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1040 Ez Tax Return Form

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1040 Ez Tax Return Form

1040 ez tax return form 23. 1040 ez tax return form   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. 1040 ez tax return form Mortgage proceeds used for business or investment. 1040 ez tax return form Introduction This chapter discusses what interest expenses you can deduct. 1040 ez tax return form Interest is the amount you pay for the use of borrowed money. 1040 ez tax return form The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). 1040 ez tax return form Home mortgage interest, including certain points and mortgage insurance premiums. 1040 ez tax return form Investment interest. 1040 ez tax return form This chapter explains these deductions. 1040 ez tax return form It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. 1040 ez tax return form Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. 1040 ez tax return form Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). 1040 ez tax return form The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. 1040 ez tax return form You can deduct home mortgage interest if all the following conditions are met. 1040 ez tax return form You file Form 1040 and itemize deductions on Schedule A (Form 1040). 1040 ez tax return form The mortgage is a secured debt on a qualified home in which you have an ownership interest. 1040 ez tax return form (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. 1040 ez tax return form The term “qualified home” means your main home or second home. 1040 ez tax return form For details, see Publication 936. 1040 ez tax return form )  Both you and the lender must intend that the loan be repaid. 1040 ez tax return form Amount Deductible In most cases, you can deduct all of your home mortgage interest. 1040 ez tax return form How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. 1040 ez tax return form Fully deductible interest. 1040 ez tax return form   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. 1040 ez tax return form (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. 1040 ez tax return form )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). 1040 ez tax return form Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). 1040 ez tax return form Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). 1040 ez tax return form The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. 1040 ez tax return form   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. 1040 ez tax return form    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. 1040 ez tax return form Figure 23-A. 1040 ez tax return form Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. 1040 ez tax return form Figure 23-A. 1040 ez tax return form Is My Interest Fully Deductible? Limits on deduction. 1040 ez tax return form   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. 1040 ez tax return form If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. 1040 ez tax return form Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. 1040 ez tax return form It also describes certain special situations that may affect your deduction. 1040 ez tax return form Late payment charge on mortgage payment. 1040 ez tax return form   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. 1040 ez tax return form Mortgage prepayment penalty. 1040 ez tax return form   If you pay off your home mortgage early, you may have to pay a penalty. 1040 ez tax return form You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. 1040 ez tax return form Sale of home. 1040 ez tax return form   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. 1040 ez tax return form Example. 1040 ez tax return form John and Peggy Harris sold their home on May 7. 1040 ez tax return form Through April 30, they made home mortgage interest payments of $1,220. 1040 ez tax return form The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. 1040 ez tax return form Their mortgage interest deduction is $1,270 ($1,220 + $50). 1040 ez tax return form Prepaid interest. 1040 ez tax return form   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. 1040 ez tax return form You can deduct in each year only the interest that qualifies as home mortgage interest for that year. 1040 ez tax return form However, there is an exception that applies to points, discussed later. 1040 ez tax return form Mortgage interest credit. 1040 ez tax return form   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. 1040 ez tax return form Figure the credit on Form 8396, Mortgage Interest Credit. 1040 ez tax return form If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. 1040 ez tax return form   For more information on the credit, see chapter 37. 1040 ez tax return form Ministers' and military housing allowance. 1040 ez tax return form   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. 1040 ez tax return form Hardest Hit Fund and Emergency Homeowners' Loan Programs. 1040 ez tax return form   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. 1040 ez tax return form You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. 1040 ez tax return form You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. 1040 ez tax return form If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). 1040 ez tax return form However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. 1040 ez tax return form Mortgage assistance payments under section 235 of the National Housing Act. 1040 ez tax return form   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. 1040 ez tax return form You cannot deduct the interest that is paid for you. 1040 ez tax return form No other effect on taxes. 1040 ez tax return form   Do not include these mortgage assistance payments in your income. 1040 ez tax return form Also, do not use these payments to reduce other deductions, such as real estate taxes. 1040 ez tax return form Divorced or separated individuals. 1040 ez tax return form   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. 1040 ez tax return form See the discussion of Payments for jointly-owned home in chapter 18. 1040 ez tax return form Redeemable ground rents. 1040 ez tax return form   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. 1040 ez tax return form   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. 1040 ez tax return form For more information, see Publication 936. 1040 ez tax return form Nonredeemable ground rents. 1040 ez tax return form   Payments on a nonredeemable ground rent are not mortgage interest. 1040 ez tax return form You can deduct them as rent if they are a business expense or if they are for rental property. 1040 ez tax return form Reverse mortgages. 