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1040x Instructions 2012

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1040x Instructions 2012

1040x instructions 2012 8. 1040x instructions 2012   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. 1040x instructions 2012 Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. 1040x instructions 2012 Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. 1040x instructions 2012 Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. 1040x instructions 2012 Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. 1040x instructions 2012 This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. 1040x instructions 2012 A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 1040x instructions 2012 An exchange is a transfer of property for other property or services. 1040x instructions 2012 Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. 1040x instructions 2012 If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. 1040x instructions 2012 If the adjusted basis of the property is more than the amount you realize, you will have a loss. 1040x instructions 2012 Basis and adjusted basis. 1040x instructions 2012   The basis of property you buy is usually its cost. 1040x instructions 2012 The adjusted basis of property is basis plus certain additions and minus certain deductions. 1040x instructions 2012 See chapter 6 for more information about basis and adjusted basis. 1040x instructions 2012 Amount realized. 1040x instructions 2012   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. 1040x instructions 2012 The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. 1040x instructions 2012   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x instructions 2012 Amount recognized. 1040x instructions 2012   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. 1040x instructions 2012 A recognized gain is a gain you must include in gross income and report on your income tax return. 1040x instructions 2012 A recognized loss is a loss you deduct from gross income. 1040x instructions 2012 However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. 1040x instructions 2012 See Like-Kind Exchanges next. 1040x instructions 2012 Also, a loss from the disposition of property held for personal use is not deductible. 1040x instructions 2012 Like-Kind Exchanges Certain exchanges of property are not taxable. 1040x instructions 2012 This means any gain from the exchange is not recognized, and any loss cannot be deducted. 1040x instructions 2012 Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. 1040x instructions 2012 The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040x instructions 2012 To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. 1040x instructions 2012 Qualifying property. 1040x instructions 2012 Like-kind property. 1040x instructions 2012 These two requirements are discussed later. 1040x instructions 2012 Multiple-party transactions. 1040x instructions 2012   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. 1040x instructions 2012 Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. 1040x instructions 2012 Receipt of title from third party. 1040x instructions 2012   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. 1040x instructions 2012 Basis of property received. 1040x instructions 2012   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. 1040x instructions 2012 See chapter 6 for more information. 1040x instructions 2012 Money paid. 1040x instructions 2012   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. 1040x instructions 2012 The basis of the property received is the basis of the property given up, increased by the money paid. 1040x instructions 2012 Example. 1040x instructions 2012 You traded an old tractor with an adjusted basis of $15,000 for a new one. 1040x instructions 2012 The new tractor costs $300,000. 1040x instructions 2012 You were allowed $80,000 for the old tractor and paid $220,000 cash. 1040x instructions 2012 You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). 1040x instructions 2012 If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. 1040x instructions 2012 In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. 1040x instructions 2012 Reporting the exchange. 1040x instructions 2012   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. 1040x instructions 2012 The Instructions for Form 8824 explain how to report the details of the exchange. 1040x instructions 2012   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. 1040x instructions 2012 You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. 1040x instructions 2012 See chapter 9 for more information. 1040x instructions 2012 Qualifying property. 1040x instructions 2012   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. 1040x instructions 2012 Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. 1040x instructions 2012 Nonqualifying property. 1040x instructions 2012   The rules for like-kind exchanges do not apply to exchanges of the following property. 1040x instructions 2012 Property you use for personal purposes, such as your home and family car. 1040x instructions 2012 Stock in trade or other property held primarily for sale, such as crops and produce. 1040x instructions 2012 Stocks, bonds, or notes. 1040x instructions 2012 However, see Qualifying property above. 1040x instructions 2012 Other securities or evidences of indebtedness, such as accounts receivable. 1040x instructions 2012 Partnership interests. 1040x instructions 2012 However, you may have a nontaxable exchange under other rules. 1040x instructions 2012 See Other Nontaxable Exchanges in chapter 1 of Publication 544. 1040x instructions 2012 Like-kind property. 1040x instructions 2012   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. 1040x instructions 2012 Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 1040x instructions 2012 Generally, real property exchanged for real property qualifies as an exchange of like-kind property. 1040x instructions 2012 For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. 1040x instructions 2012   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. 1040x instructions 2012 An exchange of a tractor for acreage, however, is not an exchange of like-kind property. 1040x instructions 2012 The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. 1040x instructions 2012 For example, the exchange of a bull for a cow is not a like-kind exchange. 1040x instructions 2012 An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. 1040x instructions 2012    Note. 1040x instructions 2012 Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. 1040x instructions 2012 Personal property. 1040x instructions 2012   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. 1040x instructions 2012 Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. 1040x instructions 2012 Property classified in any General Asset Class may not be classified within a Product Class. 1040x instructions 2012 Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. 1040x instructions 2012 General Asset Classes. 1040x instructions 2012   General Asset Classes describe the types of property frequently used in many businesses. 1040x instructions 2012 They include, but are not limited to, the following property. 1040x instructions 2012 Office furniture, fixtures, and equipment (asset class 00. 1040x instructions 2012 11). 1040x instructions 2012 Information systems, such as computers and peripheral equipment (asset class 00. 1040x instructions 2012 12). 1040x instructions 2012 Data handling equipment except computers (asset class 00. 1040x instructions 2012 13). 1040x instructions 2012 Automobiles and taxis (asset class 00. 1040x instructions 2012 22). 1040x instructions 2012 Light general purpose trucks (asset class 00. 1040x instructions 2012 241). 1040x instructions 2012 Heavy general purpose trucks (asset class 00. 1040x instructions 2012 242). 1040x instructions 2012 Tractor units for use over-the-road (asset class 00. 1040x instructions 2012 26). 1040x instructions 2012 Trailers and trailer-mounted containers (asset class 00. 1040x instructions 2012 27). 1040x instructions 2012 Industrial steam and electric generation and/or distribution systems (asset class 00. 1040x instructions 2012 4). 1040x instructions 2012 Product Classes. 1040x instructions 2012   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). 1040x instructions 2012 The latest version of the manual can be accessed at www. 1040x instructions 2012 census. 1040x instructions 2012 gov/eos/www/naics/. 1040x instructions 2012 Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. 1040x instructions 2012 ntis. 1040x instructions 2012 gov/products/naics. 1040x instructions 2012 aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. 1040x instructions 2012 A CD-ROM version with search and retrieval software is also available from NTIS. 1040x instructions 2012    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. 1040x instructions 2012 Partially nontaxable exchange. 1040x instructions 2012   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. 1040x instructions 2012 You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. 1040x instructions 2012 A loss is not deductible. 1040x instructions 2012 Example 1. 1040x instructions 2012 You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. 1040x instructions 2012 You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). 1040x instructions 2012 However, only $10,000, the cash received, is recognized (included in income). 1040x instructions 2012 Example 2. 1040x instructions 2012 Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. 1040x instructions 2012 Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). 1040x instructions 2012 Example 3. 1040x instructions 2012 Assume in Example 1 that the FMV of the land you received was only $15,000. 1040x instructions 2012 Your $5,000 loss is not recognized. 1040x instructions 2012 Unlike property given up. 1040x instructions 2012   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. 1040x instructions 2012 The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. 1040x instructions 2012 Like-kind exchanges between related persons. 1040x instructions 2012   Special rules apply to like-kind exchanges between related persons. 1040x instructions 2012 These rules affect both direct and indirect exchanges. 1040x instructions 2012 Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 1040x instructions 2012 The gain or loss on the original exchange must be recognized as of the date of the later disposition. 