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1040x site efile com Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. 1040x site efile com S. 1040x site efile com Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). 1040x site efile com If you itemize, you cannot take the standard deduction. 1040x site efile com This section explains what expenses you can deduct as a homeowner. 1040x site efile com It also points out expenses that you cannot deduct. 1040x site efile com There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. 1040x site efile com Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. 1040x site efile com Your house payment. 1040x site efile com   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. 1040x site efile com Your house payment may include several costs of owning a home. 1040x site efile com The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. 1040x site efile com These are discussed in more detail later. 1040x site efile com   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. 1040x site efile com Minister's or military housing allowance. 1040x site efile com   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. 1040x site efile com You do not have to reduce your deductions by your nontaxable allowance. 1040x site efile com For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. 1040x site efile com Nondeductible payments. 1040x site efile com   You cannot deduct any of the following items. 1040x site efile com Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. 1040x site efile com Wages you pay for domestic help. 1040x site efile com Depreciation. 1040x site efile com The cost of utilities, such as gas, electricity, or water. 1040x site efile com Most settlement costs. 1040x site efile com See Settlement or closing costs under Cost as Basis, later, for more information. 1040x site efile com Forfeited deposits, down payments, or earnest money. 1040x site efile com Hardest Hit Fund and Emergency Homeowners' Loan Programs You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. 1040x site efile com You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. 1040x site efile com You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. 1040x site efile com If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) and box 5 (real property taxes). 1040x site efile com However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. 1040x site efile com Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. 1040x site efile com This is called a real estate tax. 1040x site efile com You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. 1040x site efile com The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. 1040x site efile com Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. 1040x site efile com You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. 1040x site efile com If you own a cooperative apartment, see Special Rules for Cooperatives , later. 1040x site efile com Where to deduct real estate taxes. 1040x site efile com   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. 1040x site efile com Real estate taxes paid at settlement or closing. 1040x site efile com   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. 1040x site efile com Your share of these taxes is fully deductible if you itemize your deductions. 1040x site efile com Division of real estate taxes. 1040x site efile com   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. 1040x site efile com You (the buyer) are treated as paying the taxes beginning with the date of sale. 1040x site efile com This applies regardless of the lien dates under local law. 1040x site efile com Generally, this information is included on the settlement statement you get at closing. 1040x site efile com   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. 1040x site efile com You each can deduct your own share, if you itemize deductions, for the year the property is sold. 1040x site efile com Example. 1040x site efile com You bought your home on September 1. 1040x site efile com The property tax year (the period to which the tax relates) in your area is the calendar year. 1040x site efile com The tax for the year was $730 and was due and paid by the seller on August 15. 1040x site efile com You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). 1040x site efile com You figure your deduction for real estate taxes on your home as follows. 1040x site efile com 1. 1040x site efile com Enter the total real estate taxes for the real property tax year $730 2. 1040x site efile com Enter the number of days in the property tax year that you owned the property 122 3. 1040x site efile com Divide line 2 by 365 . 1040x site efile com 3342 4. 1040x site efile com Multiply line 1 by line 3. 1040x site efile com This is your deduction. 1040x site efile com Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. 1040x site efile com You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. 1040x site efile com Delinquent taxes. 1040x site efile com   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. 1040x site efile com If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. 1040x site efile com You treat them as part of the cost of your home. 1040x site efile com See Real estate taxes , later, under Basis. 1040x site efile com Escrow accounts. 1040x site efile com   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. 1040x site efile com You may not be able to deduct the total you pay into the escrow account. 1040x site efile com You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. 1040x site efile com Your real estate tax bill will show this amount. 1040x site efile com Refund or rebate of real estate taxes. 1040x site efile com   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. 1040x site efile com If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. 1040x site efile com For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. 1040x site efile com Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. 1040x site efile com Charges for services. 1040x site efile com   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. 1040x site efile com You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). 1040x site efile com    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. 1040x site efile com If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. 1040x site efile com Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. 1040x site efile com Assessments for local benefits. 1040x site efile com   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. 1040x site efile com Local benefits include the construction of streets, sidewalks, or water and sewer systems. 1040x site efile com You must add these amounts to the basis of your property. 1040x site efile com   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. 1040x site efile com An example is a charge to repair an existing sidewalk and any interest included in that charge. 1040x site efile com   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. 1040x site efile com If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. 1040x site efile com   An assessment for a local benefit may be listed as an item in your real estate tax bill. 1040x site efile com If so, use the rules in this section to find how much of it, if any, you can deduct. 1040x site efile com Transfer taxes (or stamp taxes). 1040x site efile com   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. 1040x site efile com If you are the buyer and you pay them, include them in the cost basis of the property. 1040x site efile com If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. 1040x site efile com Homeowners association assessments. 1040x site efile com   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. 1040x site efile com Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. 1040x site efile com As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. 1040x site efile com You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. 1040x site efile com For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. 1040x site efile com At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. 1040x site efile com At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. 1040x site efile com Tenant-stockholders. 1040x site efile com   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. 