1040 ez tax return form   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. 1040 ez tax return form With a reverse mortgage, you retain title to your home. 1040 ez tax return form Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. 1040 ez tax return form Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. 1040 ez tax return form Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. 1040 ez tax return form Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. 1040 ez tax return form Rental payments. 1040 ez tax return form   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. 1040 ez tax return form This is true even if the settlement papers call them interest. 1040 ez tax return form You cannot deduct these payments as home mortgage interest. 1040 ez tax return form Mortgage proceeds invested in tax-exempt securities. 1040 ez tax return form   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. 1040 ez tax return form “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. 1040 ez tax return form Refunds of interest. 1040 ez tax return form   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. 1040 ez tax return form If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. 1040 ez tax return form However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. 1040 ez tax return form This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. 1040 ez tax return form    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. 1040 ez tax return form For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. 1040 ez tax return form   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. 1040 ez tax return form Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. 1040 ez tax return form Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. 1040 ez tax return form A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. 1040 ez tax return form See Points paid by the seller , later. 1040 ez tax return form General Rule You generally cannot deduct the full amount of points in the year paid. 1040 ez tax return form Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. 1040 ez tax return form See Deduction Allowed Ratably , next. 1040 ez tax return form For exceptions to the general rule, see Deduction Allowed in Year Paid , later. 1040 ez tax return form Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. 1040 ez tax return form You use the cash method of accounting. 1040 ez tax return form This means you report income in the year you receive it and deduct expenses in the year you pay them. 1040 ez tax return form Most individuals use this method. 1040 ez tax return form Your loan is secured by a home. 1040 ez tax return form (The home does not need to be your main home. 1040 ez tax return form ) Your loan period is not more than 30 years. 1040 ez tax return form If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. 1040 ez tax return form Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. 1040 ez tax return form Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. 1040 ez tax return form (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. 1040 ez tax return form ) Your loan is secured by your main home. 1040 ez tax return form (Your main home is the one you ordinarily live in most of the time. 1040 ez tax return form ) Paying points is an established business practice in the area where the loan was made. 1040 ez tax return form The points paid were not more than the points generally charged in that area. 1040 ez tax return form You use the cash method of accounting. 1040 ez tax return form This means you report income in the year you receive it and deduct expenses in the year you pay them. 1040 ez tax return form (If you want more information about this method, see Accounting Methods in chapter 1. 1040 ez tax return form ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. 1040 ez tax return form The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. 1040 ez tax return form The funds you provided are not required to have been applied to the points. 1040 ez tax return form They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. 1040 ez tax return form You cannot have borrowed these funds from your lender or mortgage broker. 1040 ez tax return form You use your loan to buy or build your main home. 1040 ez tax return form The points were computed as a percentage of the principal amount of the mortgage. 1040 ez tax return form The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. 1040 ez tax return form The points may be shown as paid from either your funds or the seller's. 1040 ez tax return form Figure 23-B. 1040 ez tax return form Are My Points Fully Deductible This Year? Please click here for the text description of the image. 1040 ez tax return form Figure 23-B. 1040 ez tax return form Are My Points Fully Deductible This Year? Note. 1040 ez tax return form If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. 1040 ez tax return form Home improvement loan. 1040 ez tax return form   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. 1040 ez tax return form Second home. 1040 ez tax return form You cannot fully deduct in the year paid points you pay on loans secured by your second home. 1040 ez tax return form You can deduct these points only over the life of the loan. 1040 ez tax return form Refinancing. 1040 ez tax return form   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. 1040 ez tax return form This is true even if the new mortgage is secured by your main home. 1040 ez tax return form   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. 1040 ez tax return form You can deduct the rest of the points over the life of the loan. 1040 ez tax return form Example 1. 1040 ez tax return form In 1998, Bill Fields got a mortgage to buy a home. 1040 ez tax return form In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. 1040 ez tax return form The mortgage is secured by his home. 1040 ez tax return form To get the new loan, he had to pay three points ($3,000). 1040 ez tax return form Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. 1040 ez tax return form Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. 1040 ez tax return form The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. 1040 ez tax return form Bill's first payment on the new loan was due July 1. 1040 ez tax return form He made six payments on the loan in 2013 and is a cash basis taxpayer. 1040 ez tax return form Bill used the funds from the new mortgage to repay his existing mortgage. 1040 ez tax return form Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. 1040 ez tax return form He cannot deduct all of the points in 2013. 1040 ez tax return form He can deduct two points ($2,000) ratably over the life of the loan. 1040 ez tax return form He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. 