1040x instructions 2012 The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. 1040x instructions 2012 Related persons. 1040x instructions 2012   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. 1040x instructions 2012 ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. 1040x instructions 2012   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. 1040x instructions 2012 Example. 1040x instructions 2012 You used a grey pickup truck in your farming business. 1040x instructions 2012 Your sister used a red pickup truck in her landscaping business. 1040x instructions 2012 In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. 1040x instructions 2012 At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. 1040x instructions 2012 The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. 1040x instructions 2012 You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). 1040x instructions 2012 Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). 1040x instructions 2012 However, because this was a like-kind exchange, you recognized no gain. 1040x instructions 2012 Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). 1040x instructions 2012 She recognized gain only to the extent of the money she received, $200. 1040x instructions 2012 Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). 1040x instructions 2012 In 2013, you sold the red pickup truck to a third party for $7,000. 1040x instructions 2012 Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 1040x instructions 2012 On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. 1040x instructions 2012 You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). 1040x instructions 2012 In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. 1040x instructions 2012 Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). 1040x instructions 2012 Exceptions to the rules for related persons. 1040x instructions 2012   The following property dispositions are excluded from these rules. 1040x instructions 2012 Dispositions due to the death of either related person. 1040x instructions 2012 Involuntary conversions. 1040x instructions 2012 Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. 1040x instructions 2012 Multiple property exchanges. 1040x instructions 2012   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. 1040x instructions 2012 However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. 1040x instructions 2012 Transfer and receive properties in two or more exchange groups. 1040x instructions 2012 Transfer or receive more than one property within a single exchange group. 1040x instructions 2012   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x instructions 2012 Deferred exchange. 1040x instructions 2012   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. 1040x instructions 2012 A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. 1040x instructions 2012 The property you receive is replacement property. 1040x instructions 2012 The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. 1040x instructions 2012 In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. 1040x instructions 2012   For more information see Deferred Exchanges in chapter 1 of Publication 544. 1040x instructions 2012 Transfer to Spouse 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 a former spouse if incident to divorce. 1040x instructions 2012 This rule does not apply if the recipient is a nonresident alien. 1040x instructions 2012 Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. 1040x instructions 2012 Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. 1040x instructions 2012 The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 1040x instructions 2012 This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. 1040x instructions 2012 This rule applies for determining loss as well as gain. 1040x instructions 2012 Any gain recognized on a transfer in trust increases the basis. 1040x instructions 2012 For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. 1040x instructions 2012 Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). 1040x instructions 2012 You may also have a capital gain if your section 1231 transactions result in a net gain. 1040x instructions 2012 See Section 1231 Gains and Losses in  chapter 9. 1040x instructions 2012 To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). 1040x instructions 2012 Your net capital gains may be taxed at a lower tax rate than ordinary income. 1040x instructions 2012 See Capital Gains Tax Rates , later. 1040x instructions 2012 Your deduction for a net capital loss may be limited. 1040x instructions 2012 See Treatment of Capital Losses , later. 1040x instructions 2012 Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. 1040x instructions 2012 The following items are examples of capital assets. 1040x instructions 2012 A home owned and occupied by you and your family. 1040x instructions 2012 Household furnishings. 1040x instructions 2012 A car used for pleasure. 1040x instructions 2012 If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. 1040x instructions 2012 Stocks and bonds. 1040x instructions 2012 However, there are special rules for gains on qualified small business stock. 1040x instructions 2012 For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. 1040x instructions 2012 Personal-use property. 1040x instructions 2012   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. 1040x instructions 2012 Loss from the sale or exchange of personal-use property is not deductible. 1040x instructions 2012 You can deduct a loss relating to personal-use property only if it results from a casualty or theft. 1040x instructions 2012 For information on casualties and thefts, see chapter 11. 1040x instructions 2012 Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. 1040x instructions 2012 The time you own an asset before disposing of it is the holding period. 1040x instructions 2012 If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. 1040x instructions 2012 Report it in Part I of Schedule D (Form 1040). 1040x instructions 2012 If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. 1040x instructions 2012 Report it in Part II of Schedule D (Form 1040). 1040x instructions 2012 Holding period. 1040x instructions 2012   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. 1040x instructions 2012 The day you disposed of the property is part of your holding period. 1040x instructions 2012 Example. 1040x instructions 2012 If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. 1040x instructions 2012 If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. 1040x instructions 2012 Inherited property. 1040x instructions 2012   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. 1040x instructions 2012 This rule does not apply to livestock used in a farm business. 1040x instructions 2012 See Holding period under Livestock , later. 1040x instructions 2012 Nonbusiness bad debt. 1040x instructions 2012   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. 1040x instructions 2012 See chapter 4 of Publication 550. 1040x instructions 2012 Nontaxable exchange. 1040x instructions 2012   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. 1040x instructions 2012 That is, it begins on the same day as your holding period for the old property. 1040x instructions 2012 Gift. 1040x instructions 2012   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. 1040x instructions 2012 Real property. 1040x instructions 2012   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. 1040x instructions 2012   However, taking possession of real property under an option agreement is not enough to start the holding period. 1040x instructions 2012 The holding period cannot start until there is an actual contract of sale. 1040x instructions 2012 The holding period of the seller cannot end before that time. 1040x instructions 2012 Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. 1040x instructions 2012 Net short-term capital gain or loss. 1040x instructions 2012   Combine your short-term capital gains and losses. 1040x instructions 2012 Do this by adding all of your short-term capital gains. 1040x instructions 2012 Then add all of your short-term capital losses. 1040x instructions 2012 Subtract the lesser total from the greater. 1040x instructions 2012 The difference is your net short-term capital gain or loss. 1040x instructions 2012 Net long-term capital gain or loss. 1040x instructions 2012   Follow the same steps to combine your long-term capital gains and losses. 1040x instructions 2012 The result is your net long-term capital gain or loss. 1040x instructions 2012 Net gain. 1040x instructions 2012   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. 1040x instructions 2012 However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. 1040x instructions 2012 See Capital Gains Tax Rates , later. 1040x instructions 2012 Net loss. 1040x instructions 2012   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. 1040x instructions 2012 But there are limits on how much loss you can deduct and when you can deduct it. 1040x instructions 2012 See Treatment of Capital Losses next. 1040x instructions 2012 Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. 1040x instructions 2012 For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). 1040x instructions 2012 If your other income is low, you may not be able to use the full $3,000. 1040x instructions 2012 The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). 1040x instructions 2012 Capital loss carryover. 1040x instructions 2012   Generally, you have a capital loss carryover if either of the following situations applies to you. 1040x instructions 2012 Your net loss on Schedule D (Form 1040), is more than the yearly limit. 1040x instructions 2012 Your taxable income without your deduction for exemptions is less than zero. 1040x instructions 2012 If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. 1040x instructions 2012    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). 1040x instructions 2012 Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. 1040x instructions 2012 These lower rates are called the maximum capital gains rates. 1040x instructions 2012 The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 1040x instructions 2012 See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). 1040x instructions 2012 Also see Publication 550. 1040x instructions 2012 Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. 1040x instructions 2012 A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). 1040x instructions 2012 Property held for sale in the ordinary course of your farm business. 