1040x site efile com The tenant-stockholder does not have to live in any of the cooperative's dwelling units. 1040x site efile com The units that the tenant-stockholder has the right to occupy can be rented to others. 1040x site efile com Deductible taxes. 1040x site efile com   You figure your share of real estate taxes in the following way. 1040x site efile com Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 1040x site efile com Multiply the corporation's deductible real estate taxes by the number you figured in (1). 1040x site efile com This is your share of the real estate taxes. 1040x site efile com   Generally, the corporation will tell you your share of its real estate tax. 1040x site efile com This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. 1040x site efile com Refund of real estate taxes. 1040x site efile com   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. 1040x site efile com Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. 1040x site efile com Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). 1040x site efile com Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. 1040x site efile com For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). 1040x site efile com If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. 1040x site efile com Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. 1040x site efile com Most home buyers take out a mortgage (loan) to buy their home. 1040x site efile com They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. 1040x site efile com Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). 1040x site efile com However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. 1040x site efile com If either of these situations applies to you, see Publication 936 for more information. 1040x site efile com Also see Publication 936 if you later refinance your mortgage or buy a second home. 1040x site efile com Refund of home mortgage interest. 1040x site efile com   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. 1040x site efile com For more information, see Recoveries in Publication 525. 1040x site efile com The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. 1040x site efile com See Mortgage Interest Statement , later. 1040x site efile com Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. 1040x site efile com The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. 1040x site efile com Prepaid interest. 1040x site efile com   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. 1040x site efile com Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. 1040x site efile com An exception (discussed later) applies to points. 1040x site efile com Late payment charge on mortgage payment. 1040x site efile com   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. 1040x site efile com Mortgage prepayment penalty. 1040x site efile com   If you pay off your home mortgage early, you may have to pay a penalty. 1040x site efile com You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. 1040x site efile com Ground rent. 1040x site efile com   In some states (such as Maryland), you may buy your home subject to a ground rent. 1040x site efile com A ground rent is an obligation you assume to pay a fixed amount per year on the property. 1040x site efile com Under this arrangement, you are leasing (rather than buying) the land on which your home is located. 1040x site efile com Redeemable ground rents. 1040x site efile com   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. 1040x site efile com The ground rent is a redeemable ground rent only if all of the following are true. 1040x site efile com Your lease, including renewal periods, is for more than 15 years. 1040x site efile com You can freely assign the lease. 1040x site efile com You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. 1040x site efile com The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. 1040x site efile com   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. 1040x site efile com You cannot deduct them. 1040x site efile com Nonredeemable ground rents. 1040x site efile com   Payments on a nonredeemable ground rent are not mortgage interest. 1040x site efile com You can deduct them as rent only if they are a business expense or if they are for rental property. 1040x site efile com Cooperative apartment. 1040x site efile com   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . 1040x site efile com In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. 1040x site efile com Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. 1040x site efile com For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. 1040x site efile com Refund of cooperative's mortgage interest. 1040x site efile com   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. 1040x site efile com The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. 1040x site efile com   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. 1040x site efile com Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. 1040x site efile com You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). 1040x site efile com This amount should be included in the mortgage interest statement provided by your lender. 1040x site efile com See the discussion under Mortgage Interest Statement , later. 1040x site efile com Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. 1040x site efile com Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. 1040x site efile com Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. 1040x site efile com A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. 1040x site efile com See Points paid by the seller , later. 1040x site efile com General rule. 1040x site efile com   You cannot deduct the full amount of points in the year paid. 1040x site efile com They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. 1040x site efile com Exception. 1040x site efile com   You can deduct the full amount of points in the year paid if you meet all the following tests. 1040x site efile com Your loan is secured by your main home. 1040x site efile com (Generally, your main home is the one you live in most of the time. 1040x site efile com ) Paying points is an established business practice in the area where the loan was made. 1040x site efile com The points paid were not more than the points generally charged in that area. 1040x site efile com You use the cash method of accounting. 1040x site efile com This means you report income in the year you receive it and deduct expenses in the year you pay them. 1040x site efile com Most individuals use this method. 1040x site efile com The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. 1040x site efile com The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. 1040x site efile com The funds you provided are not required to have been applied to the points. 1040x site efile com They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. 1040x site efile com You cannot have borrowed these funds. 1040x site efile com You use your loan to buy or build your main home. 1040x site efile com The points were computed as a percentage of the principal amount of the mortgage. 1040x site efile com The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. 1040x site efile com The points may be shown as paid from either your funds or the seller's. 1040x site efile com Note. 1040x site efile com If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. 1040x site efile com If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. 1040x site efile com Home improvement loan. 1040x site efile com   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. 1040x site efile com Refinanced loan. 1040x site efile com   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. 1040x site efile com You can deduct the rest of the points over the life of the loan. 1040x site efile com Points not fully deductible in year paid. 1040x site efile com    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. 1040x site efile com Figure A. 1040x site efile com   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. 1040x site efile com    Please click here for the text description of the image. 1040x site efile com Figure A. 1040x site efile com Are my points fully deductible this year? Amounts charged for services. 1040x site efile com   Amounts charged by the lender for specific services connected to the loan are not interest. 1040x site efile com Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. 