1040 ez tax return form The other point ($1,000) was a fee for services and is not deductible. 1040 ez tax return form Example 2. 1040 ez tax return form The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. 1040 ez tax return form Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. 1040 ez tax return form His deduction is $500 ($2,000 × 25%). 1040 ez tax return form Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. 1040 ez tax return form This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. 1040 ez tax return form The total amount Bill deducts in 2013 is $550 ($500 + $50). 1040 ez tax return form Special Situations This section describes certain special situations that may affect your deduction of points. 1040 ez tax return form Original issue discount. 1040 ez tax return form   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. 1040 ez tax return form This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. 1040 ez tax return form Amounts charged for services. 1040 ez tax return form   Amounts charged by the lender for specific services connected to the loan are not interest. 1040 ez tax return form Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. 1040 ez tax return form You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. 1040 ez tax return form Points paid by the seller. 1040 ez tax return form   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 1040 ez tax return form Treatment by seller. 1040 ez tax return form   The seller cannot deduct these fees as interest. 1040 ez tax return form But they are a selling expense that reduces the amount realized by the seller. 1040 ez tax return form See chapter 15 for information on selling your home. 1040 ez tax return form Treatment by buyer. 1040 ez tax return form    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. 1040 ez tax return form If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. 1040 ez tax return form If any of those tests are not met, the buyer deducts the points over the life of the loan. 1040 ez tax return form   For information about basis, see chapter 13. 1040 ez tax return form Funds provided are less than points. 1040 ez tax return form   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. 1040 ez tax return form In addition, you can deduct any points paid by the seller. 1040 ez tax return form Example 1. 1040 ez tax return form When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). 1040 ez tax return form You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. 1040 ez tax return form Of the $1,000 charged for points, you can deduct $750 in the year paid. 1040 ez tax return form You spread the remaining $250 over the life of the mortgage. 1040 ez tax return form Example 2. 1040 ez tax return form The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. 1040 ez tax return form In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). 1040 ez tax return form You spread the remaining $250 over the life of the mortgage. 1040 ez tax return form You must reduce the basis of your home by the $1,000 paid by the seller. 1040 ez tax return form Excess points. 1040 ez tax return form   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. 1040 ez tax return form You must spread any additional points over the life of the mortgage. 1040 ez tax return form Mortgage ending early. 1040 ez tax return form   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. 1040 ez tax return form However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. 1040 ez tax return form Instead, deduct the remaining balance over the term of the new loan. 1040 ez tax return form    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. 1040 ez tax return form Example. 1040 ez tax return form Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. 1040 ez tax return form He deducts $200 points per year. 1040 ez tax return form Through 2012, Dan has deducted $2,200 of the points. 1040 ez tax return form Dan prepaid his mortgage in full in 2013. 1040 ez tax return form He can deduct the remaining $800 of points in 2013. 1040 ez tax return form Limits on deduction. 1040 ez tax return form   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . 1040 ez tax return form See Publication 936 for details. 1040 ez tax return form Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. 1040 ez tax return form The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. 1040 ez tax return form Qualified mortgage insurance. 1040 ez tax return form   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). 1040 ez tax return form   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. 1040 ez tax return form If provided by the Rural Housing Service, it is commonly known as a guarantee fee. 1040 ez tax return form These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. 1040 ez tax return form Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. 1040 ez tax return form Special rules for prepaid mortgage insurance. 1040 ez tax return form   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. 1040 ez tax return form You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. 1040 ez tax return form No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. 1040 ez tax return form This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. 1040 ez tax return form See the Example below. 1040 ez tax return form Example. 1040 ez tax return form Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. 1040 ez tax return form Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. 1040 ez tax return form Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. 1040 ez tax return form Ryan's adjusted gross income (AGI) for 2012 is $76,000. 1040 ez tax return form Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. 1040 ez tax return form For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. 1040 ez tax return form In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). 1040 ez tax return form Limit on deduction. 1040 ez tax return form   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. 1040 ez tax return form See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. 1040 ez tax return form If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. 1040 ez tax return form Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. 1040 ez tax return form You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. 1040 ez tax return form A governmental unit is a person for purposes of furnishing the statement. 1040 ez tax return form The statement for each year should be sent to you by January 31 of the following year. 1040 ez tax return form A copy of this form will also be sent to the IRS. 1040 ez tax return form The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. 1040 ez tax return form However, it should not show any interest that was paid for you by a government agency. 1040 ez tax return form As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. 1040 ez tax return form However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. 1040 ez tax return form See Points , earlier, to determine whether you can deduct points not shown on Form 1098. 1040 ez tax return form Prepaid interest on Form 1098. 1040 ez tax return form   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. 1040 ez tax return form However, you cannot deduct the prepaid amount for January 2014 in 2013. 1040 ez tax return form (See Prepaid interest , earlier. 1040 ez tax return form ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. 1040 ez tax return form You will include the interest for January 2014 with the other interest you pay for 2014. 1040 ez tax return form See How To Report , later. 1040 ez tax return form Refunded interest. 1040 ez tax return form   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. 1040 ez tax return form See Refunds of interest , earlier. 1040 ez tax return form Mortgage insurance premiums. 1040 ez tax return form   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. 1040 ez tax return form See Mortgage Insurance Premiums, earlier. 1040 ez tax return form Investment Interest This section discusses interest expenses you may be able to deduct as an investor. 1040 ez tax return form If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 1040 ez tax return form You can deduct investment interest subject to the limit discussed later. 1040 ez tax return form However, you cannot deduct interest you incurred to produce tax-exempt income. 1040 ez tax return form Nor can you deduct interest expenses on straddles. 1040 ez tax return form 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. 1040 ez tax return form Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 1040 ez tax return form 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). 1040 ez tax return form Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 1040 ez tax return form Partners, shareholders, and beneficiaries. 1040 ez tax return form   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 1040 ez tax return form 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. 1040 ez tax return form Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 1040 ez tax return form The allocation is not affected by the use of property that secures the debt. 1040 ez tax return form Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. 1040 ez tax return form You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. 1040 ez tax return form The interest carried over is treated as investment interest paid or accrued in that next year. 1040 ez tax return form 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. 1040 ez tax return form Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 1040 ez tax return form Investment income. 1040 ez tax return form    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 1040 ez tax return form Investment income does not include Alaska Permanent Fund dividends. 1040 ez tax return form It also does not include qualified dividends or net capital gain unless you choose to include them. 1040 ez tax return form Choosing to include qualified dividends. 1040 ez tax return form   Investment income generally does not include qualified dividends, discussed in chapter 8. 1040 ez tax return form However, you can choose to include all or part of your qualified dividends in investment income. 1040 ez tax return form   You make this choice by completing Form 4952, line 4g, according to its instructions. 1040 ez tax return form   If you choose to include any amount 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. 1040 ez tax return form Choosing to include net capital gain. 1040 ez tax return form   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 1040 ez tax return form However, you can choose to include all or part of your net capital gain in investment income. 1040 ez tax return form    You make this choice by completing Form 4952, line 4g, according to its instructions. 1040 ez tax return form   If you choose to include any amount 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. 1040 ez tax return form    Before making either choice, consider the overall effect on your tax liability. 1040 ez tax return form Compare your tax if you make one or both of these choices with your tax if you do not. 1040 ez tax return form Investment income of child reported on parent's return. 1040 ez tax return form    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. 1040 ez tax return form 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, Parents' Election To Report Child's Interest and Dividends. 1040 ez tax return form Child's qualified dividends. 1040 ez tax return form   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. 1040 ez tax return form However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 1040 ez tax return form   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). 1040 ez tax return form Child's Alaska Permanent Fund dividends. 1040 ez tax return form   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 1040 ez tax return form 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. 1040 ez tax return form 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. 1040 ez tax return form Subtract the result from the amount on Form 8814, line 12. 1040 ez tax return form Child's capital gain distributions. 1040 ez tax return form    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. 1040 ez tax return form However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 1040 ez tax return form   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). 1040 ez tax return form Investment expenses. 1040 ez tax return form   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 1040 ez tax return form 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. 1040 ez tax return form Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. 1040 ez tax return form Losses from passive activities. 1040 ez tax return form   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). 1040 ez tax return form See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. 1040 ez tax return form Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. 1040 ez tax return form Exception to use of Form 4952. 1040 ez tax return form   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 1040 ez tax return form Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 1040 ez tax return form You do not have any other deductible investment expenses. 1040 ez tax return form You have no carryover of investment interest expense from 2012. 1040 ez tax return form If you meet all of these tests, you can deduct all of your investment interest. 1040 ez tax return form More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. 1040 ez tax return form Items You Cannot Deduct Some interest payments are not deductible. 1040 ez tax return form Certain expenses similar to interest also are not deductible. 1040 ez tax return form Nondeductible expenses include the following items. 1040 ez tax return form Personal interest (discussed later). 1040 ez tax return form Service charges (however, see Other Expenses (Line 23) in chapter 28). 1040 ez tax return form Annual fees for credit cards. 1040 ez tax return form Loan fees. 1040 ez tax return form Credit investigation fees. 1040 ez tax return form Interest to purchase or carry tax-exempt securities. 1040 ez tax return form Penalties. 1040 ez tax return form   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. 1040 ez tax return form Personal Interest Personal interest is not deductible. 1040 ez tax return form Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. 1040 ez tax return form It includes the following items. 1040 ez tax return form Interest on car loans (unless you use the car for business). 1040 ez tax return form Interest on federal, state, or local income tax. 1040 ez tax return form Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. 1040 ez tax return form Late payment charges by a public utility. 1040 ez tax return form You may be able to deduct interest you pay on a qualified student loan. 1040 ez tax return form For details, see Publication 970, Tax Benefits for Education. 1040 ez tax return form Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. 1040 ez tax return form However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. 1040 ez tax return form You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. 1040 ez tax return form You do this by tracing disbursements of the debt proceeds to specific uses. 1040 ez tax return form For details on how to do this, see chapter 4 of Publication 535. 1040 ez tax return form How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. 1040 ez tax return form Where you deduct your interest expense generally depends on how you use the loan proceeds. 1040 ez tax return form See Table 23-1 for a summary of where to deduct your interest expense. 1040 ez tax return form Home mortgage interest and points. 1040 ez tax return form   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. 1040 ez tax return form If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. 1040 ez tax return form Attach a statement explaining the difference and print “See attached” next to line 10. 1040 ez tax return form    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. 1040 ez tax return form If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. 1040 ez tax return form The seller must give you this number and you must give the seller your TIN. 1040 ez tax return form A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. 1040 ez tax return form Failure to meet any of these requirements may result in a $50 penalty for each failure. 1040 ez tax return form The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. 1040 ez tax return form See Social Security Number (SSN) in chapter 1 for more information about TINs. 1040 ez tax return form    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. 1040 ez tax return form   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. 1040 ez tax return form More than one borrower. 1040 ez tax return form   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. 1040 ez tax return form Show how much of the interest each of you paid, and give the name and address of the person who received the form. 1040 ez tax return form Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. 1040 ez tax return form Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. 1040 ez tax return form   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. 1040 ez tax return form You should let each of the other borrowers know what his or her share is. 1040 ez tax return form Mortgage proceeds used for business or investment. 1040 ez tax return form    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. 1040 ez tax return form It shows where to deduct the part of your excess interest that is for those activities. 1040 ez tax return form Investment interest. 1040 ez tax return form    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. 1040 ez tax return form Amortization of bond premium. 1040 ez tax return form   There are various ways to treat the premium you pay to buy taxable bonds. 1040 ez tax return form See Bond Premium Amortization in Publication 550. 1040 ez tax return form Income-producing rental or royalty interest. 1040 ez tax return form   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). 1040 ez tax return form Example. 1040 ez tax return form You rent out part of your home and borrow money to make repairs. 1040 ez tax return form You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). 1040 ez tax return form Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. 1040 ez tax return form Table 23-1. 1040 ez tax return form Where To Deduct Your Interest Expense IF you have . 1040 ez tax return form . 1040 ez tax return form . 1040 ez tax return form THEN deduct it on . 1040 ez tax return form . 1040 ez tax return form . 1040 ez tax return form AND for more information go to . 1040 ez tax return form . 1040 ez tax return form . 1040 ez tax return form deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. 1040 ez tax return form deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. 1040 ez tax return form deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. 1040 ez tax return form deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. 1040 ez tax return form deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. 1040 ez tax return form deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. 1040 ez tax return form deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. 1040 ez tax return form deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. 1040 ez tax return form deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. 1040 ez tax return form personal interest not deductible. 1040 ez tax return form Prev  Up  Next   Home   More Online Publications
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Understand the Requirements

Bankruptcy generally is considered the debt management option of last resort because the results are long lasting and far reaching. The Bankruptcy Abuse and Prevention Act of 2005 established more stringent rules for consumers and attorneys.

The filing process may be difficult for debtors:

  • Debtors must file more documents; including itemized statements of monthly net income, proof of income (pay stubs) for the last 60 days, and tax returns for the preceding year (four years for Chapter 13).
  • Debtors must take a pre-filing credit counseling and post-filing education course to have debts discharged.
  • Debtors face increased filing fees, plus fees for credit counseling/education.
  • The bankruptcy petition and process are more complicated, so it's very difficult to file without an attorney.

The filing process is difficult for lawyers:

  • An attorney's signature on a petition certifies that the attorney has performed a reasonable investigation into the circumstances giving rise to the petition.
  • Attorneys must carefully review documents such as tax returns and pay stubs, as well as ask clients for credit reports.
  • Attorneys are more apprehensive about sanctions.

The 1040 Ez Tax Return Form

1040 ez tax return form 9. 1040 ez tax return form   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. 1040 ez tax return form Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. 1040 ez tax return form Amount to report as ordinary income. 1040 ez tax return form Applicable percentage. 1040 ez tax return form Amount to report as ordinary income. 1040 ez tax return form Applicable percentage. 1040 ez tax return form Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. 1040 ez tax return form When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. 1040 ez tax return form Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. 1040 ez tax return form Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. 1040 ez tax return form Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. 1040 ez tax return form Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. 1040 ez tax return form Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). 1040 ez tax return form Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. 1040 ez tax return form Table 9-1. 1040 ez tax return form Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. 1040 ez tax return form Held 24 mos. 1040 ez tax return form  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. 1040 ez tax return form Held 12 mos. 1040 ez tax return form   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). 1040 ez tax return form Do not take that gain into account as section 1231 gain. 1040 ez tax return form Section 1231 transactions. 1040 ez tax return form   Gain or loss on the following transactions is subject to section 1231 treatment. 1040 ez tax return form Sale or exchange of cattle and horses. 1040 ez tax return form The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. 1040 ez tax return form Sale or exchange of other livestock. 1040 ez tax return form This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. 1040 ez tax return form Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. 1040 ez tax return form Other livestock does not include poultry. 1040 ez tax return form Sale or exchange of depreciable personal property. 1040 ez tax return form This property must be used in your business and held longer than 1 year. 1040 ez tax return form Generally, property held for the production of rents or royalties is considered to be used in a trade or business. 1040 ez tax return form Examples of depreciable personal property include farm machinery and trucks. 1040 ez tax return form It also includes amortizable section 197 intangibles. 1040 ez tax return form Sale or exchange of real estate. 1040 ez tax return form This property must be used in your business and held longer than 1 year. 1040 ez tax return form Examples are your farm or ranch (including barns and sheds). 1040 ez tax return form Sale or exchange of unharvested crops. 1040 ez tax return form The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. 1040 ez tax return form You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). 1040 ez tax return form Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. 1040 ez tax return form Distributive share of partnership gains and losses. 1040 ez tax return form Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). 1040 ez tax return form Cutting or disposal of timber. 1040 ez tax return form Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . 1040 ez tax return form Condemnation. 1040 ez tax return form The condemned property (defined in chapter 11) must have been held longer than 1 year. 1040 ez tax return form It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. 1040 ez tax return form It cannot be property held for personal use. 1040 ez tax return form Casualty or theft. 1040 ez tax return form The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). 1040 ez tax return form You must have held the property longer than 1 year. 1040 ez tax return form However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. 1040 ez tax return form Section 1231 does not apply to personal casualty gains and losses. 1040 ez tax return form See chapter 11 for information on how to treat those gains and losses. 1040 ez tax return form If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. 1040 ez tax return form See Table 9-1. 1040 ez tax return form Property for sale to customers. 1040 ez tax return form   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. 1040 ez tax return form If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. 1040 ez tax return form Treatment as ordinary or capital. 1040 ez tax return form   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. 1040 ez tax return form If you have a net section 1231 loss, it is an ordinary loss. 1040 ez tax return form If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. 1040 ez tax return form The rest, if any, is long-term capital gain. 1040 ez tax return form Nonrecaptured section 1231 losses. 1040 ez tax return form   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. 1040 ez tax return form These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. 1040 ez tax return form Example. 1040 ez tax return form In 2013, Ben has a $2,000 net section 1231 gain. 1040 ez tax return form To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. 1040 ez tax return form From 2008 through 2012 he had the following section 1231 gains and losses. 1040 ez tax return form Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. 1040 ez tax return form 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. 1040 ez tax return form Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. 1040 ez tax return form To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. 1040 ez tax return form For more information, see chapter 3 of Publication 544. 1040 ez tax return form Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. 1040 ez tax return form Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. 1040 ez tax return form See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. 1040 ez tax return form Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. 1040 ez tax return form Personal property (either tangible or intangible). 1040 ez tax return form Other tangible property (except buildings and their structural components) used as any of the following. 1040 ez tax return form See Buildings and structural components below. 1040 ez tax return form An integral part of manufacturing, production, or extraction, or of furnishing certain services. 1040 ez tax return form A research facility in any of the activities in (a). 1040 ez tax return form A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). 1040 ez tax return form That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. 1040 ez tax return form Amortization of certified pollution control facilities. 1040 ez tax return form The section 179 expense deduction. 1040 ez tax return form Deduction for clean-fuel vehicles and certain refueling property. 1040 ez tax return form Expenditures to remove architectural and transportation barriers to the handicapped and elderly. 1040 ez tax return form Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. 1040 ez tax return form Single purpose agricultural (livestock) or horticultural structures. 1040 ez tax return form Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. 1040 ez tax return form Buildings and structural components. 1040 ez tax return form   Section 1245 property does not include buildings and structural components. 1040 ez tax return form The term building includes a house, barn, warehouse, or garage. 1040 ez tax return form The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. 1040 ez tax return form   Do not treat a structure that is essentially machinery or equipment as a building or structural component. 1040 ez tax return form Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. 1040 ez tax return form   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. 1040 ez tax return form Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. 1040 ez tax return form Facility for bulk storage of fungible commodities. 1040 ez tax return form   This is a facility used mainly for the bulk storage of fungible commodities. 1040 ez tax return form Bulk storage means storage of a commodity in a large mass before it is used. 1040 ez tax return form For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. 1040 ez tax return form To be fungible, a commodity must be such that one part may be used in place of another. 1040 ez tax return form Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. 1040 ez tax return form The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. 1040 ez tax return form The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). 1040 ez tax return form For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. 1040 ez tax return form For details, see chapter 3 of Publication 544. 1040 ez tax return form Use Part III of Form 4797 to figure the ordinary income part of the gain. 1040 ez tax return form Depreciation claimed on other property or claimed by other taxpayers. 1040 ez tax return form   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. 1040 ez tax return form Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. 1040 ez tax return form For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. 1040 ez tax return form Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). 1040 ez tax return form Example. 1040 ez tax return form Jeff Free paid $120,000 for a tractor in 2012. 1040 ez tax return form On February 23, 2013, he traded it for a chopper and paid an additional $30,000. 1040 ez tax return form To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. 1040 ez tax return form Jeff can also depreciate the additional $30,000 for the chopper. 1040 ez tax return form Depreciation and amortization. 1040 ez tax return form   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. 1040 ez tax return form See Depreciation Recapture in chapter 3 of Publication 544 for more details. 1040 ez tax return form Ordinary depreciation deductions. 1040 ez tax return form Section 179 deduction (see chapter 7). 1040 ez tax return form Any special depreciation allowance. 1040 ez tax return form Amortization deductions for all the following costs. 1040 ez tax return form Acquiring a lease. 1040 ez tax return form Lessee improvements. 1040 ez tax return form Pollution control facilities. 1040 ez tax return form Reforestation expenses. 1040 ez tax return form Section 197 intangibles. 1040 ez tax return form Qualified disaster expenses. 1040 ez tax return form Franchises, trademarks, and trade names acquired before August 11, 1993. 1040 ez tax return form Example. 1040 ez tax return form You file your returns on a calendar year basis. 1040 ez tax return form In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. 1040 ez tax return form You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. 1040 ez tax return form You did not claim the section 179 expense deduction for the truck. 1040 ez tax return form You sold it in May 2013 for $7,000. 1040 ez tax return form The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). 1040 ez tax return form Figure the gain treated as ordinary income as follows. 1040 ez tax return form 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. 1040 ez tax return form   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. 1040 ez tax return form If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. 1040 ez tax return form If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. 1040 ez tax return form This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. 1040 ez tax return form Disposition of plants and animals. 1040 ez tax return form   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. 1040 ez tax return form If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. 1040 ez tax return form For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. 1040 ez tax return form For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. 1040 ez tax return form You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. 1040 ez tax return form Example. 1040 ez tax return form Janet Maple sold her apple orchard in 2013 for $80,000. 1040 ez tax return form Her adjusted basis at the time of sale was $60,000. 1040 ez tax return form She bought the orchard in 2006, but the trees did not produce a crop until 2009. 1040 ez tax return form Her pre-productive expenses were $6,000. 1040 ez tax return form She elected not to use the uniform capitalization rules. 1040 ez tax return form Janet must treat $6,000 of the gain as ordinary income. 1040 ez tax return form Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. 1040 ez tax return form It includes buildings and structural components that are not section 1245 property (discussed earlier). 1040 ez tax return form It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. 1040 ez tax return form A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. 1040 ez tax return form Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. 1040 ez tax return form To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. 1040 ez tax return form You will not have additional depreciation if any of the following apply to the property disposed of. 1040 ez tax return form You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. 1040 ez tax return form You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. 1040 ez tax return form The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. 1040 ez tax return form These properties are depreciated using the straight line method. 1040 ez tax return form Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. 1040 ez tax return form This applies even if no payments are received in that year. 1040 ez tax return form If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. 1040 ez tax return form For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. 1040 ez tax return form If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. 1040 ez tax return form To do this, allocate the selling price and the payments you receive in the year of sale to each asset. 1040 ez tax return form Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. 1040 ez tax return form For more information on installment sales, see chapter 10. 1040 ez tax return form Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. 1040 ez tax return form By gift. 1040 ez tax return form At death. 1040 ez tax return form In like-kind exchanges. 1040 ez tax return form In involuntary conversions. 1040 ez tax return form Publication 544 also explains how to handle a single transaction involving multiple properties. 1040 ez tax return form Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. 1040 ez tax return form Deductions for soil and water conservation expenditures (section 1252 property). 1040 ez tax return form Exclusions from income for certain cost sharing payments (section 1255 property). 1040 ez tax return form Section 1252 property. 1040 ez tax return form   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. 1040 ez tax return form Exceptions. 1040 ez tax return form   Do not treat gain on the following transactions as gain on section 1252 property. 1040 ez tax return form Disposition of farmland by gift. 1040 ez tax return form Transfer of farm property at death (except for income in respect of a decedent). 1040 ez tax return form For more information, see Regulations section 1. 1040 ez tax return form 1252-2. 1040 ez tax return form Amount to report as ordinary income. 1040 ez tax return form   You report as ordinary income the lesser of the following amounts. 1040 ez tax return form Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). 1040 ez tax return form The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. 1040 ez tax return form Applicable percentage. 1040 ez tax return form   The applicable percentage is based on the length of time you held the land. 1040 ez tax return form If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. 1040 ez tax return form If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. 1040 ez tax return form If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. 1040 ez tax return form Example. 1040 ez tax return form You acquired farmland on January 19, 2005. 1040 ez tax return form On October 3, 2013, you sold the land at a $30,000 gain. 1040 ez tax return form Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. 1040 ez tax return form The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. 1040 ez tax return form You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. 1040 ez tax return form Section 1255 property. 1040 ez tax return form   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. 1040 ez tax return form If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. 1040 ez tax return form Amount to report as ordinary income. 1040 ez tax return form   You report as ordinary income the lesser of the following amounts. 1040 ez tax return form The applicable percentage of the total excluded cost-sharing payments. 1040 ez tax return form The gain on the disposition of the property. 1040 ez tax return form You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. 1040 ez tax return form However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. 1040 ez tax return form Applicable percentage. 1040 ez tax return form   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. 1040 ez tax return form If the property is held less than 10 years after you receive the payments, the percentage is 100%. 1040 ez tax return form After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. 1040 ez tax return form Form 4797, Part III. 1040 ez tax return form   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. 1040 ez tax return form Prev  Up  Next   Home   More Online Publications