1040x instructions 2012   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. 1040x instructions 2012 Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). 1040x instructions 2012 The treatment of this property is discussed in chapter 3. 1040x instructions 2012 Land and depreciable properties. 1040x instructions 2012   Land and depreciable property you use in farming are not capital assets. 1040x instructions 2012 Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. 1040x instructions 2012 However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. 1040x instructions 2012 The sales of these business assets are reported on Form 4797. 1040x instructions 2012 See chapter 9 for more information. 1040x instructions 2012 Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. 1040x instructions 2012 Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. 1040x instructions 2012 A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. 1040x instructions 2012 The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. 1040x instructions 2012 A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. 1040x instructions 2012 Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. 1040x instructions 2012 Hedging transactions. 1040x instructions 2012 Transactions that are not hedging transactions. 1040x instructions 2012 Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. 1040x instructions 2012 There is a limit on the amount of capital losses you can deduct each year. 1040x instructions 2012 Hedging transactions are not subject to the mark-to-market rules. 1040x instructions 2012 If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. 1040x instructions 2012 They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. 1040x instructions 2012 The gain or loss on the termination of these hedges is generally ordinary gain or loss. 1040x instructions 2012 Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. 1040x instructions 2012 Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. 1040x instructions 2012 Examples include fuel and feed. 1040x instructions 2012 If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. 1040x instructions 2012 Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. 1040x instructions 2012 It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. 1040x instructions 2012 Retain the identification of each hedging transaction with your books and records. 1040x instructions 2012 Also, identify the item(s) or aggregate risk that is being hedged in your records. 1040x instructions 2012 Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. 1040x instructions 2012 For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. 1040x instructions 2012 Accounting methods for hedging transactions. 1040x instructions 2012   The accounting method you use for a hedging transaction must clearly reflect income. 1040x instructions 2012 This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. 1040x instructions 2012 There are requirements and limits on the method you can use for certain hedging transactions. 1040x instructions 2012 See Regulations section 1. 1040x instructions 2012 446-4(e) for those requirements and limits. 1040x instructions 2012   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. 1040x instructions 2012 Cash method. 1040x instructions 2012 Farm-price method. 1040x instructions 2012 Unit-livestock-price method. 1040x instructions 2012   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. 1040x instructions 2012   Your books and records must describe the accounting method used for each type of hedging transaction. 1040x instructions 2012 They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. 1040x instructions 2012 You must make the additional identification no more than 35 days after entering into the hedging transaction. 1040x instructions 2012 Example of a hedging transaction. 1040x instructions 2012   You file your income tax returns on the cash method. 1040x instructions 2012 On July 2 you anticipate a yield of 50,000 bushels of corn this year. 1040x instructions 2012 The December futures price is $5. 1040x instructions 2012 75 a bushel, but there are indications that by harvest time the price will drop. 1040x instructions 2012 To protect yourself against a drop in the price, you enter into the following hedging transaction. 1040x instructions 2012 You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. 1040x instructions 2012 75 a bushel. 1040x instructions 2012   The price did not drop as anticipated but rose to $6 a bushel. 1040x instructions 2012 In November, you sell your crop at a local elevator for $6 a bushel. 1040x instructions 2012 You also close out your futures position by buying ten December contracts for $6 a bushel. 1040x instructions 2012 You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. 1040x instructions 2012   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. 1040x instructions 2012 Your loss on the hedge is 25 cents a bushel. 1040x instructions 2012 In effect, the net selling price of your corn is $5. 1040x instructions 2012 75 a bushel. 1040x instructions 2012   Report the results of your futures transactions and your sale of corn separately on Schedule F. 1040x instructions 2012 See the instructions for the 2013 Schedule F (Form 1040). 1040x instructions 2012   The loss on your futures transactions is $13,900, figured as follows. 1040x instructions 2012 July 2 - Sold December corn futures (50,000 bu. 1040x instructions 2012 @$5. 1040x instructions 2012 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 1040x instructions 2012 @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. 1040x instructions 2012   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. 1040x instructions 2012 × $6). 1040x instructions 2012 Report it on Schedule F, Part I, line 2, as income from sales of products you raised. 1040x instructions 2012   Assume you were right and the price went down 25 cents a bushel. 1040x instructions 2012 In effect, you would still net $5. 1040x instructions 2012 75 a bushel, figured as follows. 1040x instructions 2012 Sold cash corn, per bushel $5. 1040x instructions 2012 50 Gain on hedge, per bushel . 1040x instructions 2012 25 Net price, per bushel $5. 1040x instructions 2012 75       The gain on your futures transactions would have been $11,100, figured as follows. 1040x instructions 2012 July 2 - Sold December corn futures (50,000 bu. 1040x instructions 2012 @$5. 1040x instructions 2012 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 1040x instructions 2012 @$5. 1040x instructions 2012 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. 1040x instructions 2012   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. 1040x instructions 2012 Livestock This part discusses the sale or exchange of livestock used in your farm business. 1040x instructions 2012 Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. 1040x instructions 2012 However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. 1040x instructions 2012 See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. 1040x instructions 2012 The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. 1040x instructions 2012 The sale of this livestock is reported on Schedule F. 1040x instructions 2012 See chapter 3. 1040x instructions 2012 Also, special rules apply to sales or exchanges caused by weather-related conditions. 1040x instructions 2012 See chapter 3. 1040x instructions 2012 Holding period. 1040x instructions 2012   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). 1040x instructions 2012 Livestock. 1040x instructions 2012   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. 1040x instructions 2012 Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. 1040x instructions 2012 Livestock used in farm business. 1040x instructions 2012   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. 1040x instructions 2012 The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. 1040x instructions 2012 An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. 1040x instructions 2012 However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. 1040x instructions 2012 Example 1. 1040x instructions 2012 You discover an animal that you intend to use for breeding purposes is sterile. 1040x instructions 2012 You dispose of it within a reasonable time. 1040x instructions 2012 This animal was held for breeding purposes. 1040x instructions 2012 Example 2. 1040x instructions 2012 You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. 1040x instructions 2012 These young animals were held for breeding or dairy purposes. 1040x instructions 2012 Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. 1040x instructions 2012 See Sales Caused by Weather-Related Conditions in chapter 3. 1040x instructions 2012 Example 3. 1040x instructions 2012 You are in the business of raising hogs for slaughter. 1040x instructions 2012 Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. 1040x instructions 2012 You sell the brood sows after obtaining the litter. 1040x instructions 2012 Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. 1040x instructions 2012 Example 4. 1040x instructions 2012 You are in the business of raising registered cattle for sale to others for use as breeding cattle. 1040x instructions 2012 The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. 1040x instructions 2012 Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. 1040x instructions 2012 Such use does not demonstrate that you are holding the cattle for breeding purposes. 1040x instructions 2012 However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. 1040x instructions 2012 The same applies to hog and sheep breeders. 1040x instructions 2012 Example 5. 1040x instructions 2012 You breed, raise, and train horses for racing purposes. 1040x instructions 2012 Every year you cull horses from your racing stable. 1040x instructions 2012 In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. 1040x instructions 2012 These horses are all considered held for sporting purposes. 1040x instructions 2012 Figuring gain or loss on the cash method. 1040x instructions 2012   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. 1040x instructions 2012 Raised livestock. 1040x instructions 2012   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. 1040x instructions 2012 Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. 1040x instructions 2012 The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. 1040x instructions 2012 However, see Uniform Capitalization Rules in chapter 6. 1040x instructions 2012 Purchased livestock. 1040x instructions 2012   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. 1040x instructions 2012 Example. 1040x instructions 2012 A farmer sold a breeding cow on January 8, 2013, for $1,250. 1040x instructions 2012 Expenses of the sale were $125. 1040x instructions 2012 The cow was bought July 2, 2009, for $1,300. 1040x instructions 2012 Depreciation (not less than the amount allowable) was $867. 1040x instructions 2012 Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. 1040x instructions 2012 Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. 1040x instructions 2012 Any loss on the disposition of such property is treated as a long-term capital loss. 1040x instructions 2012 Converted wetland. 1040x instructions 2012   This is generally land that was drained or filled to make the production of agricultural commodities possible. 1040x instructions 2012 It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. 1040x instructions 2012   A wetland (before conversion) is land that meets all the following conditions. 1040x instructions 2012 It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. 1040x instructions 2012 It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. 1040x instructions 2012 It supports, under normal circumstances, mostly plants that grow in saturated soil. 1040x instructions 2012 Highly erodible cropland. 1040x instructions 2012   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. 1040x instructions 2012 Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. 1040x instructions 2012 Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. 1040x instructions 2012 Successor. 1040x instructions 2012   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. 1040x instructions 2012 Timber Standing timber you held as investment property is a capital asset. 1040x instructions 2012 Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. 1040x instructions 2012 If you held the timber primarily for sale to customers, it is not a capital asset. 1040x instructions 2012 Gain or loss on its sale is ordinary business income or loss. 1040x instructions 2012 It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). 1040x instructions 2012 See the Instructions for Schedule F (Form 1040). 1040x instructions 2012 Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. 1040x instructions 2012 Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. 1040x instructions 2012 , are ordinary farm income and expenses reported on Schedule F. 1040x instructions 2012 Different 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, discussed below. 1040x instructions 2012 Timber considered cut. 1040x instructions 2012   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. 1040x instructions 2012 This is true whether the timber is cut under contract or whether you cut it yourself. 1040x instructions 2012 Christmas trees. 1040x instructions 2012   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. 1040x instructions 2012 They qualify for both rules discussed below. 1040x instructions 2012 Election to treat cutting as a sale or exchange. 1040x instructions 2012   Under the general rule, the cutting of timber results in no gain or loss. 1040x instructions 2012 It is not until a sale or exchange occurs that gain or loss is realized. 1040x instructions 2012 But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. 1040x instructions 2012 Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. 1040x instructions 2012 Any later sale results in ordinary business income or loss. 1040x instructions 2012 See the example below. 1040x instructions 2012   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. 1040x instructions 2012 Making the election. 1040x instructions 2012   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. 1040x instructions 2012 You do not have to make the election in the first year you cut the timber. 1040x instructions 2012 You can make it in any year to which the election would apply. 1040x instructions 2012 If the timber is partnership property, the election is made on the partnership return. 1040x instructions 2012 This election cannot be made on an amended return. 1040x instructions 2012   Once you have made the election, it remains in effect for all later years unless you revoke it. 1040x instructions 2012 Election under section 631(a) may be revoked. 1040x instructions 2012   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. 1040x instructions 2012 The prior election (and revocation) is disregarded for purposes of making a subsequent election. 1040x instructions 2012 See Form T (Timber), Forest Activities Schedule, for more information. 1040x instructions 2012 Gain or loss. 1040x instructions 2012   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. 1040x instructions 2012   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. 1040x instructions 2012 Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. 1040x instructions 2012 611-3. 1040x instructions 2012   Depletion of timber is discussed in chapter 7. 1040x instructions 2012 Example. 1040x instructions 2012   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. 1040x instructions 2012 It had an adjusted basis for depletion of $40 per MBF. 1040x instructions 2012 You are a calendar year taxpayer. 1040x instructions 2012 On January 1, 2013, the timber had a FMV of $350 per MBF. 1040x instructions 2012 It was cut in April for sale. 1040x instructions 2012 On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. 1040x instructions 2012 You report the difference between the FMV and your adjusted basis for depletion as a gain. 1040x instructions 2012 This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. 1040x instructions 2012 You figure your gain as follows. 1040x instructions 2012 FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. 1040x instructions 2012 Outright sales of timber. 1040x instructions 2012   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). 1040x instructions 2012 However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). 1040x instructions 2012 Cutting contract. 1040x instructions 2012   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. 1040x instructions 2012 You are the owner of the timber. 1040x instructions 2012 You held the timber longer than 1 year before its disposal. 1040x instructions 2012 You kept an economic interest in the timber. 1040x instructions 2012   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. 1040x instructions 2012   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. 1040x instructions 2012 Include this amount on Form 4797 along with your other section 1231 gains or losses. 1040x instructions 2012 Date of disposal. 1040x instructions 2012   The date of disposal is the date the timber is cut. 1040x instructions 2012 However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. 1040x instructions 2012   This election applies only to figure the holding period of the timber. 1040x instructions 2012 It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). 1040x instructions 2012   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. 1040x instructions 2012 The statement must identify the advance payments subject to the election and the contract under which they were made. 1040x instructions 2012   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). 1040x instructions 2012 Attach the statement to the amended return and write “Filed pursuant to section 301. 1040x instructions 2012 9100-2” at the top of the statement. 1040x instructions 2012 File the amended return at the same address the original return was filed. 1040x instructions 2012 Owner. 1040x instructions 2012   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. 1040x instructions 2012 You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. 1040x instructions 2012 Tree stumps. 1040x instructions 2012   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. 1040x instructions 2012 Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. 1040x instructions 2012 However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. 1040x instructions 2012 Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. 1040x instructions 2012   See Form T (Timber) and its separate instructions for more information about dispositions of timber. 1040x instructions 2012 Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). 1040x instructions 2012 If you have a gain from the sale, you may be allowed to exclude the gain on your home. 1040x instructions 2012 For more information, see Publication 523, Selling Your Home. 1040x instructions 2012 The gain on the sale of your business property is taxable. 1040x instructions 2012 A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. 1040x instructions 2012 Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. 1040x instructions 2012 See chapter 9. 1040x instructions 2012 Losses from personal-use property, other than casualty or theft losses, are not deductible. 1040x instructions 2012 If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. 1040x instructions 2012 See chapter 10 for information about installment sales. 1040x instructions 2012 When you sell your farm, the gain or loss on each asset is figured separately. 1040x instructions 2012 The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. 1040x instructions 2012 Each of the assets sold must be classified as one of the following. 1040x instructions 2012 Capital asset held 1 year or less. 1040x instructions 2012 Capital asset held longer than 1 year. 1040x instructions 2012 Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). 1040x instructions 2012 Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). 1040x instructions 2012 Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. 1040x instructions 2012 Allocation of consideration paid for a farm. 1040x instructions 2012   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. 1040x instructions 2012 The residual method is required only if the group of assets sold constitutes a trade or business. 1040x instructions 2012 This method determines gain or loss from the transfer of each asset. 1040x instructions 2012 It also determines the buyer's basis in the business assets. 1040x instructions 2012 For more information, see Sale of a Business in chapter 2 of Publication 544. 1040x instructions 2012 Property used in farm operation. 1040x instructions 2012   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. 1040x instructions 2012 Recognized gains and losses on business property must be reported on your return for the year of the sale. 1040x instructions 2012 If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). 1040x instructions 2012 Example. 1040x instructions 2012 You sell your farm, including your main home, which you have owned since December 2001. 1040x instructions 2012 You realize gain on the sale as follows. 1040x instructions 2012   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. 1040x instructions 2012 All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. 1040x instructions 2012 Treat the balance as section 1231 gain. 1040x instructions 2012 The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . 1040x instructions 2012 Partial sale. 1040x instructions 2012   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. 1040x instructions 2012 You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. 1040x instructions 2012 For a detailed discussion on installment sales, see Publication 544. 1040x instructions 2012 Adjusted basis of the part sold. 1040x instructions 2012   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. 1040x instructions 2012 , on the part sold. 1040x instructions 2012 If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . 1040x instructions 2012 Example. 1040x instructions 2012 You bought a 600-acre farm for $700,000. 1040x instructions 2012 The farm included land and buildings. 1040x instructions 2012 The purchase contract designated $600,000 of the purchase price to the land. 1040x instructions 2012 You later sold 60 acres of land on which you had installed a fence. 1040x instructions 2012 Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. 1040x instructions 2012 Use this amount to determine your gain or loss on the sale of the 60 acres. 1040x instructions 2012 Assessed values for local property taxes. 1040x instructions 2012   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. 1040x instructions 2012 Example. 1040x instructions 2012 Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. 1040x instructions 2012 However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. 1040x instructions 2012 The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. 1040x instructions 2012 Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. 1040x instructions 2012 The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). 1040x instructions 2012 Sale of your home. 1040x instructions 2012   Your home is a capital asset and not property used in the trade or business of farming. 1040x instructions 2012 If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. 1040x instructions 2012 Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. 1040x instructions 2012   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. 1040x instructions 2012 For more information on basis, see chapter 6. 1040x instructions 2012 More information. 1040x instructions 2012   For more information on selling your home, see Publication 523. 1040x instructions 2012 Gain from condemnation. 1040x instructions 2012   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. 1040x instructions 2012 However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. 1040x instructions 2012 Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. 1040x instructions 2012 The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 1040x instructions 2012 This is true even if you voluntarily return the property to the lender. 1040x instructions 2012 You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. 1040x instructions 2012 Buyer's (borrower's) gain or loss. 1040x instructions 2012   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. 1040x instructions 2012 The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 1040x instructions 2012 See Determining Gain or Loss , earlier. 1040x instructions 2012 Worksheet 8-1. 1040x instructions 2012 Worksheet for Foreclosures andRepossessions Part 1. 1040x instructions 2012 Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 1040x instructions 2012 Complete this part only if you were personally liable for the debt. 1040x instructions 2012 Otherwise, go to Part 2. 1040x instructions 2012   1. 1040x instructions 2012 Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. 1040x instructions 2012 Enter the Fair Market Value of the transferred property   3. 1040x instructions 2012 Ordinary income from cancellation of debt upon foreclosure or repossession. 1040x instructions 2012 * Subtract line 2 from line 1. 1040x instructions 2012 If zero or less, enter -0-   Part 2. 1040x instructions 2012 Figure your gain or loss from foreclosure or repossession. 1040x instructions 2012   4. 1040x instructions 2012 If you completed Part 1, enter the smaller of line 1 or line 2. 1040x instructions 2012 If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. 1040x instructions 2012 Enter any proceeds you received from the foreclosure sale   6. 1040x instructions 2012 Add lines 4 and 5   7. 1040x instructions 2012 Enter the adjusted basis of the transferred property   8. 1040x instructions 2012 Gain or loss from foreclosure or repossession. 1040x instructions 2012 Subtract line 7  from line 6   * The income may not be taxable. 1040x instructions 2012 See Cancellation of debt . 1040x instructions 2012    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. 1040x instructions 2012 Amount realized on a nonrecourse debt. 1040x instructions 2012   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. 1040x instructions 2012 The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. 1040x instructions 2012 Example 1. 1040x instructions 2012 Ann paid $200,000 for land used in her farming business. 1040x instructions 2012 She paid $15,000 down and borrowed the remaining $185,000 from a bank. 1040x instructions 2012 Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. 1040x instructions 2012 The bank foreclosed on the loan 2 years after Ann stopped making payments. 1040x instructions 2012 When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. 1040x instructions 2012 The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. 1040x instructions 2012 She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). 1040x instructions 2012 She has a $20,000 deductible loss. 1040x instructions 2012 Example 2. 1040x instructions 2012 Assume the same facts as in Example 1 except the FMV of the land was $210,000. 1040x instructions 2012 The result is the same. 1040x instructions 2012 The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. 1040x instructions 2012 Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. 1040x instructions 2012 Amount realized on a recourse debt. 1040x instructions 2012   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. 1040x instructions 2012   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. 1040x instructions 2012 The amount realized does not include the canceled debt that is your income from cancellation of debt. 1040x instructions 2012 See Cancellation of debt , later. 1040x instructions 2012 Example 3. 1040x instructions 2012 Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). 1040x instructions 2012 In this case, the amount she realizes is $170,000. 1040x instructions 2012 This is the canceled debt ($180,000) up to the FMV of the land ($170,000). 1040x instructions 2012 Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). 1040x instructions 2012 She has a $30,000 deductible loss, which she figures on Form 4797, Part I. 1040x instructions 2012 She is also treated as receiving ordinary income from cancellation of debt. 1040x instructions 2012 That income is $10,000 ($180,000 − $170,000). 1040x instructions 2012 This is the part of the canceled debt not included in the amount realized. 1040x instructions 2012 She reports this as other income on Schedule F, line 8. 1040x instructions 2012 Seller's (lender's) gain or loss on repossession. 1040x instructions 2012   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. 1040x instructions 2012 For more information, see Repossession in Publication 537, Installment Sales. 1040x instructions 2012 Cancellation of debt. 1040x instructions 2012   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. 1040x instructions 2012 This income is separate from any gain or loss realized from the foreclosure or repossession. 1040x instructions 2012 Report the income from cancellation of a business debt on Schedule F, line 8. 1040x instructions 2012 Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 1040x instructions 2012    You can use Worksheet 8-1 to figure your income from cancellation of debt. 1040x instructions 2012   However, income from cancellation of debt is not taxed if any of the following apply. 1040x instructions 2012 The cancellation is intended as a gift. 1040x instructions 2012 The debt is qualified farm debt (see chapter 3). 1040x instructions 2012 The debt is qualified real property business debt (see chapter 5 of Publication 334). 1040x instructions 2012 You are insolvent or bankrupt (see  chapter 3). 1040x instructions 2012 The debt is qualified principal residence indebtedness (see chapter 3). 1040x instructions 2012   Use Form 982 to report the income exclusion. 1040x instructions 2012 Abandonment The abandonment of property is a disposition of property. 1040x instructions 2012 You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. 1040x instructions 2012 Business or investment property. 1040x instructions 2012   Loss from abandonment of business or investment property is deductible as a loss. 1040x instructions 2012 Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 1040x instructions 2012 If your adjusted basis is more than the amount you realize (if any), then you have a loss. 1040x instructions 2012 If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 1040x instructions 2012 This rule also applies to leasehold improvements the lessor made for the lessee. 1040x instructions 2012 However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . 1040x instructions 2012   If the abandoned property is secured by debt, special rules apply. 1040x instructions 2012 The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). 1040x instructions 2012 For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). 1040x instructions 2012 The abandonment loss is deducted in the tax year in which the loss is sustained. 1040x instructions 2012 Report the loss on Form 4797, Part II, line 10. 1040x instructions 2012 Personal-use property. 1040x instructions 2012   You cannot deduct any loss from abandonment of your home or other property held for personal use. 1040x instructions 2012 Canceled debt. 1040x instructions 2012   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. 1040x instructions 2012 This income is separate from any loss realized from abandonment of the property. 1040x instructions 2012 Report income from cancellation of a debt related to a business or rental activity as business or rental income. 1040x instructions 2012 Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 1040x instructions 2012   However, income from cancellation of debt is not taxed in certain circumstances. 1040x instructions 2012 See Cancellation of debt earlier under Foreclosure or Repossession . 1040x instructions 2012 Forms 1099-A and 1099-C. 1040x instructions 2012   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. 1040x instructions 2012 However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. 1040x instructions 2012 The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 1040x instructions 2012 For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 1040x instructions 2012 Prev  Up  Next   Home   More Online Publications
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The 1040x Instructions 2012

1040x instructions 2012 2. 1040x instructions 2012   Source of Income Table of Contents Introduction Topics - This chapter discusses: Resident Aliens Nonresident AliensInterest Income Dividends Guarantee of Indebtedness Personal Services Transportation Income Scholarships, Grants, Prizes, and Awards Pensions and Annuities Rents or Royalties Real Property Personal Property Community Income Introduction After you have determined your alien status, you must determine the source of your income. 1040x instructions 2012 This chapter will help you determine the source of different types of income you may receive during the tax year. 1040x instructions 2012 This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws. 1040x instructions 2012 Topics - This chapter discusses: Income source rules, and Community income. 1040x instructions 2012 Resident Aliens A resident alien's income is generally subject to tax in the same manner as a U. 1040x instructions 2012 S. 1040x instructions 2012 citizen. 1040x instructions 2012 If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U. 1040x instructions 2012 S. 1040x instructions 2012 tax return. 1040x instructions 2012 You must report these amounts from sources within and outside the United States. 1040x instructions 2012 Nonresident Aliens A nonresident alien usually is subject to U. 1040x instructions 2012 S. 1040x instructions 2012 income tax only on U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012 Under limited circumstances, certain foreign source income is subject to U. 1040x instructions 2012 S. 1040x instructions 2012 tax. 1040x instructions 2012 See Foreign Income in chapter 4. 1040x instructions 2012 The general rules for determining U. 1040x instructions 2012 S. 1040x instructions 2012 source income that apply to most nonresident aliens are shown in Table 2-1. 1040x instructions 2012 The following discussions cover the general rules as well as the exceptions to these rules. 1040x instructions 2012 Not all items of U. 1040x instructions 2012 S. 1040x instructions 2012 source income are taxable. 1040x instructions 2012 See chapter 3. 1040x instructions 2012 Interest Income Generally, U. 1040x instructions 2012 S. 1040x instructions 2012 source interest income includes the following items. 1040x instructions 2012 Interest on bonds, notes, or other interest-bearing obligations of U. 1040x instructions 2012 S. 1040x instructions 2012 residents or domestic corporations. 1040x instructions 2012 Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U. 1040x instructions 2012 S. 1040x instructions 2012 trade or business at any time during the tax year. 1040x instructions 2012 Original issue discount. 1040x instructions 2012 Interest from a state, the District of Columbia, or the U. 1040x instructions 2012 S. 1040x instructions 2012 Government. 1040x instructions 2012 The place or manner of payment is immaterial in determining the source of the income. 1040x instructions 2012 A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. 1040x instructions 2012 Exceptions. 1040x instructions 2012   U. 1040x instructions 2012 S. 1040x instructions 2012 source interest income does not include the following items. 1040x instructions 2012 Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: Is from sources outside the United States, and Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U. 1040x instructions 2012 S. 1040x instructions 2012 possession. 1040x instructions 2012 However, the interest will be considered U. 1040x instructions 2012 S. 1040x instructions 2012 source interest income if either of the following apply. 1040x instructions 2012 The recipient of the interest is related to the resident alien or domestic corporation. 1040x instructions 2012 See section 954(d)(3) for the definition of related person. 1040x instructions 2012 The terms of the obligation are significantly modified after August 9, 2010. 1040x instructions 2012 Any extension of the term of the obligation is considered a significant modification. 1040x instructions 2012 Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. 1040x instructions 2012 Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. 1040x instructions 2012 Dividends In most cases, dividend income received from domestic corporations is U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012 Dividend income from foreign corporations is usually foreign source income. 1040x instructions 2012 Exceptions to both of these rules are discussed below. 1040x instructions 2012 A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security. 1040x instructions 2012 Dividend equivalent payments. 1040x instructions 2012   U. 1040x instructions 2012 S. 1040x instructions 2012 source dividends also include all dividend equivalent payments. 1040x instructions 2012 Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U. 1040x instructions 2012 S. 1040x instructions 2012 sources. 1040x instructions 2012    The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. 1040x instructions 2012 You can view this regulation at www. 1040x instructions 2012 irs. 1040x instructions 2012 gov/irb/2013-52_IRB/ar08. 1040x instructions 2012 html. 1040x instructions 2012 First exception. 1040x instructions 2012   Dividends received from a domestic corporation are not U. 1040x instructions 2012 S. 1040x instructions 2012 source income if the corporation elects to take the American Samoa economic development credit. 1040x instructions 2012 Second exception. 1040x instructions 2012   Part of the dividends received from a foreign corporation is U. 1040x instructions 2012 S. 1040x instructions 2012 source income if 25% or more of its total gross income for the 3-year period ending with the close of its tax year preceding the declaration of dividends was effectively connected with a trade or business in the United States. 1040x instructions 2012 If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed. 1040x instructions 2012 Determine the part that is U. 1040x instructions 2012 S. 1040x instructions 2012 source income by multiplying the dividend by the following fraction. 1040x instructions 2012   Foreign corporation's gross income connected with a U. 1040x instructions 2012 S. 1040x instructions 2012 trade or business for the 3-year period     Foreign corporation's gross income from all sources for that period   Guarantee of Indebtedness Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012 They must be paid by a noncorporate resident or U. 1040x instructions 2012 S. 1040x instructions 2012 corporation or by any foreign person if the amounts are effectively connected with the conduct of a U. 1040x instructions 2012 S. 1040x instructions 2012 trade or business. 1040x instructions 2012 For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9). 1040x instructions 2012 Personal Services All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. 1040x instructions 2012 The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members. 1040x instructions 2012 If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. 1040x instructions 2012 Compensation (other than certain fringe benefits) is sourced on a time basis. 1040x instructions 2012 Certain fringe benefits (such as housing and education) are sourced on a geographical basis. 1040x instructions 2012 Or, you may be permitted to use an alternative basis to determine the source of compensation. 1040x instructions 2012 See Alternative Basis , later. 1040x instructions 2012 Multi-level marketing. 1040x instructions 2012   Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. 1040x instructions 2012 Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. 1040x instructions 2012 The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable. 1040x instructions 2012 Self-employed individuals. 1040x instructions 2012   If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. 1040x instructions 2012 In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. 1040x instructions 2012 Time Basis Use a time basis to figure your U. 1040x instructions 2012 S. 1040x instructions 2012 source compensation (other than the fringe benefits discussed later). 1040x instructions 2012 Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed services in the United States during the year     Total number of days you performed services during the year   You can use a unit of time less than a day in the above fraction, if appropriate. 1040x instructions 2012 The time period for which the compensation is made does not have to be a year. 1040x instructions 2012 Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. 1040x instructions 2012 Example 1. 1040x instructions 2012 Christina Brooks, a resident of the Netherlands, worked 240 days for a U. 1040x instructions 2012 S. 1040x instructions 2012 company during the tax year. 1040x instructions 2012 She received $80,000 in compensation. 1040x instructions 2012 None of it was for fringe benefits. 1040x instructions 2012 Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. 1040x instructions 2012 Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012 Example 2. 1040x instructions 2012 Rob Waters, a resident of South Africa, is employed by a corporation. 1040x instructions 2012 His annual salary is $100,000. 1040x instructions 2012 None of it is for fringe benefits. 1040x instructions 2012 During the first quarter of the year he worked entirely within the United States. 1040x instructions 2012 On April 1, Rob was transferred to Singapore for the remainder of the year. 1040x instructions 2012 Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. 1040x instructions 2012 Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (. 1040x instructions 2012 25 × $100,000). 1040x instructions 2012 All of it is U. 1040x instructions 2012 S. 1040x instructions 2012 source income because he worked entirely within the United States during that quarter. 1040x instructions 2012 The remaining $75,000 is attributable to the last three quarters of the year. 1040x instructions 2012 During those quarters, he worked 150 days in Singapore and 30 days in the United States. 1040x instructions 2012 His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. 1040x instructions 2012 Of this $75,000, $12,500 ($75,000 × 30/180) is U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012 Multi-year compensation. 1040x instructions 2012   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. 1040x instructions 2012 Multi-year compensation is compensation that is included in your income in one tax year but that is attributable to a period that includes two or more tax years. 1040x instructions 2012   You determine the period to which the compensation is attributable based on the facts and circumstances of your case. 1040x instructions 2012 For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. 1040x instructions 2012   The amount of compensation treated as from U. 1040x instructions 2012 S. 1040x instructions 2012 sources is figured by multiplying the total multi-year compensation by a fraction. 1040x instructions 2012 The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the United States in connection with the project. 1040x instructions 2012 The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project. 1040x instructions 2012 Geographical Basis Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis. 1040x instructions 2012 Housing. 1040x instructions 2012 Education. 1040x instructions 2012 Local transportation. 1040x instructions 2012 Tax reimbursement. 1040x instructions 2012 Hazardous or hardship duty pay as defined in Regulations section 1. 1040x instructions 2012 861-4(b)(2)(ii)(D)(5). 1040x instructions 2012 Moving expense reimbursement. 1040x instructions 2012 The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. 1040x instructions 2012 Principal place of work. 1040x instructions 2012   The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your principal place of work. 1040x instructions 2012 Your principal place of work is usually the place where you spend most of your working time. 1040x instructions 2012 This could be your office, plant, store, shop, or other location. 1040x instructions 2012 If there is no one place where you spend most of your working time, your main job location is the place where your work is centered, such as where you report for work or are otherwise required to “base” your work. 1040x instructions 2012   If you have more than one job at any time, your main job location depends on the facts in each case. 1040x instructions 2012 The more important factors to be considered are: The total time you spend at each place, The amount of work you do at each place, and How much money you earn at each place. 1040x instructions 2012 Housing. 1040x instructions 2012   The source of a housing fringe benefit is determined based on the location of your principal place of work. 1040x instructions 2012 A housing fringe benefit includes payments to you or on your behalf (and your family's if your family resides with you) only for the following. 1040x instructions 2012 Rent. 1040x instructions 2012 Utilities (except telephone charges). 1040x instructions 2012 Real and personal property insurance. 1040x instructions 2012 Occupancy taxes not deductible under section 164 or 216(a). 1040x instructions 2012 Nonrefundable fees for securing a leasehold. 1040x instructions 2012 Rental of furniture and accessories. 1040x instructions 2012 Household repairs. 1040x instructions 2012 Residential parking. 1040x instructions 2012 Fair rental value of housing provided in kind by your employer. 1040x instructions 2012   A housing fringe benefit does not include: Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation), The cost of buying property, including principal payments on a mortgage, The cost of domestic labor (maids, gardeners, etc. 1040x instructions 2012 ), Pay television subscriptions, Improvements and other expenses that increase the value or appreciably prolong the life of property, Purchased furniture or accessories, Depreciation or amortization of property or improvements, The value of meals or lodging that you exclude from gross income, or The value of meals or lodging that you deduct as moving expenses. 1040x instructions 2012 Education. 1040x instructions 2012   The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. 1040x instructions 2012 An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school. 1040x instructions 2012 Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment. 1040x instructions 2012 Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance. 1040x instructions 2012 Local transportation. 1040x instructions 2012   The source of a local transportation fringe benefit is determined based on the location of your principal place of work. 1040x instructions 2012 Your local transportation fringe benefit is the amount that you receive as compensation for local transportation for you or your spouse or dependents at the location of your principal place of work. 1040x instructions 2012 The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you, your spouse, or your dependents for local transportation. 1040x instructions 2012 Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf. 1040x instructions 2012 Tax reimbursement. 1040x instructions 2012   The source of a tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed. 1040x instructions 2012 Moving expense reimbursement. 1040x instructions 2012   The source of a moving expense reimbursement is generally based on the location of your new principal place of work. 1040x instructions 2012 However, the source is determined based on the location of your former principal place of work if you provide sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. 1040x instructions 2012 Sufficient evidence generally requires an agreement between you and your employer, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. 1040x instructions 2012 The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. 1040x instructions 2012 It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work. 1040x instructions 2012 Alternative Basis If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. 1040x instructions 2012 If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. 1040x instructions 2012 Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following. 1040x instructions 2012 Your name and social security number (written across the top of the statement). 1040x instructions 2012 The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis. 1040x instructions 2012 For each item in (2), the alternative basis of allocation of source used. 1040x instructions 2012 For each item in (2), a computation showing how the alternative allocation was computed. 1040x instructions 2012 A comparison of the dollar amount of the U. 1040x instructions 2012 S. 1040x instructions 2012 compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier. 1040x instructions 2012 Transportation Income Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. 1040x instructions 2012 This is true whether the vessel or aircraft is owned, hired, or leased. 1040x instructions 2012 The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft. 1040x instructions 2012 All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. 1040x instructions 2012 If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States. 1040x instructions 2012 For transportation income from personal services, 50% of the income is U. 1040x instructions 2012 S. 1040x instructions 2012 source income if the transportation is between the United States and a U. 1040x instructions 2012 S. 1040x instructions 2012 possession. 1040x instructions 2012 For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft. 1040x instructions 2012 For information on how U. 1040x instructions 2012 S. 1040x instructions 2012 source transportation income is taxed, see chapter 4. 1040x instructions 2012 Scholarships, Grants, Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. 1040x instructions 2012 However, see Activities to be performed outside the United States , later. 1040x instructions 2012 For example, payments for research or study in the United States made by the United States, a noncorporate U. 1040x instructions 2012 S. 1040x instructions 2012 resident, or a domestic corporation, are from U. 1040x instructions 2012 S. 1040x instructions 2012 sources. 1040x instructions 2012 Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U. 1040x instructions 2012 S. 1040x instructions 2012 agent. 1040x instructions 2012 Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources. 1040x instructions 2012 Activities to be performed outside the United States. 1040x instructions 2012   Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012    These rules do not apply to amounts paid as salary or other compensation for services. 1040x instructions 2012 See Personal Services, earlier, for the source rules that apply. 1040x instructions 2012 Pensions and Annuities If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U. 1040x instructions 2012 S. 1040x instructions 2012 sources. 1040x instructions 2012 That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. 1040x instructions 2012 This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). 1040x instructions 2012 If you performed services as an employee of the United States, you may receive a distribution from the U. 1040x instructions 2012 S. 1040x instructions 2012 Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. 1040x instructions 2012 Your U. 1040x instructions 2012 S. 1040x instructions 2012 source income is the otherwise taxable amount of the distribution that is attributable to your total U. 1040x instructions 2012 S. 1040x instructions 2012 Government basic pay other than tax-exempt pay for services performed outside the United States. 1040x instructions 2012 Rents or Royalties Your U. 1040x instructions 2012 S. 1040x instructions 2012 source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property. 1040x instructions 2012 U. 1040x instructions 2012 S. 1040x instructions 2012 source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property. 1040x instructions 2012 Real Property Real property is land and buildings and generally anything built on, growing on, or attached to land. 1040x instructions 2012 Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States. 1040x instructions 2012 Natural resources. 1040x instructions 2012   The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country, or located in a foreign country and sold in the United States, is partly from sources in the United States. 1040x instructions 2012 For information on determining that part, see section 1. 1040x instructions 2012 863-1(b) of the regulations. 1040x instructions 2012 Table 2-1. 1040x instructions 2012 Summary of Source Rules for Income of Nonresident Aliens Item of income Factor determining source Salaries, wages, other compensation Where services performed Business income:   Personal services Where services performed Sale of inventory—purchased Where sold Sale of inventory—produced Allocation Interest Residence of payer Dividends Whether a U. 1040x instructions 2012 S. 1040x instructions 2012 or foreign corporation* Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. 1040x instructions 2012 Where property is used Sale of real property Location of property Sale of personal property Seller's tax home (but see Personal Property , later, for exceptions) Pension distributions attributable to contributions Where services were performed that earned the pension Investment earnings on pension contributions Location of pension trust Sale of natural resources Allocation based on fair market value of product at export terminal. 1040x instructions 2012 For more information, see section 1. 1040x instructions 2012 863-1(b) of the regulations. 1040x instructions 2012 *Exceptions include: a) Dividends paid by a U. 1040x instructions 2012 S. 1040x instructions 2012 corporation are foreign source if the corporation elects the  American Samoa economic development credit. 1040x instructions 2012  b) Part of a dividend paid by a foreign corporation is U. 1040x instructions 2012 S. 1040x instructions 2012 source if at least 25% of the  corporation's gross income is effectively connected with a U. 1040x instructions 2012 S. 1040x instructions 2012 trade or business for the  3 tax years before the year in which the dividends are declared. 1040x instructions 2012 Personal Property Personal property is property, such as machinery, equipment, or furniture, that is not real property. 1040x instructions 2012 Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. 1040x instructions 2012 If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States. 1040x instructions 2012 Tax home. 1040x instructions 2012   Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. 1040x instructions 2012 Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. 1040x instructions 2012 If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. 1040x instructions 2012 If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. 1040x instructions 2012 Inventory property. 1040x instructions 2012   Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. 1040x instructions 2012 Income from the sale of inventory that you purchased is sourced where the property is sold. 1040x instructions 2012 Generally, this is where title to the property passes to the buyer. 1040x instructions 2012 For example, income from the sale of inventory in the United States is U. 1040x instructions 2012 S. 1040x instructions 2012 source income, whether you purchased it in the United States or in a foreign country. 1040x instructions 2012   Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. 1040x instructions 2012 For information on making this allocation, see section 1. 1040x instructions 2012 863-3 of the regulations. 1040x instructions 2012   These rules apply even if your tax home is not in the United States. 1040x instructions 2012 Depreciable property. 1040x instructions 2012   To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. 1040x instructions 2012 You allocate this part of the gain to sources in the United States based on the ratio of U. 1040x instructions 2012 S. 1040x instructions 2012 depreciation adjustments to total depreciation adjustments. 1040x instructions 2012 The rest of this part of the gain is considered to be from sources outside the United States. 1040x instructions 2012   For this purpose, “U. 1040x instructions 2012 S. 1040x instructions 2012 depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring taxable income from U. 1040x instructions 2012 S. 1040x instructions 2012 sources. 1040x instructions 2012 However, if the property is used predominantly in the United States during a tax year, all depreciation deductions allowable for that year are treated as U. 1040x instructions 2012 S. 1040x instructions 2012 depreciation adjustments. 1040x instructions 2012 But there are some exceptions for certain transportation, communications, and other property used internationally. 1040x instructions 2012   Gain from the sale of depreciable property that is more than the total depreciation adjustments on the property is sourced as if the property were inventory property, as discussed above. 1040x instructions 2012   A loss is sourced in the same way as the depreciation deductions were sourced. 1040x instructions 2012 However, if the property was used predominantly in the United States, the entire loss reduces U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012   The basis of property usually means the cost (money plus the fair market value of other property or services) of property you acquire. 1040x instructions 2012 Depreciation is an amount deducted to recover the cost or other basis of a trade or business asset. 1040x instructions 2012 The amount you can deduct depends on the property's cost, when you began using the property, how long it will take to recover your cost, and which depreciation method you use. 1040x instructions 2012 A depreciation deduction is any deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible expense. 1040x instructions 2012 Intangible property. 1040x instructions 2012   Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names, or other like property. 1040x instructions 2012 The gain from the sale of amortizable or depreciable intangible property, up to the previously allowable amortization or depreciation deductions, is sourced in the same way as the original deductions were sourced. 1040x instructions 2012 This is the same as the source rule for gain from the sale of depreciable property. 1040x instructions 2012 See Depreciable property , earlier, for details on how to apply this rule. 1040x instructions 2012   Gain in excess of the amortization or depreciation deductions is sourced in the country where the property is used if the income from the sale is contingent on the productivity, use, or disposition of that property. 1040x instructions 2012 If the income is not contingent on the productivity, use, or disposition of the property, the income is sourced according to your tax home as discussed earlier. 1040x instructions 2012 If payments for goodwill do not depend on its productivity, use, or disposition, their source is the country in which the goodwill was generated. 1040x instructions 2012 Sales through offices or fixed places of business. 1040x instructions 2012   Despite any of the earlier rules, if you do not have a tax home in the United States, but you maintain an office or other fixed place of business in the United States, treat the income from any sale of personal property (including inventory property) that is attributable to that office or place of business as U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012 However, this rule does not apply to sales of inventory property for use, disposition, or consumption outside the United States if your office or other fixed place of business outside the United States materially participated in the sale. 1040x instructions 2012   If you have a tax home in the United States but maintain an office or other fixed place of business outside the United States, income from sales of personal property, other than inventory, depreciable property, or intangibles, that is attributable to that foreign office or place of business may be treated as U. 1040x instructions 2012 S. 1040x instructions 2012 source income. 1040x instructions 2012 The income is treated as U. 1040x instructions 2012 S. 1040x instructions 2012 source income if an income tax of less than 10% of the income from the sale is paid to a foreign country. 1040x instructions 2012 This rule also applies to losses if the foreign country would have imposed an income tax of less than 10% had the sale resulted in a gain. 1040x instructions 2012 Community Income If you are married and you or your spouse is subject to the community property laws of a foreign country, a U. 1040x instructions 2012 S. 1040x instructions 2012 state, or a U. 1040x instructions 2012 S. 1040x instructions 2012 possession, you generally must follow those laws to determine the income of yourself and your spouse for U. 1040x instructions 2012 S. 1040x instructions 2012 tax purposes. 1040x instructions 2012 But you must disregard certain community property laws if: Both you and your spouse are nonresident aliens, or One of you is a nonresident alien and the other is a U. 1040x instructions 2012 S. 1040x instructions 2012 citizen or resident and you do not both choose to be treated as U. 1040x instructions 2012 S. 1040x instructions 2012 residents as explained in chapter 1. 1040x instructions 2012 In these cases, you and your spouse must report community income as explained later. 1040x instructions 2012 Earned income. 1040x instructions 2012   Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. 1040x instructions 2012 That spouse must report all of it on his or her separate return. 1040x instructions 2012 Trade or business income. 1040x instructions 2012   Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. 1040x instructions 2012 That spouse must report all of it on his or her separate return. 1040x instructions 2012 Partnership income (or loss). 1040x instructions 2012   A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. 1040x instructions 2012 The partner must report all of it on his or her separate return. 1040x instructions 2012 Separate property income. 1040x instructions 2012   Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. 1040x instructions 2012 That spouse must report all of it on his or her separate return. 1040x instructions 2012 Use the appropriate community property law to determine what is separate property. 1040x instructions 2012 Other community income. 1040x instructions 2012   All other community income is treated as provided by the applicable community property laws. 1040x instructions 2012 Prev  Up  Next   Home   More Online 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