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State Tax Free File

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State Tax Free File

State tax free file 14. State tax free file   Sale of Property Table of Contents Reminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities Reminder Foreign income. State tax free file  If you are a U. State tax free file S. State tax free file citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U. State tax free file S. State tax free file law. State tax free file This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer. State tax free file Introduction This chapter discusses the tax consequences of selling or trading investment property. State tax free file It explains the following. State tax free file What a sale or trade is. State tax free file Figuring gain or loss. State tax free file Nontaxable trades. State tax free file Related party transactions. State tax free file Capital gains or losses. State tax free file Capital assets and noncapital assets. State tax free file Holding period. State tax free file Rollover of gain from publicly traded securities. State tax free file Other property transactions. State tax free file   Certain transfers of property are not discussed here. State tax free file They are discussed in other IRS publications. State tax free file These include the following. State tax free file Sales of a main home, covered in chapter 15. State tax free file Installment sales, covered in Publication 537, Installment Sales. State tax free file Transactions involving business property, covered in Publication 544, Sales and Other Dispositions of Assets. State tax free file Dispositions of an interest in a passive activity, covered in Publication 925, Passive Activity and At-Risk Rules. State tax free file    Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), provides a more detailed discussion about sales and trades of investment property. State tax free file Publication 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. State tax free file It also discusses investment-related expenses. State tax free file Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 8949 Sales and Other Dispositions of Capital Assets 8824 Like-Kind Exchanges Sales and Trades If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. State tax free file Generally, you should receive the statement by February 15 of the next year. State tax free file It will show the gross proceeds from the sale. State tax free file If you sold a covered security in 2013, your 1099-B (or substitute statement) will show your basis. State tax free file Generally, a covered security is a security you acquired after 2010, with certain exceptions. State tax free file See the Instructions for Form 8949. State tax free file The IRS will also get a copy of Form 1099-B from the broker. State tax free file Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. State tax free file What Is a Sale or Trade? This section explains what is a sale or trade. State tax free file It also explains certain transactions and events that are treated as sales or trades. State tax free file A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. State tax free file A trade is a transfer of property for other property or services and may be taxed in the same way as a sale. State tax free file Sale and purchase. State tax free file   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. State tax free file The sale and purchase are two separate transactions. State tax free file But see Like-kind exchanges under Nontaxable Trades, later. State tax free file Redemption of stock. State tax free file   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. State tax free file Dividend versus sale or trade. State tax free file   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. State tax free file Both direct and indirect ownership of stock will be considered. State tax free file The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend (see chapter 8), There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. State tax free file Redemption or retirement of bonds. State tax free file   A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade. State tax free file   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. State tax free file For details, see Regulations section 1. State tax free file 1001-3. State tax free file Surrender of stock. State tax free file   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. State tax free file The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. State tax free file Worthless securities. State tax free file    Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. State tax free file This affects whether your capital loss is long term or short term. State tax free file See Holding Period , later. State tax free file   Worthless securities also include securities that you abandon after March 12, 2008. State tax free file To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. State tax free file All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. State tax free file    If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. State tax free file Do not deduct them in the year the stock became worthless. State tax free file How to report loss. State tax free file    Report worthless securities in Part I or Part II, whichever applies, of Form 8949. State tax free file In column (a), enter “Worthless. State tax free file ”    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. State tax free file See Form 8949 and the Instructions for Form 8949. State tax free file For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. State tax free file See also Schedule D (Form 1040), Form 8949, and their separate instructions. State tax free file Filing a claim for refund. State tax free file   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. State tax free file You must use Form 1040X, Amended U. State tax free file S. State tax free file Individual Income Tax Return, to amend your return for the year the security became worthless. State tax free file You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. State tax free file For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. State tax free file How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. State tax free file Gain. State tax free file   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. State tax free file Loss. State tax free file   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. State tax free file Adjusted basis. State tax free file   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. State tax free file See chapter 13 for more information about determining the adjusted basis of property. State tax free file Amount realized. State tax free file   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). State tax free file Amount realized includes the money you receive plus the fair market value of any property or services you receive. State tax free file If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized. State tax free file If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. State tax free file For more information, see Publication 537. State tax free file Fair market value. State tax free file   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. State tax free file Example. State tax free file You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. State tax free file Your gain is $3,000 ($10,000 − $7,000). State tax free file Debt paid off. State tax free file    A debt against the property, or against you, that is paid off as a part of the transaction, or that is assumed by the buyer, must be included in the amount realized. State tax free file This is true even if neither you nor the buyer is personally liable for the debt. State tax free file For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. State tax free file Example. State tax free file You sell stock that you had pledged as security for a bank loan of $8,000. State tax free file Your basis in the stock is $6,000. State tax free file The buyer pays off your bank loan and pays you $20,000 in cash. State tax free file The amount realized is $28,000 ($20,000 + $8,000). State tax free file Your gain is $22,000 ($28,000 − $6,000). State tax free file Payment of cash. State tax free file   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. State tax free file Determine your gain or loss by subtracting the cash you pay plus the adjusted basis of the property you trade in from the amount you realize. State tax free file If the result is a positive number, it is a gain. State tax free file If the result is a negative number, it is a loss. State tax free file No gain or loss. State tax free file   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. State tax free file In this case, you may have neither a gain nor a loss. State tax free file See Basis Other Than Cost in chapter 13. State tax free file Nontaxable Trades This section discusses trades that generally do not result in a taxable gain or deductible loss. State tax free file For more information on nontaxable trades, see chapter 1 of Publication 544. State tax free file Like-kind exchanges. State tax free file   If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. State tax free file To be nontaxable, a trade must meet all six of the following conditions. State tax free file The property must be business or investment property. State tax free file You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. State tax free file Neither property may be property used for personal purposes, such as your home or family car. State tax free file The property must not be held primarily for sale. State tax free file The property you trade and the property you receive must not be property you sell to customers, such as merchandise. State tax free file The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. State tax free file However, see Special rules for mutual ditch, reservoir, or irrigation company stock, in chapter 4 