assessment from the amount you received. Myfreetaxes com Severance damages received. Myfreetaxes com   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Myfreetaxes com Any balance of the special assessment is used to reduce the condemnation award. Myfreetaxes com Example. Myfreetaxes com You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Myfreetaxes com You spent $300 to obtain the severance damages. Myfreetaxes com A special assessment of $800 was retained out of the award. Myfreetaxes com The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Myfreetaxes com Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Myfreetaxes com Part business or rental. Myfreetaxes com   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Myfreetaxes com Figure your gain or loss separately because gain or loss on each part may be treated differently. Myfreetaxes com   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Myfreetaxes com Example. Myfreetaxes com You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Myfreetaxes com You rented half the building and lived in the other half. Myfreetaxes com You paid $25,000 for the building and spent an additional $1,000 for a new roof. Myfreetaxes com You claimed allowable depreciation of $4,600 on the rental half. Myfreetaxes com You spent $200 in legal expenses to obtain the condemnation award. Myfreetaxes com Figure your gain or loss as follows. Myfreetaxes com     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Myfreetaxes com Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Myfreetaxes com Your basis for the new property is the same as your basis for the old. Myfreetaxes com Money or unlike property received. Myfreetaxes com   You ordinarily must report the gain if you receive money or unlike property. Myfreetaxes com You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Myfreetaxes com You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Myfreetaxes com See Controlling interest in a corporation, later. Myfreetaxes com   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Myfreetaxes com If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Myfreetaxes com   The basis of the replacement property is its cost, reduced by the postponed gain. Myfreetaxes com Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Myfreetaxes com See Controlling interest in a corporation, later. Myfreetaxes com You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Myfreetaxes com Postponing gain on severance damages. Myfreetaxes com   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Myfreetaxes com See Treatment of severance damages, earlier. Myfreetaxes com You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Myfreetaxes com   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Myfreetaxes com If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Myfreetaxes com   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Myfreetaxes com Postponing gain on the sale of related property. Myfreetaxes com   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Myfreetaxes com You must meet the requirements explained earlier under Related property voluntarily sold. Myfreetaxes com You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Myfreetaxes com Buying replacement property from a related person. Myfreetaxes com   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Myfreetaxes com For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Myfreetaxes com   This rule applies to the following taxpayers. Myfreetaxes com C corporations. Myfreetaxes com Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Myfreetaxes com All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Myfreetaxes com   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Myfreetaxes com If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Myfreetaxes com If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Myfreetaxes com Exception. Myfreetaxes com   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Myfreetaxes com Advance payment. Myfreetaxes com   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Myfreetaxes com Replacement property. Myfreetaxes com   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Myfreetaxes com You do not have to use the actual funds from the condemnation award to acquire the replacement property. Myfreetaxes com Property you acquire by gift or inheritance does not qualify as replacement property. Myfreetaxes com Similar or related in service or use. Myfreetaxes com   Your replacement property must be similar or related in service or use to the property it replaces. Myfreetaxes com   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Myfreetaxes com For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Myfreetaxes com Owner-user. Myfreetaxes com   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Myfreetaxes com Example. Myfreetaxes com Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Myfreetaxes com Your replacement property is not similar or related in service or use to the condemned property. Myfreetaxes com To be similar or related in service or use, your replacement property must also be used by you as your home. Myfreetaxes com Owner-investor. Myfreetaxes com   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Myfreetaxes com You decide this by determining all the following information. Myfreetaxes com Whether the properties are of similar service to you. Myfreetaxes com The nature of the business risks connected with the properties. Myfreetaxes com What the properties demand of you in the way of management, service, and relations to your tenants. Myfreetaxes com Example. Myfreetaxes com You owned land and a building you rented to a manufacturing company. Myfreetaxes com The building was condemned. Myfreetaxes com During the replacement period, you had a new building built on other land you already owned. Myfreetaxes com You rented out the new building for use as a wholesale grocery warehouse. Myfreetaxes com The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Myfreetaxes com Your management activities. Myfreetaxes com The amount and kind of services you provide to your tenants. Myfreetaxes com The nature of your business risks connected with the properties. Myfreetaxes com Leasehold replaced with fee simple property. Myfreetaxes com   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Myfreetaxes com   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Myfreetaxes com A leasehold is property held under a lease, usually for a term of years. Myfreetaxes com Outdoor advertising display replaced with real property. Myfreetaxes com   You can elect to treat an outdoor advertising display as real property. Myfreetaxes