1040x site efile com You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. 1040x site efile com For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. 1040x site efile com Points paid by the seller. 1040x site efile com   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 1040x site efile com Treatment by seller. 1040x site efile com   The seller cannot deduct these fees as interest. 1040x site efile com However, they are a selling expense that reduces the seller's amount realized. 1040x site efile com See Publication 523 for more information. 1040x site efile com Treatment by buyer. 1040x site efile com   The buyer treats seller-paid points as if he or she had paid them. 1040x site efile com If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. 1040x site efile com If any of those tests are not met, the buyer must deduct the points over the life of the loan. 1040x site efile com   The buyer must also reduce the basis of the home by the amount of the seller-paid points. 1040x site efile com For more information about the basis of your home, see Basis , later. 1040x site efile com Funds provided are less than points. 1040x site efile com   If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. 1040x site efile com In addition, you can deduct any points paid by the seller. 1040x site efile com Example 1. 1040x site efile com When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). 1040x site efile com You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. 1040x site efile com Of the $1,000 you were charged for points, you can deduct $750 in the year paid. 1040x site efile com You spread the remaining $250 over the life of the mortgage. 1040x site efile com Example 2. 1040x site efile com The facts are the same as in Example 1 , except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. 1040x site efile com In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). 1040x site efile com You spread the remaining $250 over the life of the mortgage. 1040x site efile com You must reduce the basis of your home by the $1,000 paid by the seller. 1040x site efile com Excess points. 1040x site efile com   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. 1040x site efile com You must spread any additional points over the life of the mortgage. 1040x site efile com Mortgage ending early. 1040x site efile com   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. 1040x site efile com A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. 1040x site efile com Example. 1040x site efile com Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. 1040x site efile com He had deducted $1,400 of these points through 2012. 1040x site efile com Dan prepaid his mortgage in full in 2013. 1040x site efile com He can deduct the remaining $1,600 of points in 2013. 1040x site efile com Exception. 1040x site efile com   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. 1040x site efile com Instead, deduct them over the term of the new loan. 1040x site efile com Form 1098. 1040x site efile com   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. 1040x site efile com See Mortgage Interest Statement , later. 1040x site efile com Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). 1040x site efile com If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. 1040x site efile com See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. 1040x site efile com If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. 1040x site efile com The seller must give you this number and you must give the seller your SSN. 1040x site efile com Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. 1040x site efile com Failure to meet either of these requirements may result in a $50 penalty for each failure. 1040x site efile com Table 1. 1040x site efile com Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. 1040x site efile com IF you are eligible to deduct . 1040x site efile com . 1040x site efile com . 1040x site efile com THEN report the amount  on Schedule A (Form 1040) . 1040x site efile com . 1040x site efile com . 1040x site efile com real estate taxes line 6. 1040x site efile com home mortgage interest and points reported on Form 1098 line 10. 1040x site efile com home mortgage interest not reported on  Form 1098 line 11. 1040x site efile com points not reported on Form 1098 line 12. 1040x site efile com qualified mortgage insurance premiums line 13. 1040x site efile com Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. 1040x site efile com The statement will show the total interest paid on your mortgage during the year. 1040x site efile com If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. 1040x site efile com See Points , earlier. 1040x site efile com The interest you paid at settlement should be included on the statement. 1040x site efile com If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. 1040x site efile com Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. 1040x site efile com Write “See attached” to the right of line 10. 1040x site efile com A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. 1040x site efile com If a statement comes from a cooperative housing corporation, it generally will show your share of interest. 1040x site efile com Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. 1040x site efile com If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. 1040x site efile com A copy of this form will be sent to the IRS also. 1040x site efile com Example. 1040x site efile com You bought a new home on May 3. 1040x site efile com You paid no points on the purchase. 1040x site efile com During the year, you made mortgage payments which included $4,480 deductible interest on your new home. 1040x site efile com The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. 1040x site efile com The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). 1040x site efile com You can deduct the $5,100 if you itemize your deductions. 1040x site efile com Refund of overpaid interest. 1040x site efile com   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. 1040x site efile com Generally, you must include the refund in income in the year you receive it. 1040x site efile com See Refund of home mortgage interest , earlier, under Home Mortgage Interest. 1040x site efile com More than one borrower. 1040x site efile com   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. 1040x site efile com Show how much of the interest each of you paid, and give the name and address of the person who received the form. 1040x site efile com Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. 1040x site efile com Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. 1040x site efile com Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. 1040x site efile com Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). 1040x site efile com Prepaid mortgage insurance premiums. 1040x site efile com   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. 1040x site efile com The premiums are treated as paid in the year to which they were allocated. 1040x site efile com If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. 1040x site efile com See Publication 936 for details. 1040x site efile com Exception for certain mortgage insurance. 1040x site efile com   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. 1040x site efile com Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. 1040x site efile com It also must be secured by that home. 1040x site efile com If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. 1040x site efile com Home acquisition debt limit. 1040x site efile com   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). 1040x site efile com Discharges of qualified principal residence indebtedness. 1040x site efile com   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. 1040x site efile com You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. 1040x site efile com Principal residence. 1040x site efile com   Your principal residence is the home where you ordinarily live most of the time. 1040x site efile com You can have only one principal residence at any one time. 1040x site efile com Qualified principal residence indebtedness. 1040x site efile com   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. 1040x site efile com If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. 1040x site efile com   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. 1040x site efile com Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. 1040x site efile com Amount you can exclude. 1040x site efile com   You can only exclude debt discharged after 2006 and before 2014. 1040x site efile com The most you can exclude is $2 million ($1 million if married filing separately). 1040x site efile com You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. 1040x site efile com Ordering rule. 1040x site efile com   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. 1040x site efile com Qualified Home This means your main home or your second home. 1040x site efile com A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. 1040x site efile com Main home. 1040x site efile com   You can have only one main home at any one time. 1040x site efile com This is the home where you ordinarily live most of the time. 1040x site efile com Second home and other special situations. 1040x site efile com   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. 1040x site efile com Limit on Deduction If your adjusted gross income (AGI) on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are deductible is reduced and may be eliminated. 1040x site efile com See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. 1040x site efile com If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. 1040x site efile com Form 1098. 1040x site efile com   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. 1040x site efile com See Form 1098, Mortgage Interest Statement in Publication 936. 1040x site efile com Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. 1040x site efile com If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. 1040x site efile com Who qualifies. 1040x site efile com   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. 1040x site efile com Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. 1040x site efile com The MCC will show the certificate credit rate you will use to figure your credit. 1040x site efile com It also will show the certified indebtedness amount. 1040x site efile com Only the interest on that amount qualifies for the credit. 1040x site efile com See Figuring the Credit , later. 1040x site efile com You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. 1040x site efile com Contact your state or local housing finance agency for information about the availability of MCCs in your area. 1040x site efile com How to claim the credit. 1040x site efile com   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. 1040x site efile com S. 1040x site efile com Nonresident Alien Income Tax Return. 1040x site efile com Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. 1040x site efile com Reducing your home mortgage interest deduction. 1040x site efile com   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. 1040x site efile com You must do this even if part of that amount is to be carried forward to 2014. 1040x site efile com Selling your home. 1040x site efile com   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. 1040x site efile com For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. 1040x site efile com Figuring the Credit Figure your credit on Form 8396. 1040x site efile com Mortgage not more than certified indebtedness. 1040x site efile com   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. 1040x site efile com Mortgage more than certified indebtedness. 1040x site efile com   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. 1040x site efile com To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. 1040x site efile com Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. 1040x site efile com Example. 1040x site efile com Emily bought a home this year. 1040x site efile com Her mortgage loan is $125,000. 1040x site efile com The certified indebtedness amount on her MCC is $100,000. 1040x site efile com She paid $7,500 interest this year. 1040x site efile com Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. 1040x site efile com 80)       $125,000       $7,500 x . 1040x site efile com 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. 1040x site efile com In each later year, she will figure her credit using only 80% of the interest she pays for that year. 1040x site efile com Limits Two limits may apply to your credit. 1040x site efile com A limit based on the credit rate, and A limit based on your tax. 1040x site efile com Limit based on credit rate. 1040x site efile com   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. 1040x site efile com Limit based on tax. 1040x site efile com   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. 1040x site efile com See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. 1040x site efile com Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. 1040x site efile com Example. 1040x site efile com John and his brother, George, were issued an MCC. 1040x site efile com They used it to get a mortgage on their main home. 1040x site efile com John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. 1040x site efile com John paid $5,400 mortgage interest this year and George paid $3,600. 1040x site efile com The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. 1040x site efile com The loan amount (mortgage) on their home is $120,000. 1040x site efile com The credit is limited to $2,000 because the credit rate is more than 20%. 1040x site efile com John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. 1040x site efile com His credit is limited to $1,200 ($2,000 × 60%). 1040x site efile com George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. 1040x site efile com His credit is limited to $800 ($2,000 × 40%). 1040x site efile com Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. 1040x site efile com Example. 1040x site efile com You receive a mortgage credit certificate from State X. 1040x site efile com This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. 1040x site efile com You claim no other credits. 1040x site efile com Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). 1040x site efile com You can carry forward this amount to the next 3 years or until used, whichever comes first. 1040x site efile com Credit rate more than 20%. 1040x site efile com   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). 1040x site efile com Example. 1040x site efile com In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. 1040x site efile com The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. 1040x site efile com Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. 1040x site efile com The amount of credit you can claim on the new loan may change. 1040x site efile com Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. 1040x site efile com Table 2. 1040x site efile com Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . 1040x site efile com . 1040x site efile com . 1040x site efile com THEN the interest you claim on Form 8396, line 1, is* . 1040x site efile com . 1040x site efile com . 1040x site efile com smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. 1040x site efile com larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. 1040x site efile com         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. 1040x site efile com  See New MCC cannot increase your credit above. 1040x site efile com An issuer may reissue an MCC after you refinance your mortgage. 1040x site efile com If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. 1040x site efile com Year of refinancing. 1040x site efile com   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. 1040x site efile com   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. 1040x site efile com The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. 1040x site efile com It must show a separate calculation for the part of the year when the new MCC was in effect. 1040x site efile com Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. 1040x site efile com New MCC cannot increase your credit. 1040x site efile com   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. 1040x site efile com   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. 1040x site efile com However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. 1040x site efile com In that case, you will need to know the amount of the credit you could have claimed using the old MCC. 1040x site efile com   There are two methods for figuring the credit you could have claimed. 1040x site efile com Under one method, you figure the actual credit that would have been allowed. 1040x site efile com This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. 1040x site efile com   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. 1040x site efile com Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. 1040x site efile com The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. 1040x site efile com The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. 1040x site efile com    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. 1040x site efile com    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. 1040x site efile com Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. 1040x site efile com While you own your home, you may add certain items to your basis. 1040x site efile com You may subtract certain other items from your basis. 1040x site efile com These items are called adjustments to basis and are explained later under Adjusted Basis . 1040x site efile com It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. 1040x site efile com You also must keep records of the events that affect basis or adjusted basis. 1040x site efile com See Keeping Records , below. 1040x site efile com Figuring Your Basis How you figure your basis depends on how you acquire your home. 1040x site efile com If you buy or build your home, your cost is your basis. 1040x site efile com If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. 1040x site efile com If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. 1040x site efile com Each of these topics is discussed later. 1040x site efile com Property transferred from a spouse. 1040x site efile com   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. 1040x site efile com Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. 1040x site efile com Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. 1040x site efile com The cost of your home includes most settlement or closing costs you paid when you bought the home. 1040x site efile com If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. 1040x site efile com See Settlement or closing costs , later. 1040x site efile com If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. 1040x site efile com Purchase. 1040x site efile com   The basis of a home you bought is the amount you paid for it. 1040x site efile com This usually includes your down payment and any debt you assumed. 1040x site efile com The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. 1040x site efile com This amount includes any purchase commissions or other costs of acquiring the shares. 1040x site efile com Construction. 1040x site efile com   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. 1040x site efile com This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. 1040x site efile com If you built all or part of your home yourself, your basis is the total amount it cost you to build it. 1040x site efile com You cannot include in basis the value of your own labor or any other labor for which you did not pay. 1040x site efile com Real estate taxes. 1040x site efile com   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. 1040x site efile com See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. 1040x site efile com   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. 1040x site efile com You cannot deduct them as taxes paid. 1040x site efile com   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. 1040x site efile com Do not include those taxes in your basis. 1040x site efile com If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 1040x site efile com Example 1. 1040x site efile com You bought your home on September 1. 1040x site efile com The property tax year in your area is the calendar year, and the tax is due on August 15. 1040x site efile com The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. 1040x site efile com You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. 1040x site efile com You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. 1040x site efile com You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. 1040x site efile com Example 2. 1040x site efile com You bought your home on May 3, 2013. 1040x site efile com The property tax year in your area is the calendar year. 1040x site efile com The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. 1040x site efile com Under state law, the taxes become a lien on May 31. 1040x site efile com You agreed to pay all taxes due after the date of sale. 1040x site efile com The taxes due in 2013 for 2012 were $1,375. 1040x site efile com The taxes due in 2014 for 2013 will be $1,425. 1040x site efile com You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. 1040x site efile com Instead, you add the $1,375 to the cost (basis) of your home. 1040x site efile com You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. 1040x site efile com You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. 1040x site efile com Settlement or closing costs. 1040x site efile com   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. 1040x site efile com These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. 1040x site efile com If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. 1040x site efile com   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. 1040x site efile com You deduct them in the year you buy your home if you itemize your deductions. 1040x site efile com You can add certain other settlement or closing costs to the basis of your home. 1040x site efile com Items added to basis. 1040x site efile com   You can include in your basis the settlement fees and closing costs you paid for buying your home. 1040x site efile com A fee is for buying the home if you would have had to pay it even if you paid cash for the home. 1040x site efile com   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. 1040x site efile com Abstract fees (abstract of title fees). 1040x site efile com Charges for installing utility services. 1040x site efile com Legal fees (including fees for the title search and preparation of the sales contract and deed). 1040x site efile com Recording fees. 1040x site efile com Surveys. 1040x site efile com Transfer or stamp taxes. 1040x site efile com Owner's title insurance. 1040x site efile com Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. 1040x site efile com   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. 1040x site efile com Items not added to basis and not deductible. 1040x site efile com   Here are some settlement and closing costs that you cannot deduct or add to your basis. 1040x site efile com Fire insurance premiums. 1040x site efile com Charges for using utilities or other services related to occupancy of the home before closing. 1040x site efile com Rent for occupying the home before closing. 1040x site efile com Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. 1040x site efile com Points paid by seller. 1040x site efile com   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. 1040x site efile com   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. 1040x site efile com See Points , earlier, for the rules on deducting points. 1040x site efile com Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. 1040x site efile com Fair market value. 1040x site efile com   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. 1040x site efile com Donor's adjusted basis is more than FMV. 1040x site efile com   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. 1040x site efile com Disposition basis. 1040x site efile com   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. 1040x site efile com Your basis for figuring a gain is the same as the donor's adjusted basis. 1040x site efile com Your basis for figuring a loss is the FMV when you received the gift. 1040x site efile com If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. 1040x site efile com However, if using the FMV results in a gain, then you neither have a gain nor a loss. 1040x site efile com Example 1. 1040x site efile com Andrew received a house as a gift from Ishmael (the donor). 1040x site efile com At the time of the gift, the home had an FMV of $80,000. 1040x site efile com Ishmael's adjusted basis was $100,000. 1040x site efile com After he received the house, no events occurred to increase or decrease the basis. 1040x site efile com If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. 1040x site efile com Example 2. 1040x site efile com Same facts as Example 1 , except this time Andrew sells the house for $70,000. 1040x site efile com He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. 1040x site efile com Example 3. 1040x site efile com Same facts as Example 1 , except this time Andrew sells the house for $90,000. 1040x site efile com Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. 1040x site efile com Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. 1040x site efile com So in this situation, Andrew will neither have a gain nor a loss. 1040x site efile com Donor's adjusted basis equal to or less than the FMV. 1040x site efile com   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. 1040x site efile com Part of federal gift tax due to net increase in value. 1040x site efile com   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. 1040x site efile com The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. 1040x site efile com The net increase in the value of the home is its FMV minus the adjusted basis of the donor. 1040x site efile com Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. 1040x site efile com Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. 1040x site efile com If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. 1040x site efile com If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. 1040x site efile com Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. 1040x site efile com If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. 1040x site efile com Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. 1040x site efile com These events can increase or decrease your original basis. 1040x site efile com The result is called adjusted basis. 1040x site efile com See Table 3, on this page, for a list of some of the items that can adjust your basis. 1040x site efile com Table 3. 1040x site efile com Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. 1040x site efile com It is not intended to be all-inclusive. 1040x site efile com Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. 1040x site efile com   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. 1040x site efile com You must add the cost of any improvements to the basis of your home. 1040x site efile com You cannot deduct these costs. 1040x site efile com   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. 1040x site efile com Amount added to basis. 1040x site efile com   The amount you add to your basis for improvements is your actual cost. 1040x site efile com This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. 1040x site efile com For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. 1040x site efile com   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. 1040x site efile com These assessments are discussed earlier under Real Estate Taxes . 1040x site efile com Improvements no longer part of home. 1040x site efile com    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. 1040x site efile com Example. 1040x site efile com You put wall-to-wall carpeting in your home 15 years ago. 1040x site efile com Later, you replaced that carpeting with new wall-to-wall carpeting. 1040x site efile com The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. 1040x site efile com Repairs versus improvements. 1040x site efile com   A repair keeps your home in an ordinary, efficient operating condition. 1040x site efile com It does not add to the value of your home or prolong its life. 1040x site efile com Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. 1040x site efile com You cannot deduct repair costs and generally cannot add them to the basis of your home. 1040x site efile com   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. 1040x site efile com You add them to the basis of your home. 1040x site efile com Records to keep. 1040x site efile com   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. 1040x site efile com Also see Keeping Records , below. 1040x site efile com Energy conservation subsidy. 1040x site efile com   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. 1040x site efile com You must reduce the basis of your home by that value. 1040x site efile com   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. 1040x site efile com Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. 1040x site efile com These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. 1040x site efile com You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. 1040x site efile com In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. 1040x site efile com How to keep records. 1040x site efile com   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. 1040x site efile com How long to keep records. 1040x site efile com   You must keep your records for as long as they are important for meeting any provision of the federal tax law. 1040x site efile com   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. 1040x site efile com (A period of limitations is the period of time after which no legal action can be brought. 1040x site efile com ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. 1040x site efile com For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. 1040x site efile com Returns filed before the due date are treated as filed on the due date. 1040x site efile com   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. 1040x site efile com Keep those records as long as they are important in figuring the basis of the original or replacement property. 1040x site efile com Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. 1040x site efile com Table 4. 1040x site efile com Record of Home Improvements Keep this for your records. 1040x site efile com Also, keep receipts or other proof of improvements. 1040x site efile com Remove from this record any improvements that are no longer part of your main home. 1040x site efile com For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. 1040x site efile com (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To
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The 1040x Site Efile Com

1040x site efile com 2. 1040x site efile com   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. 1040x site efile com You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. 1040x site efile com This chapter discusses accounting methods. 1040x site efile com For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. 1040x site efile com Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. 1040x site efile com Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. 1040x site efile com Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 1040x site efile com A material item is one that affects the proper time for inclusion of income or allowance of a deduction. 1040x site efile com An item considered material for financial statement purposes is generally also considered material for income tax purposes. 1040x site efile com See Publication 538 for more information. 1040x site efile com You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. 1040x site efile com If you later want to change your accounting method, you generally must get IRS approval. 1040x site efile com How to obtain IRS approval is discussed later under Changes in Methods of Accounting . 1040x site efile com Types of accounting methods. 1040x site efile com   Generally, you can use any of the following accounting methods. 1040x site efile com Each method is discussed in detail below. 1040x site efile com Cash method. 1040x site efile com Accrual method. 1040x site efile com Special methods of accounting for certain items of income and expenses. 1040x site efile com Combination (hybrid) method using elements of two or more of the above. 1040x site efile com Business and other items. 1040x site efile com   You can account for business and personal items using different accounting methods. 1040x site efile com For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. 1040x site efile com Two or more businesses. 1040x site efile com   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 1040x site efile com Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. 1040x site efile com Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. 1040x site efile com However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. 1040x site efile com See Accrual Method Required , later. 1040x site efile com Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. 1040x site efile com Items of income include money received as well as property or services received. 1040x site efile com If you receive property or services, you must include the fair market value (FMV) of the property or services in income. 1040x site efile com See chapter 3 for information on how to report farm income on your income tax return. 1040x site efile com Constructive receipt. 1040x site efile com   Income is constructively received when an amount is credited to your account or made available to you without restriction. 1040x site efile com You do not need to have possession of the income for it to be treated as income for the tax year. 1040x site efile com If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. 1040x site efile com Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. 1040x site efile com Direct payments and counter-cyclical payments. 1040x site efile com   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. 1040x site efile com Delaying receipt of income. 1040x site efile com   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. 1040x site efile com You must report the income in the year the money or property is received or made available to you without restriction. 1040x site efile com Example. 1040x site efile com Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. 1040x site efile com She was told in December that her payment was available. 1040x site efile com She requested not to be paid until January 2014. 1040x site efile com However, she must still include this payment in her 2013 income because it was made available to her in 2013. 1040x site efile com Debts paid by another person or canceled. 1040x site efile com   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. 1040x site efile com If you receive income in this way, you constructively receive the income when the debt is canceled or paid. 1040x site efile com See Cancellation of Debt in chapter 3. 1040x site efile com Deferred payment contract. 1040x site efile com   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. 1040x site efile com However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. 1040x site efile com Example. 1040x site efile com You are a farmer who uses the cash method and a calendar tax year. 1040x site efile com You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. 1040x site efile com You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. 1040x site efile com However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. 1040x site efile com Repayment of income. 1040x site efile com   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. 1040x site efile com If the repayment is more than $3,000, a special rule applies. 1040x site efile com For details, see Repayments in chapter 11 of Publication 535, Business Expenses. 1040x site efile com Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. 1040x site efile com This includes business expenses for which you contest liability. 1040x site efile com However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. 1040x site efile com See chapter 4 for information on how to deduct farm business expenses on your income tax return. 1040x site efile com Prepayment. 1040x site efile com   Generally, you cannot deduct expenses paid in advance. 1040x site efile com This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 1040x site efile com Example. 1040x site efile com On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. 1040x site efile com In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. 1040x site efile com In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. 1040x site efile com An exception applies if the expense qualifies for the 12-month rule. 1040x site efile com See Publication 538 for more information and examples. 1040x site efile com See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. 1040x site efile com Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. 1040x site efile com The purpose of an accrual method of accounting is to correctly match income and expenses. 1040x site efile com Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. 1040x site efile com See Accrual Method Required and Farm Inventory , later. 1040x site efile com Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. 1040x site efile com Under this rule, include an amount in income on the earliest of the following dates. 1040x site efile com When you receive payment. 1040x site efile com When the income amount is due to you. 1040x site efile com When you earn the income. 1040x site efile com When title passes. 1040x site efile com If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. 1040x site efile com Inventory. 1040x site efile com   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. 1040x site efile com An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 1040x site efile com See Publication 538 for more information. 1040x site efile com Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. 1040x site efile com Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. 1040x site efile com The all-events test has been met. 1040x site efile com This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. 1040x site efile com Economic performance has occurred. 1040x site efile com Economic performance. 1040x site efile com   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 1040x site efile com If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. 1040x site efile com If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 1040x site efile com Example. 1040x site efile com Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. 1040x site efile com She entered into a contract with ABC Farm Consulting in 2012. 1040x site efile com The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. 1040x site efile com It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. 1040x site efile com Jane paid ABC Farm Consulting $2,000 in December 2012. 1040x site efile com Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. 1040x site efile com Economic performance for Jane's liability in the contract occurs as the services are provided. 1040x site efile com Jane incurs the $2,000 cost in 2013. 1040x site efile com An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. 1040x site efile com For more information, see Economic Performance in Publication 538. 1040x site efile com Special rule for related persons. 1040x site efile com   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. 1040x site efile com Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. 1040x site efile com For more information, see Internal Revenue Code section 267. 1040x site efile com Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. 1040x site efile com A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. 1040x site efile com A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. 1040x site efile com A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. 1040x site efile com A tax shelter. 1040x site efile com Note. 1040x site efile com Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). 1040x site efile com Family corporation. 1040x site efile com   A family corporation is generally a corporation that meets one of the following ownership requirements. 1040x site efile com Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. 1040x site efile com Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. 1040x site efile com Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. 1040x site efile com For more information on family corporations, see Internal Revenue Code section 447. 1040x site efile com Tax shelter. 1040x site efile com   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. 1040x site efile com Its principal purpose is the avoidance or evasion of federal income tax. 1040x site efile com It is a farming syndicate. 1040x site efile com A farming syndicate is an entity that meets either of the following tests. 1040x site efile com Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. 1040x site efile com More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. 1040x site efile com   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. 1040x site efile com   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. 1040x site efile com Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. 1040x site efile com This record should show the actual count or measurement of the inventory. 1040x site efile com It should also show all factors that enter into its valuation, including quality and weight, if applicable. 1040x site efile com Hatchery business. 1040x site efile com   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. 1040x site efile com Products held for sale. 1040x site efile com   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. 1040x site efile com , must be included in inventory. 1040x site efile com Supplies. 1040x site efile com   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. 1040x site efile com Deduct the cost of supplies in the year used or consumed in operations. 1040x site efile com Do not include incidental supplies in inventory as these are deductible in the year of purchase. 1040x site efile com Livestock. 1040x site efile com   Livestock held primarily for sale must be included in inventory. 1040x site efile com Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. 1040x site efile com See also Unit-livestock-price method , later. 1040x site efile com If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. 1040x site efile com Growing crops. 1040x site efile com   Generally, growing crops are not required to be included in inventory. 1040x site efile com However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. 1040x site efile com See Uniform capitalization rules below. 1040x site efile com Also see Uniform Capitalization Rules in  chapter 6. 1040x site efile com Items to include in inventory. 1040x site efile com   Your inventory should include all items held for sale, or for use as feed, seed, etc. 1040x site efile com , whether raised or purchased, that are unsold at the end of the year. 1040x site efile com Uniform capitalization rules. 1040x site efile com   The following applies if you are required to use an accrual method of accounting. 1040x site efile com The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. 1040x site efile com The costs of animals are subject to the uniform capitalization rules. 1040x site efile com Inventory valuation methods. 1040x site efile com   The following methods, described below, are those generally available for valuing inventory. 1040x site efile com The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 1040x site efile com Cost. 1040x site efile com Lower of cost or market. 1040x site efile com Farm-price method. 1040x site efile com Unit-livestock-price method. 1040x site efile com Cost and lower of cost or market methods. 1040x site efile com   See Publication 538 for information on these valuation methods. 1040x site efile com If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. 1040x site efile com However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. 1040x site efile com Farm-price method. 1040x site efile com   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. 1040x site efile com Market price is the current price at the nearest market in the quantities you usually sell. 1040x site efile com Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. 1040x site efile com If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. 1040x site efile com Unit-livestock-price method. 1040x site efile com   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. 1040x site efile com You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. 1040x site efile com The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. 1040x site efile com Unit prices and classifications are subject to approval by the IRS on examination of your return. 1040x site efile com You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. 1040x site efile com IRS approval is not required for these adjustments. 1040x site efile com Any other changes in unit prices or classifications do require IRS approval. 1040x site efile com   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. 1040x site efile com This method accounts only for the increase in cost of raising an animal to maturity. 1040x site efile com It does not provide for any decrease in the animal's market value after it reaches maturity. 1040x site efile com Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. 1040x site efile com   Do not include sold or lost animals in the year-end inventory. 1040x site efile com If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. 1040x site efile com The animals on hand at the end of the year are considered those most recently acquired. 1040x site efile com   You must include in inventory all livestock purchased primarily for sale. 1040x site efile com You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. 1040x site efile com However, you must be consistent from year to year, regardless of the method you have chosen. 1040x site efile com You cannot change your method without obtaining approval from the IRS. 1040x site efile com   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. 1040x site efile com If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. 1040x site efile com However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. 1040x site efile com This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. 1040x site efile com It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. 1040x site efile com Uniform capitalization rules. 1040x site efile com   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. 1040x site efile com This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. 1040x site efile com Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. 1040x site efile com Example 1. 1040x site efile com You are a farmer who uses an accrual method of accounting. 1040x site efile com You keep your books on the calendar year basis. 1040x site efile com You sell grain in December 2013 but you are not paid until January 2014. 1040x site efile com Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. 1040x site efile com Example 2. 1040x site efile com Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. 1040x site efile com Under this method, you include the sales proceeds in income for 2014, the year you receive payment. 1040x site efile com Deduct the costs of producing the grain in the year you pay for them. 1040x site efile com Special Methods of Accounting There are special methods of accounting for certain items of income and expense. 1040x site efile com Crop method. 1040x site efile com   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. 1040x site efile com You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. 1040x site efile com Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. 1040x site efile com    See chapter 4 for details on deducting the costs of operating a farm. 1040x site efile com Also see Regulations section 1. 1040x site efile com 162-12. 1040x site efile com Other special methods. 1040x site efile com   Other special methods of accounting apply to the following items. 1040x site efile com Amortization, see chapter 7. 1040x site efile com Casualties, see chapter 11. 1040x site efile com Condemnations, see chapter 11. 1040x site efile com Depletion, see chapter 7. 1040x site efile com Depreciation, see chapter 7. 1040x site efile com Farm business expenses, see chapter 4. 1040x site efile com Farm income, see chapter 3. 1040x site efile com Installment sales, see chapter 10. 1040x site efile com Soil and water conservation expenses, see chapter 5. 1040x site efile com Thefts, see chapter 11. 1040x site efile com Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. 1040x site efile com However, the following restrictions apply. 1040x site efile com If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. 1040x site efile com If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 1040x site efile com Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). 1040x site efile com Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. 1040x site efile com You may also have to pay a fee. 1040x site efile com To obtain approval, you must generally file Form 3115. 1040x site efile com There are instances when you can obtain automatic consent to change certain methods of accounting. 1040x site efile com See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. 1040x site efile com For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. 1040x site efile com Also see Publication 538. 1040x site efile com Prev  Up  Next   Home   More Online Publications