of Publication 550 for an exception. State tax free file Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later. State tax free file There must be a trade of like property. State tax free file The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. State tax free file The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. State tax free file The trade of a piece of machinery for a store building is not a trade of like property. State tax free file Real property located in the United States and real property located outside the United States are not like property. State tax free file Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property. State tax free file The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. State tax free file The property to be received must be received by the earlier of: The 180th day after the date on which you transfer the property given up in the trade, or The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. State tax free file    If you trade property with a related party in a like-kind exchange, a special rule may apply. State tax free file See Related Party Transactions , later in this chapter. State tax free file Also, see chapter 1 of Publication 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties. State tax free file Partly nontaxable exchange. State tax free file   If you receive money or unlike property in addition to like property, and the above six conditions are met, you have a partly nontaxable trade. State tax free file You are taxed on any gain you realize, but only up to the amount of the money and the fair market value of the unlike property you receive. State tax free file You cannot deduct a loss. State tax free file Like property and unlike property transferred. State tax free file   If you give up unlike property in addition to the like property, you must recognize gain or loss on the unlike property you give up. State tax free file The gain or loss is the difference between the adjusted basis of the unlike property and its fair market value. State tax free file Like property and money transferred. State tax free file   If all of the above conditions (1) – (6) are met, you have a nontaxable trade even if you pay money in addition to the like property. State tax free file Basis of property received. State tax free file   To figure the basis of the property received, see Nontaxable Exchanges in chapter 13. State tax free file How to report. State tax free file   You must report the trade of like property on Form 8824. State tax free file If you figure a recognized gain or loss on Form 8824, report it on Schedule D (Form 1040), or on Form 4797, Sales of Business Property, whichever applies. State tax free file See the instructions for Line 22 in the Instructions for Form 8824. State tax free file   For information on using Form 4797, see chapter 4 of Publication 544. State tax free file Corporate stocks. State tax free file   The following trades of corporate stocks generally do not result in a taxable gain or a deductible loss. State tax free file Corporate reorganizations. State tax free file   In some instances, a company will give you common stock for preferred stock, preferred stock for common stock, or stock in one corporation for stock in another corporation. State tax free file If this is a result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you do not recognize gain or loss. State tax free file Stock for stock of the same corporation. State tax free file   You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having a recognized gain or loss. State tax free file This is true for a trade between two stockholders as well as a trade between a stockholder and the corporation. State tax free file Convertible stocks and bonds. State tax free file   You generally will not have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate. State tax free file Property for stock of a controlled corporation. State tax free file   If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you ordinarily will not recognize a gain or loss. State tax free file This rule applies both to individuals and to groups who transfer property to a corporation. State tax free file It does not apply if the corporation is an investment company. State tax free file   For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation. State tax free file   If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. State tax free file For details, see Regulations section 1. State tax free file 351-3. State tax free file Additional information. State tax free file   For more information on trades of stock, see Nontaxable Trades in chapter 4 of Publication 550. State tax free file Insurance policies and annuities. State tax free file   You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade: A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract, An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract, An annuity contract for annuity contract or for a qualified long-term care insurance contract, or A qualified long-term care insurance contract for a qualified long-term care insurance contract. State tax free file   You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. State tax free file For transfers completed before October 24, 2011, see Revenue Ruling 2003-76 in Internal Revenue Bulletin 2003-33 and Revenue Procedure 2008-24 in Internal Revenue Bulletin 2008-13. State tax free file Revenue Ruling 2003-76 is available at www. State tax free file irs. State tax free file gov/irb/2003-33_IRB/ar11. State tax free file html. State tax free file Revenue Procedure 2008-24 is available at www. State tax free file irs. State tax free file gov/irb/2008-13_IRB/ar13. State tax free file html. State tax free file For transfers completed on or after October 24, 2011, see Revenue Ruling 2003-76, above, and Revenue Procedure 2011-38, in Internal Revenue Bulletin 2011-30. State tax free file Revenue Procedure 2011-38 is available at www. State tax free file irs. State tax free file gov/irb/2011-30_IRB/ar09. State tax free file html. State tax free file   For tax years beginning after December 31, 2010, amounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. State tax free file A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. State tax free file The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts are not received as an annuity. State tax free file   Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. State tax free file Demutualization of life insurance companies. State tax free file   If you received stock in exchange for your equity interest as a policyholder or an annuitant, you generally will not have a recognized gain or loss. State tax free file See Demutualization of Life Insurance Companies in Publication 550. State tax free file U. State tax free file S. State tax free file Treasury notes or bonds. State tax free file   You can trade certain issues of U. State tax free file S. State tax free file Treasury obligations for other issues designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. State tax free file See Savings bonds traded in chapter 1 of Publication 550 for more information. State tax free file Transfers Between Spouses Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. State tax free file This nonrecognition rule does not apply in the following situations. State tax free file The recipient spouse or former spouse is a nonresident alien. State tax free file Property is transferred in trust and liability exceeds basis. State tax free file Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property. State tax free file For other situations, see Transfers Between Spouses in chapter 4 of Publication 550. State tax free file Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and is not considered a sale or exchange. State tax free file The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. State tax free file This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. State tax free file This rule applies for purposes of determining loss as well as gain. State tax free file Any gain recognized on a transfer in trust increases the basis. State tax free file A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage. State tax free file Related Party Transactions Special rules apply to the sale or trade of property between related parties. State tax free file Gain on sale or trade of depreciable property. State tax free file   Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. State tax free file See chapter 3 of Publication 544 for more information. State tax free file Like-kind exchanges. State tax free file   Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. State tax free file See Like-kind exchanges , earlier, under Nontaxable Trades. State tax free file   This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. State tax free file However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. State tax free file See Related Party Transactions in chapter 4 of Publication 550 for exceptions. State tax free file Losses on sales or trades of property. State tax free file   You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties. State tax free file Members of your family. State tax free file This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. State tax free file ), and lineal descendants (children, grandchildren, etc. State tax free file ). State tax free file A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. State tax free file A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. State tax free file (See Constructive ownership of stock , later. State tax free file ) A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. State tax free file   In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties. State tax free file A grantor and fiduciary, or the fiduciary and beneficiary, of any trust. State tax free file Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. State tax free file A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust. State tax free file A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership. State tax free file Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. State tax free file Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. State tax free file An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest). State tax free file Two corporations that are members of the same controlled group. State tax free file (Under certain conditions, however, these losses are not disallowed but must be deferred. State tax free file ) Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships. State tax free file Multiple property sales or trades. State tax free file   If you sell or trade to a related party a number of blocks of stock or pieces of property in a lump sum, you must figure the gain or loss separately for each block of stock or piece of property. State tax free file The gain on each item may be taxable. State tax free file However, you cannot deduct the loss on any item. State tax free file Also, you cannot reduce gains from the sales of any of these items by losses on the sales of any of the other items. State tax free file Indirect transactions. State tax free file   You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. State tax free file This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged. State tax free file Constructive ownership of stock. State tax free file   In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. State tax free file Rule 1. State tax free file   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. State tax free file Rule 2. State tax free file   An individual is considered to own the stock directly or indirectly owned by or for his or her family. State tax free file Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. State tax free file Rule 3. State tax free file   An individual owning, other than by applying rule 2, any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. State tax free file Rule 4. State tax free file   When applying rule 1, 2, or 3, stock constructively owned by a person under rule 1 is treated as actually owned by that person. State tax free file But stock constructively owned by an individual under rule 2 or rule 3 is not treated as owned by that individual for again applying either rule 2 or rule 3 to make another person the constructive owner of the stock. State tax free file Property received from a related party. State tax free file    If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. State tax free file This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. State tax free file This rule does not apply if the related party's loss was disallowed because of the wash sale rules described in chapter 4 of Publication 550 under Wash Sales. State tax free file   If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party. State tax free file Example 1. State tax free file Your brother sells you stock for $7,600. State tax free file His cost basis is $10,000. State tax free file Your brother cannot deduct the loss of $2,400. State tax free file Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. State tax free file Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother). State tax free file Example 2. State tax free file If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). State tax free file You cannot deduct the loss that was not allowed to your brother. State tax free file Capital Gains and Losses This section discusses the tax treatment of gains and losses from different types of investment transactions. State tax free file Character of gain or loss. State tax free file   You need to classify your gains and losses as either ordinary or capital gains or losses. State tax free file You then need to classify your capital gains and losses as either short term or long term. State tax free file If you have long-term gains and losses, you must identify your 28% rate gains and losses. State tax free file If you have a net capital gain, you must also identify any unrecaptured section 1250 gain. State tax free file   The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. State tax free file Reporting capital gains and losses is explained in chapter 16. State tax free file Capital or Ordinary Gain or Loss If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. State tax free file Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. State tax free file A sale or trade of a noncapital asset generally results in ordinary gain or loss. State tax free file Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. State tax free file In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss. State tax free file Capital Assets and Noncapital Assets For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. State tax free file Some examples are: Stocks or bonds held in your personal account, A house owned and used by you and your family, Household furnishings, A car used for pleasure or commuting, Coin or stamp collections, Gems and jewelry, and Gold, silver, or any other metal. State tax free file Any property you own is a capital asset, except the following noncapital assets. State tax free file Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. State tax free file For an exception, see Capital Asset Treatment for Self-Created Musical Works , later. State tax free file Depreciable property used in your trade or business, even if fully depreciated. State tax free file Real property used in your trade or business. State tax free file A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is: Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. State tax free file For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later. State tax free file Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1). State tax free file U. State tax free file S. State tax free file Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price. State tax free file Certain commodities derivative financial instruments held by commodities derivatives dealers. State tax free file Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. State tax free file Supplies of a type you regularly use or consume in the ordinary course of your trade or business. State tax free file Investment Property Investment property is a capital asset. State tax free file Any gain or loss from its sale or trade is generally a capital gain or loss. State tax free file Gold, silver, stamps, coins, gems, etc. State tax free file   These are capital assets except when they are held for sale by a dealer. State tax free file Any gain or loss you have from their sale or trade generally is a capital gain or loss. State tax free file Stocks, stock rights, and bonds. State tax free file   All of these (including stock received as a dividend) are capital assets except when held for sale by a securities dealer. State tax free file However, if you own small business stock, see Losses on Section 1244 (Small Business) Stock , later, and Losses on Small Business Investment Company Stock, in chapter 4 of Publication 550. State tax free file Personal Use Property Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. State tax free file However, you cannot deduct a loss from selling personal use property. State tax free file Capital Asset Treatment for Self-Created Musical Works You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if: Your personal efforts created the property, or You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. State tax free file You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. State tax free file You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. State tax free file You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D (Form 1040), and their separate instructions. State tax free file For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. State tax free file See also Schedule D (Form 1040), Form 8949, and their separate instructions. State tax free file You can revoke the election if you have IRS approval. State tax free file To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. State tax free file See, for example, Rev. State tax free file Proc. State tax free file 2013-1, corrected by Announcement 2013–9, and amplified and modified by Rev. State tax free file Proc. State tax free file 2013–32, available at www. State tax free file irs. State tax free file gov/irb/2013-01_IRB/ar06. State tax free file html. State tax free file Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital asset. State tax free file Discounted Debt Instruments Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions. State tax free file Short-term government obligations. State tax free file   Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. State tax free file This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. State tax free file Acquisition discount is the stated redemption price at maturity minus your basis in the obligation. State tax free file   However, do not treat these gains as income to the extent you previously included the discount in income. State tax free file See Discount on Short-Term Obligations in chapter 1 of Publication 550. State tax free file Short-term nongovernment obligations. State tax free file   Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of original issue discount (OID). State tax free file This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue. State tax free file   However, to the extent you previously included the discount in income, you do not have to include it in income again. State tax free file See Discount on Short-Term Obligations in chapter 1 of Publication 550. State tax free file Tax-exempt state and local government bonds. State tax free file   If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. State tax free file To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID. State tax free file   If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. State tax free file For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Publication 550. State tax free file   Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. State tax free file If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. State tax free file If you bought the bonds after April 30, 1993, the gain is ordinary income. State tax free file   You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. State tax free file For more information, see Market Discount Bonds in chapter 1 of Publication 550. State tax free file    A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss. State tax free file Redeemed before maturity. State tax free file   If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID is not taxable to you. State tax free file   If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. State tax free file However, you must report the unearned part of OID as a capital gain. State tax free file Example. State tax free file On July 2, 2002, the date of issue, you bought a 20-year, 6% municipal bond for $800. State tax free file The face amount of the bond was $1,000. State tax free file The $200 discount was OID. State tax free file At the time the bond was issued, the issuer had no intention of redeeming it before it matured. State tax free file The bond was callable at its face amount beginning 10 years after the issue date. State tax free file The issuer redeemed the bond at the end of 11 years (July 2, 2013) for its face amount of $1,000 plus accrued annual interest of $60. State tax free file The OID earned during the time you held the bond, $73, is not taxable. State tax free file The $60 accrued annual interest also is not taxable. State tax free file However, you must report the unearned part of OID ($127) as a capital gain. State tax free file Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument). State tax free file   If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of the OID at the time of the sale or redemption is ordinary income. State tax free file The rest of the gain is capital gain. State tax free file If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. State tax free file This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter. State tax free file Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument). State tax free file   If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. State tax free file Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. State tax free file See Original Issue Discount (OID) in chapter 7 for information about OID that you must report on your tax return. State tax free file   If you sell or trade the debt instrument before maturity, your gain is a capital gain. State tax free file However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. State tax free file In this case, the rest of the gain is capital gain. State tax free file Market discount bonds. State tax free file   If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. State tax free file If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. State tax free file The rest of the gain is capital gain. State tax free file See Market Discount Bonds in chapter 1 of Publication 550. State tax free file   A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. State tax free file See Market discount bonds under Discounted Debt Instruments in chapter 4 of Publication 550. State tax free file Retirement of debt instrument. State tax free file   Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument. State tax free file Notes of individuals. State tax free file   If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. State tax free file An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met. State tax free file The lender is not in the business of lending money. State tax free file The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less. State tax free file Avoiding federal tax is not one of the principal purposes of the loan. State tax free file   If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. State tax free file When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. State tax free file The rest of the gain, if any, is capital gain. State tax free file Any loss on the sale or redemption is capital loss. State tax free file Deposit in Insolvent or Bankrupt Financial Institution If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways. State tax free file Ordinary loss. State tax free file Casualty loss. State tax free file Nonbusiness bad debt (short-term capital loss). State tax free file  For more information, see Deposit in Insolvent or Bankrupt Financial Institution, in chapter 4 of Publication 550. State tax free file Sale of Annuity The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income. State tax free file Losses on Section 1244 (Small Business) Stock You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. State tax free file Report the loss on Form 4797, line 10. State tax free file Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. State tax free file Report the gain on Form 8949. State tax free file See Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. State tax free file For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. State tax free file See also Schedule D (Form 1040), Form 8949, and their separate instructions. State tax free file Holding Period If you sold or traded investment property, you must determine your holding period for the property. State tax free file Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. State tax free file Long-term or short-term. State tax free file   If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. State tax free file If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. State tax free file   To determine how long you held the investment property, begin counting on the date after the day you acquired the property. State tax free file The day you disposed of the property is part of your holding period. State tax free file Example. State tax free file If you bought investment property on February 6, 2012, and sold it on February 6, 2013, your holding period is not more than 1 year and you have a short-term capital gain or loss. State tax free file If you sold it on February 7, 2013, your holding period is more than 1 year and you will have a long-term capital gain or loss. State tax free file Securities traded on established market. State tax free file   For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them. State tax free file    Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made. State tax free file Example. State tax free file You are a cash method, calendar year taxpayer. State tax free file You sold stock at a gain on December 30, 2013. State tax free file According to the rules of the stock exchange, the sale was closed by delivery of the stock 4 trading days after the sale, on January 6, 2014. State tax free file You received payment of the sales price on that same day. State tax free file Report your gain on your 2013 return, even though you received the payment in 2014. State tax free file The gain is long term or short term depending on whether you held the stock more than 1 year. State tax free file Your holding period ended on December 30. State tax free file If you had sold the stock at a loss, you would also report it on your 2013 return. State tax free file U. State tax free file S. State tax free file Treasury notes and bonds. State tax free file   The holding period of U. State tax free file S. State tax free file Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. State tax free file The holding period of U. State tax free file S. State tax free file Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted. State tax free file Automatic investment service. State tax free file   In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. State tax free file Your holding period starts on the day after the bank's purchase date. State tax free file If a share was bought over more than one purchase date, your holding period for that share is a split holding period. State tax free file A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds. State tax free file Nontaxable trades. State tax free file   If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property. State tax free file Property received as a gift. State tax free file   If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started. State tax free file   If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift. State tax free file Inherited property. State tax free file   Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. State tax free file This is true regardless of how long you actually held the property. State tax free file However, if you inherited property from someone who died in 2010, see the information below. State tax free file Inherited property from someone who died in 2010. State tax free file   If you inherit investment property from a decedent who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your holding period. State tax free file Real property bought. State tax free file   To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. State tax free file However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. State tax free file The holding period cannot start until there is an actual contract of sale. State tax free file The holding period of the seller cannot end before that time. State tax free file Real property repossessed. State tax free file   If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. State tax free file Your holding period does not include the time between the original sale and the repossession. State tax free file That is, it does not include the period during which the first buyer held the property. State tax free file Stock dividends. State tax free file   The holding period for stock you received as a taxable stock dividend begins on the date of distribution. State tax free file   The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. State tax free file This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation. State tax free file Nontaxable stock rights. State tax free file   Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. State tax free file The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised. State tax free file Nonbusiness Bad Debts If someone owes you money that you cannot collect, you have a bad debt. State tax free file You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. State tax free file Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. State tax free file To be deductible, nonbusiness bad debts must be totally worthless. State tax free file You cannot deduct a partly worthless nonbusiness debt. State tax free file Genuine debt required. State tax free file   A debt must be genuine for you to deduct a loss. State tax free file A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. State tax free file Basis in bad debt required. State tax free file    To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. State tax free file For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. State tax free file If you are a cash method taxpayer (as most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items. State tax free file When deductible. State tax free file   You can take a bad debt deduction only in the year the debt becomes worthless. State tax free file You do not have to wait until a debt is due to determine whether it is worthless. State tax free file A debt becomes worthless when there is no longer any chance that the amount owed will be paid. State tax free file   It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. State tax free file You must only show that you have taken reasonable steps to collect the debt. State tax free file Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. State tax free file How to report bad debts. State tax free file    Deduct nonbusiness bad debts as short-term capital losses on Form 8949. State tax free file    Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949, Part I, with box C checked. State tax free file    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. State tax free file See also Schedule D (Form 1040), Form 8949, and their separate instructions. State tax free file   For each bad debt, attach a statement to your return that contains: A description of the debt, including the amount, and the date it became due, The name of the debtor, and any business or family relationship between you and the debtor, The efforts you made to collect the debt, and Why you decided the debt was worthless. State tax free file For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. State tax free file Filing a claim for refund. State tax free file    If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. State tax free file To do this, use Form 1040X to amend your return for the year the debt became worthless. State tax free file You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. State tax free file For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. State tax free file Additional information. State tax free file   For more information, see Nonbusiness Bad Debts in Publication 550. State tax free file For information on business bad debts, see chapter 10 of Publication 535, Business Expenses. State tax free file Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale. State tax free file A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. State tax free file If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). State tax free file The result is your basis in the new stock or securities. State tax free file This adjustment postpones the loss deduction until the disposition of the new stock or securities. State tax free file Your holding period for the new stock or securities includes the holding period of the stock or securities sold. State tax free file For more information, see Wash Sales, in chapter 4 of Publication 550. State tax free file Rollover of Gain From Publicly Traded Securities You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. State tax free file This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain. State tax free file You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. State tax free file This postpones your gain until the year you dispose of the replacement property. State tax free file You qualify to make this choice if you meet all the following tests. State tax free file You sell publicly traded securities at a gain. State tax free file Publicly traded securities are securities traded on an established securities market. State tax free file Your gain from the sale is a capital gain. State tax free file During the 60-day period beginning on the date of the sale, you buy replacement property. State tax free file This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). State tax free file This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993. State tax free file Amount of gain recognized. State tax free file   If you make the choice described in this section, you must recognize gain only up to the following amount. State tax free file The amount realized on the sale, minus The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities). State tax free file  If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. State tax free file If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. State tax free file Limit on gain postponed. State tax free file   The amount of gain you can postpone each year is limited to the smaller of: $50,000 ($25,000 if you are married and file a separate return), or $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years. State tax free file Basis of replacement property. State tax free file   You must subtract the amount of postponed gain from the basis of your replacement property. State tax free file How to report and postpone gain. State tax free file    See How to report and postpone gain under Rollover of Gain From Publicly Traded Securities in chapter 4 of Publication 550 for details. State tax free file Prev  Up  Next   Home   More Online Publications
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The State Tax Free File

State tax free file 3. State tax free file   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. State tax free file Other income (nonpassive income). State tax free file Expenses. State tax free file Additional information. State tax free file Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. State tax free file Basis. State tax free file How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. State tax free file Including mutual fund or REMIC expenses in income. State tax free file Nondeductible ExpensesUsed as collateral. State tax free file Short-sale expenses. State tax free file Expenses for both tax-exempt and taxable income. State tax free file State income taxes. State tax free file Nondeductible amount. State tax free file Basis adjustment. State tax free file How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . State tax free file Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. State tax free file Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. State tax free file The at-risk rules and passive activity rules are explained briefly in this section. State tax free file The limit on investment interest is explained later in this chapter under Interest Expenses . State tax free file The 2% limit is explained later in this chapter under Expenses of Producing Income . State tax free file At-risk rules. State tax free file   Special at-risk rules apply to most income-producing activities. State tax free file These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. State tax free file Generally, this is the cash and the adjusted basis of property you contribute to the activity. State tax free file It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. State tax free file For more information, see Publication 925. State tax free file Passive activity losses and credits. State tax free file   The amount of losses and tax credits you can claim from passive activities is limited. State tax free file Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. State tax free file Also, you can use credits from passive activities only against tax on the income from passive activities. State tax free file There are exceptions for certain activities, such as rental real estate activities. State tax free file Passive activity. State tax free file   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. State tax free file However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. State tax free file More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. State tax free file You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. State tax free file  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. State tax free file However, it does not include rental activities or certain activities treated as incidental to holding property for investment. State tax free file   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. State tax free file Other income (nonpassive income). State tax free file    Generally, you can use losses from passive activities only to offset income from passive activities. State tax free file You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. State tax free file Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. State tax free file It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. State tax free file This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. State tax free file   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. State tax free file Expenses. State tax free file   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. State tax free file However, this interest and other expenses may be subject to other limits. State tax free file These limits are explained in the rest of this chapter. State tax free file Additional information. State tax free file   For more information about determining and reporting income and losses from passive activities, see Publication 925. State tax free file Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. State tax free file For information on business interest, see chapter 4 of Publication 535. State tax free file You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. State tax free file Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. State tax free file You can deduct investment interest subject to the limit discussed later. State tax free file However, you cannot deduct interest you incurred to produce tax-exempt income. State tax free file See Tax-exempt income under Nondeductible Expenses, later. State tax free file You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. State tax free file Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. State tax free file Investment property. State tax free file   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. State tax free file It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). State tax free file Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). State tax free file Partners, shareholders, and beneficiaries. State tax free file   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. State tax free file Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. State tax free file Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. State tax free file The allocation is not affected by the use of property that secures the debt. State tax free file Example 1. State tax free file You borrow $10,000 and use $8,000 to buy stock. State tax free file You use the other $2,000 to buy items for your home. State tax free file Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. State tax free file The other 20% is nondeductible personal interest. State tax free file Debt proceeds received in cash. State tax free file   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. State tax free file Debt proceeds deposited in account. State tax free file   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. State tax free file But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. State tax free file Example 2. State tax free file Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. State tax free file You did not buy the household items until June 1. State tax free file You had deposited the $2,000 in the bank. State tax free file You had no other transactions on the bank account until June. State tax free file You did not sell the stock, and you made no principal payments on the debt. State tax free file You paid interest from another account. State tax free file The $8,000 is treated as being used for an investment purpose. State tax free file The $2,000 is treated as being used for an investment purpose for the 3-month period. State tax free file Your total interest expense for 3 months on this debt is investment interest. State tax free file In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. State tax free file Amounts paid within 30 days. State tax free file   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. State tax free file This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. State tax free file   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. State tax free file Payments on debt may require new allocation. State tax free file   As you repay a debt used for more than one purpose, you must reallocate the balance. State tax free file You must first reduce the amount allocated to personal purposes by the repayment. State tax free file You then reallocate the rest of the debt to find what part is for investment purposes. State tax free file Example 3. State tax free file If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. State tax free file The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. State tax free file Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. State tax free file Pass-through entities. State tax free file   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. State tax free file If you contribute to the capital of the entity, you can make the allocation using any reasonable method. State tax free file Additional allocation rules. State tax free file   For more information about allocating interest expense, see chapter 4 of Publication 535. State tax free file When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. State tax free file If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. State tax free file For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. State tax free file Example. State tax free file You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. State tax free file On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. State tax free file If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. State tax free file If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. State tax free file Interest paid in advance. State tax free file   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. State tax free file You can deduct in each year only the interest for that year. State tax free file Interest on margin accounts. State tax free file   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. State tax free file You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. State tax free file Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. State tax free file   You cannot deduct any interest on money borrowed for personal reasons. State tax free file Limit on interest deduction for market discount bonds. State tax free file   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. State tax free file This limit does not apply if you accrue the market discount and include it in your income currently. State tax free file   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. State tax free file Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . State tax free file Interest not deducted due to limit. State tax free file   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. State tax free file Choosing to deduct disallowed interest expense before the year of disposition. State tax free file   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. State tax free file The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. State tax free file Net interest income. State tax free file   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. State tax free file Limit on interest deduction for short-term obligations. State tax free file   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. State tax free file   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). State tax free file The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . State tax free file Interest not deducted due to limit. State tax free file   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. State tax free file Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. State tax free file Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. State tax free file You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. State tax free file The interest carried over is treated as investment interest paid or accrued in that next year. State tax free file You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. State tax free file Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. State tax free file Investment income. State tax free file   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). State tax free file Investment income does not include Alaska Permanent Fund dividends. State tax free file It also does not include qualified dividends or net capital gain unless you choose to include them. State tax free file Choosing to include qualified dividends. State tax free file   Investment income generally does not include qualified dividends, discussed in chapter 1. State tax free file However, you can choose to include all or part of your qualified dividends in investment income. State tax free file   You make this choice by completing Form 4952, line 4g, according to its instructions. State tax free file   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. State tax free file Choosing to include net capital gain. State tax free file    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). State tax free file However, you can choose to include all or part of your net capital gain in investment income. State tax free file   You make this choice by completing Form 4952, line 4g, according to its instructions. State tax free file   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. State tax free file   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. State tax free file    Before making either choice, consider the overall effect on your tax liability. State tax free file Compare your tax if you make one or both of these choices with your tax if you do not. State tax free file Investment income of child reported on parent's return. State tax free file   Investment income includes the part of your child's interest and dividend income you choose to report on your return. State tax free file If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. State tax free file Include it on line 4a of Form 4952. State tax free file Example. State tax free file Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. State tax free file You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. State tax free file Also enter $200 on Form 1040, line 21. State tax free file Your investment income includes this $200. State tax free file Child's qualified dividends. State tax free file   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. State tax free file However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. State tax free file   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). State tax free file Child's Alaska Permanent Fund dividends. State tax free file   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. State tax free file To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. State tax free file Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. State tax free file Subtract the result from the amount on Form 8814, line 12. State tax free file Example. State tax free file Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. State tax free file You choose to report this on your return. State tax free file You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. State tax free file You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. State tax free file You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. State tax free file Child's capital gain distributions. State tax free file   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. State tax free file However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. State tax free file   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). State tax free file Investment expenses. State tax free file   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. State tax free file Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. State tax free file Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. State tax free file See Expenses of Producing Income , later, for a discussion of the 2% limit. State tax free file Losses from passive activities. State tax free file   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). State tax free file See Publication 925 for information about passive activities. State tax free file Example. State tax free file Ted is a partner in a partnership that operates a business. State tax free file However, he does not materially participate in the partnership's business. State tax free file Ted's interest in the partnership is considered a passive activity. State tax free file Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. State tax free file His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. State tax free file His investment interest expense is $8,000. State tax free file Ted also has income from the partnership of $2,000. State tax free file Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. State tax free file His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. State tax free file Form 4952 Use Form 4952 to figure your deduction for investment interest. State tax free file See Form 4952 for more information. State tax free file Exception to use of Form 4952. State tax free file   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. State tax free file Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. State tax free file You do not have any other deductible investment expenses. State tax free file You have no carryover of investment interest expense from 2012. State tax free file   If you meet all of these tests, you can deduct all of your investment interest. State tax free file    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. State tax free file If the bond yields taxable interest, you can choose to amortize the premium. State tax free file This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. State tax free file If you make this choice, you must reduce your basis in the bond by the amortization for the year. State tax free file If the bond yields tax-exempt interest, you must amortize the premium. State tax free file This amortized amount is not deductible in determining taxable income. State tax free file However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. State tax free file Bond premium. State tax free file   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). State tax free file For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. State tax free file Special rules to determine amounts payable on a bond. State tax free file   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. State tax free file 171-3. State tax free file Basis. State tax free file   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. State tax free file However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. State tax free file See Regulations section 1. State tax free file 171-1(e). State tax free file Dealers. State tax free file   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. State tax free file   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. State tax free file How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. State tax free file Constant yield method. State tax free file   Figure the bond premium amortization for each accrual period as follows. State tax free file Step 1: Determine your yield. State tax free file   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. State tax free file Figure the yield as of the date you got the bond. State tax free file It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. State tax free file   If you do not know the yield, consult your broker or tax advisor. State tax free file Databases available to them are likely to show the yield at the date of purchase. State tax free file Step 2: Determine the accrual periods. State tax free file   You can choose the accrual periods to use. State tax free file They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. State tax free file The computation is simplest if accrual periods are the same as the intervals between interest payment dates. State tax free file Step 3: Determine the bond premium for the accrual period. State tax free file   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. State tax free file Then subtract the result from the qualified stated interest for the period. State tax free file   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. State tax free file After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. State tax free file Example. State tax free file On February 1, 2012, you bought a taxable bond for $110,000. State tax free file The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). State tax free file The bond pays qualified stated interest of $10,000 on February 1 of each year. State tax free file Your yield is 8. State tax free file 07439% compounded annually. State tax free file You choose to use annual accrual periods ending on February 1 of each year. State tax free file To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. State tax free file When you subtract the result ($8,881. State tax free file 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. State tax free file 17. State tax free file Special rules to figure amortization. State tax free file   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. State tax free file 171-3. State tax free file Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. State tax free file Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. State tax free file Straight-line method. State tax free file   Under this method, the amount of your bond premium amortization is the same each month. State tax free file Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. State tax free file Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). State tax free file This gives you your bond premium amortization for the year. State tax free file Revenue Ruling 82-10 method. State tax free file   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. State tax free file This method is explained in Revenue Ruling 82-10, 1982-1 C. State tax free file B. State tax free file 46. State tax free file Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. State tax free file You should attach a statement to your return that you are making this choice under section 171. State tax free file See How To Report Amortization, next. State tax free file This choice is binding for the year you make it and for later tax years. State tax free file It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. State tax free file You can change your decision to amortize bond premium only with the written approval of the IRS. State tax free file To request approval, use Form 3115. State tax free file For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. State tax free file You can find Revenue Procedure 2011-14 at www. State tax free file irs. State tax free file gov/irb/2011-04_IRB/ar08. State tax free file html. State tax free file How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. State tax free file Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. State tax free file Under your last entry on line 1, put a subtotal of all interest listed on line 1. State tax free file Below this subtotal, print “ABP Adjustment,” and the total interest you received. State tax free file Subtract this amount from the subtotal, and enter the result on line 2. State tax free file Bond premium amortization more than interest. State tax free file   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. State tax free file    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. State tax free file Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. State tax free file Pre-1998 election to amortize bond premium. State tax free file   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. State tax free file Bonds acquired before October 23, 1986. State tax free file   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. State tax free file Bonds acquired after October 22, 1986, but before 1988. State tax free file    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. State tax free file Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). State tax free file To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. State tax free file The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. State tax free file The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. State tax free file The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. State tax free file For information on how to report expenses of producing income, see How To Report Investment Expenses , later. State tax free file Attorney or accounting fees. State tax free file   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. State tax free file However, in some cases, attorney or accounting fees are part of the basis of property. State tax free file See Basis of Investment Property in chapter 4. State tax free file Automatic investment service and dividend reinvestment plans. State tax free file   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. State tax free file Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. State tax free file Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. State tax free file   A corporation in which you own stock also may have a dividend reinvestment plan. State tax free file This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. State tax free file   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. State tax free file If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. State tax free file Deduct the charges in the year you pay them. State tax free file Clerical help and office rent. State tax free file   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. State tax free file Cost of replacing missing securities. State tax free file   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. State tax free file You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. State tax free file   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. State tax free file Under certain types of insurance policies, you can recover some of the expenses. State tax free file   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. State tax free file If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. State tax free file Fees to collect income. State tax free file   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. State tax free file Fees to buy or sell. State tax free file   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. State tax free file You must add the fee to the cost of the property. State tax free file See Basis of Investment Property in chapter 4. State tax free file    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. State tax free file They can be used only to figure gain or loss from the sale. State tax free file See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. State tax free file Investment counsel and advice. State tax free file   You can deduct fees you pay for counsel and advice about investments that produce taxable income. State tax free file This includes amounts you pay for investment advisory services. State tax free file Safe deposit box rent. State tax free file   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. State tax free file If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. State tax free file See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. State tax free file State and local transfer taxes. State tax free file   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. State tax free file If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. State tax free file If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. State tax free file Trustee's commissions for revocable trust. State tax free file   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. State tax free file However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. State tax free file   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. State tax free file You cannot deduct the entire amount in the year you pay it. State tax free file Investment expenses from pass-through entities. State tax free file   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. State tax free file A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). State tax free file A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). State tax free file Publicly-offered mutual funds are discussed later. State tax free file   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. State tax free file Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). State tax free file   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. State tax free file Including mutual fund or REMIC expenses in income. State tax free file   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. State tax free file You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. State tax free file If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). State tax free file If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. State tax free file If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. State tax free file Publicly-offered mutual funds. State tax free file   Most mutual funds are publicly offered. State tax free file These mutual funds, generally, are traded on an established securities exchange. State tax free file These funds do not pass investment expenses through to you. State tax free file Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. State tax free file As a result, you cannot deduct the expenses on your return. State tax free file   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. State tax free file    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. State tax free file Contact your mutual fund if you are not sure whether it is publicly offered. State tax free file Nondeductible Expenses Some expenses that you incur as an investor are not deductible. State tax free file Stockholders' meetings. State tax free file   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. State tax free file This is true even if your purpose in attending is to get information that would be useful in making further investments. State tax free file Investment-related seminar. State tax free file   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. State tax free file Single-premium life insurance, endowment, and annuity contracts. State tax free file   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. State tax free file Used as collateral. State tax free file   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. State tax free file Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. State tax free file Borrowing on insurance. State tax free file   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. State tax free file This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. State tax free file Tax-exempt income. State tax free file   You cannot deduct expenses you incur to produce tax-exempt income. State tax free file Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. State tax free file Short-sale expenses. State tax free file   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. State tax free file However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. State tax free file Short sales are discussed in Short Sales in chapter 4. State tax free file Expenses for both tax-exempt and taxable income. State tax free file   You may have expenses that are for both tax-exempt and taxable income. State tax free file If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. State tax free file You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. State tax free file   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. State tax free file If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. State tax free file To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. State tax free file Example. State tax free file You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. State tax free file In earning this income, you had $500 of expenses. State tax free file You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. State tax free file 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. State tax free file You cannot deduct $400 (80% of $500) of the expenses. State tax free file You can deduct $100 (the rest of the expenses) because they are for the taxable interest. State tax free file State income taxes. State tax free file   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. State tax free file But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. State tax free file Interest expense and carrying charges on straddles. State tax free file   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. State tax free file The nondeductible interest and carrying charges are added to the basis of the straddle property. State tax free file However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. State tax free file  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. State tax free file   Interest includes any amount you pay or incur in connection with personal property used in a short sale. State tax free file However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. State tax free file   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). State tax free file Nondeductible amount. State tax free file   Figure the nondeductible interest and carrying charges on straddle property as follows. State tax free file Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. State tax free file Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. State tax free file Basis adjustment. State tax free file   Add the nondeductible amount to the basis of your straddle property. State tax free file How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). State tax free file Enter your deductible investment interest expense on Schedule A (Form1040), line 14. State tax free file Include any deductible short sale expenses. State tax free file (See Short Sales in chapter 4 for information on these expenses. State tax free file ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. State tax free file Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. State tax free file List the type and amount of each expense on the dotted lines next to line 23. State tax free file (If necessary, you can show the required information on an attached statement. State tax free file ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. State tax free file When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. State tax free file If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. State tax free file Also see When To Deduct Investment Interest , earlier in this chapter. State tax free file Unpaid expenses owed to related party. State tax free file   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. State tax free file The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. State tax free file If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. State tax free file   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . State tax free file It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. State tax free file   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. State tax free file This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. State tax free file Prev  Up  Next   Home   More Online Publications