com If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Myfreetaxes com For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Myfreetaxes com   You can make this election only if you did not claim a section 179 deduction for the display. Myfreetaxes com You cannot cancel this election unless you get the consent of the IRS. Myfreetaxes com   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Myfreetaxes com Substituting replacement property. Myfreetaxes com   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Myfreetaxes com But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Myfreetaxes com Controlling interest in a corporation. Myfreetaxes com   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Myfreetaxes com You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Myfreetaxes com Basis adjustment to corporation's property. Myfreetaxes com   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Myfreetaxes com You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Myfreetaxes com   Allocate this reduction to the following classes of property in the order shown below. Myfreetaxes com Property that is similar or related in service or use to the condemned property. Myfreetaxes com Depreciable property not reduced in (1). Myfreetaxes com All other property. Myfreetaxes com If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Myfreetaxes com The reduced basis of any single property cannot be less than zero. Myfreetaxes com Main home replaced. Myfreetaxes com   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Myfreetaxes com The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Myfreetaxes com   You must reduce the basis of your replacement property by the postponed gain. Myfreetaxes com Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Myfreetaxes com Example. Myfreetaxes com City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Myfreetaxes com The city paid you a condemnation award of $400,000. Myfreetaxes com Your adjusted basis in the property was $80,000. Myfreetaxes com You realize a gain of $320,000 ($400,000 − $80,000). Myfreetaxes com You purchased a new home for $100,000. Myfreetaxes com You can exclude $250,000 of the realized gain from your gross income. Myfreetaxes com The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Myfreetaxes com You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Myfreetaxes com The remaining $20,000 of realized gain is postponed. Myfreetaxes com Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Myfreetaxes com Replacement period. Myfreetaxes com   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Myfreetaxes com This is the replacement period. Myfreetaxes com   The replacement period for a condemnation begins on the earlier of the following dates. Myfreetaxes com The date on which you disposed of the condemned property. Myfreetaxes com The date on which the threat of condemnation began. Myfreetaxes com   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Myfreetaxes com However, see the exceptions below. Myfreetaxes com Three-year replacement period for certain property. Myfreetaxes com   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Myfreetaxes com However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Myfreetaxes com Five-year replacement period for certain property. Myfreetaxes com   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Myfreetaxes com Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Myfreetaxes com Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Myfreetaxes com Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Myfreetaxes com Extended replacement period for taxpayers affected by other federally declared disasters. Myfreetaxes com    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Myfreetaxes com For more information visit www. Myfreetaxes com irs. Myfreetaxes com gov/uac/Tax-Relief-in-Disaster-Situations. Myfreetaxes com Weather-related sales of livestock in an area eligible for federal assistance. Myfreetaxes com   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Myfreetaxes com    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Myfreetaxes com See Notice 2006-82. Myfreetaxes com You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Myfreetaxes com irs. Myfreetaxes com gov/irb/2006-39_IRB/ar13. Myfreetaxes com html. Myfreetaxes com    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Myfreetaxes com If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Myfreetaxes com You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Myfreetaxes com irs. Myfreetaxes com gov/irb/2013-45_IRB/ar04. Myfreetaxes com html. Myfreetaxes com The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Myfreetaxes com Determining when gain is realized. Myfreetaxes com   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Myfreetaxes com If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Myfreetaxes com   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Myfreetaxes com A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Myfreetaxes com   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Myfreetaxes com All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Myfreetaxes com All or part of the award is actually or constructively received. Myfreetaxes com For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Myfreetaxes com Replacement property bought before the condemnation. Myfreetaxes com   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Myfreetaxes com Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Myfreetaxes com Example. Myfreetaxes com On April 3, 2012, city authorities notified you that your property would be condemned. Myfreetaxes com On June 5, 2012, you acquired property to replace the property to be condemned. Myfreetaxes com You still had the new property when the city took possession of your old property on September 4, 2013. Myfreetaxes com You have made a replacement within the replacement period. Myfreetaxes com Extension. Myfreetaxes com   You can request an extension of the replacement period from the IRS director for your area. Myfreetaxes com You should apply before the end of the replacement period. Myfreetaxes com Your request should explain in detail why you need an extension. Myfreetaxes com The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Myfreetaxes com An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Myfreetaxes com   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Myfreetaxes com Extensions are usually limited to a period of 1 year or less. Myfreetaxes com The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Myfreetaxes com If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri