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2009 free tax software Publication 597 - Main Content Table of Contents Application of Treaty Personal Services Pensions, Annuities, Social Security, and AlimonyRoth IRAs. 2009 free tax software Tax-deferred plans. 2009 free tax software Investment Income From Canadian Sources Other Income Charitable ContributionsQualified charities. 2009 free tax software Income Tax Credits Competent Authority Assistance How To Get Tax HelpText of Treaty U. 2009 free tax software S. 2009 free tax software Taxation Canadian Taxation Application of Treaty The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. 2009 free tax software That is, a person who is recognized as a resident of the United States who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. 2009 free tax software Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for applying the treaty in cases where a taxpayer is considered by both countries to be a resident. 2009 free tax software Saving clause. 2009 free tax software   In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U. 2009 free tax software S. 2009 free tax software citizens) or of the United States to tax its residents or citizens (including U. 2009 free tax software S. 2009 free tax software citizens who are residents of the foreign country). 2009 free tax software This provision is known as the “saving clause. 2009 free tax software ”   For example, an individual who is a U. 2009 free tax software S. 2009 free tax software citizen and a resident of Canada may have dividend income from a U. 2009 free tax software S. 2009 free tax software corporation. 2009 free tax software The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. 2009 free tax software Even though a resident of Canada, the individual is a U. 2009 free tax software S. 2009 free tax software citizen and the saving clause overrides the treaty article that limits the U. 2009 free tax software S. 2009 free tax software tax to 15%. 2009 free tax software    Exceptions to the saving clause can be found in Article XXIX, paragraph 3. 2009 free tax software Treaty-based position. 2009 free tax software   If you take the position that any U. 2009 free tax software S. 2009 free tax software tax is overruled or otherwise reduced by a U. 2009 free tax software S. 2009 free tax software treaty (a treaty-based position), you generally must disclose that position on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attach it to your return. 2009 free tax software Personal Services A U. 2009 free tax software S. 2009 free tax software citizen or resident who is temporarily present in Canada during the tax year is exempt from Canadian income taxes on pay for services performed, or remittances received from the United States, if the citizen or resident qualifies under one of the treaty exemption provisions set out below. 2009 free tax software Income from employment (Article XV). 2009 free tax software   Income U. 2009 free tax software S. 2009 free tax software residents receive for the performance of dependent personal services in Canada (except as public entertainers) is exempt from Canadian tax if it is not more than $10,000 in Canadian currency for the year. 2009 free tax software If it is more than $10,000 for the year, it is exempt only if: The residents are present in Canada for no more than 183 days in any 12-month period beginning or ending in the year concerned, and The income is not paid by, or on behalf of, a Canadian resident and is not borne by a permanent establishment in Canada. 2009 free tax software    Whether there is a permanent establishment in Canada is determined by the rules set forth in Article V. 2009 free tax software Example. 2009 free tax software You are a U. 2009 free tax software S. 2009 free tax software resident employed under an 8-month contract with a Canadian firm to install equipment in their Montreal plant. 2009 free tax software During the calendar year you were physically present in Canada for 179 days and were paid $16,500 (Canadian) for your services. 2009 free tax software Although you were in Canada for not more than 183 days during the year, your income is not exempt from Canadian income tax because it was paid by a Canadian resident and was more than $10,000 (Canadian) for the year. 2009 free tax software Pay received by a U. 2009 free tax software S. 2009 free tax software resident for work regularly done in more than one country as an employee on a ship, aircraft, motor vehicle, or train operated by a U. 2009 free tax software S. 2009 free tax software resident is exempt from Canadian tax. 2009 free tax software Income from self-employment (Article VII). 2009 free tax software   Income from services performed (other than those performed as an employee) are taxed in Canada if they are attributable to a permanent establishment in Canada. 2009 free tax software This income is treated as business profits, and deductions similar to those allowed under U. 2009 free tax software S. 2009 free tax software law are allowable. 2009 free tax software   If you carry on (or have carried on) business in both Canada and the United States, the business profits are attributable to each country based on the profits that the permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities. 2009 free tax software The business profits attributable to the permanent establishment include only those profits derived from assets used, risks assumed, and activities performed by the permanent establishment. 2009 free tax software   You may be considered to have a permanent establishment if you meet certain conditions. 2009 free tax software For more information, see Article V (Permanent Establishment) and Article VII (Business Profits). 2009 free tax software Public entertainers (Article XVI). 2009 free tax software   The provisions under income from employment or income from self-employment do not apply to public entertainers (such as theater, motion picture, radio, or television artistes, musicians, or athletes) from the United States who receive more than $15,000 in gross receipts in Canadian currency, including reimbursed expenses, from their entertainment activities in Canada during the calendar year. 2009 free tax software However, this provision for public entertainers does not apply (and the other provisions will apply) to athletes participating in team sports in leagues with regularly scheduled games in both the United States and Canada. 2009 free tax software Compensation paid by the U. 2009 free tax software S. 2009 free tax software Government (Article XIX). 2009 free tax software   Wages, salaries, and similar income (other than pensions) paid to a U. 2009 free tax software S. 2009 free tax software citizen by the United States or any of its agencies, instrumentalities, or political subdivisions for discharging governmental functions are exempt from Canadian income tax. 2009 free tax software   The exemption does not apply to pay for services performed in connection with any trade or business carried on for profit by the United States, or any of its agencies, instrumentalities, or political subdivisions. 2009 free tax software Students and apprentices (Article XX). 2009 free tax software   A full-time student, apprentice, or business trainee who is in Canada to study or acquire business experience is exempt from Canadian income tax on remittances received from any source outside Canada for maintenance, education, or training. 2009 free tax software The recipient must be or must have been a U. 2009 free tax software S. 2009 free tax software resident immediately before visiting Canada. 2009 free tax software   An apprentice or business trainee can claim this exemption only for a period of one year from the date the individual first arrived in Canada for the purpose of training. 2009 free tax software Pensions, Annuities, Social Security, and Alimony Under Article XVIII, pensions and annuities from Canadian sources paid to U. 2009 free tax software S. 2009 free tax software residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). 2009 free tax software Canadian pensions and annuities paid to U. 2009 free tax software S. 2009 free tax software residents may be taxed by the United States, but the amount of any pension included in income for U. 2009 free tax software S. 2009 free tax software tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. 2009 free tax software Pensions. 2009 free tax software   A pension includes any payment under a pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances, and payments under a sickness, accident, or disability plan. 2009 free tax software It includes pensions paid by private employers and the government for services rendered. 2009 free tax software   Pensions also include payments from individual retirement arrangements (IRAs) in the United States, registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) in Canada. 2009 free tax software   Pensions do not include social security benefits. 2009 free tax software Roth IRAs. 2009 free tax software   A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U. 2009 free tax software S. 2009 free tax software tax if paid to a U. 2009 free tax software S. 2009 free tax software resident. 2009 free tax software In addition, you may elect to defer any tax in Canada on income accrued within the Roth IRA but not distributed by the Roth IRA. 2009 free tax software However, you cannot defer tax on any accruals due to contributions made after you become a Canadian resident. 2009 free tax software Tax-deferred plans. 2009 free tax software   Generally, income that accrues in a Canadian RRSP or RRIF is subject to U. 2009 free tax software S. 2009 free tax software tax, even if it is not distributed. 2009 free tax software However, a U. 2009 free tax software S. 2009 free tax software citizen or resident can elect to defer U. 2009 free tax software S. 2009 free tax software tax on income from the plan until the income is distributed. 2009 free tax software Form 8891 is used to make the election. 2009 free tax software Annuities. 2009 free tax software    An annuity is a stated sum payable periodically at stated times, during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). 2009 free tax software Annuities do not include: Non-periodic payments, or An annuity the cost of which was deductible for tax purposes. 2009 free tax software Special rules. 2009 free tax software    Special rules apply to pensions and annuities with respect to: Short-term assignments, Cross-border commuters, and Individuals who participate in a Canadian qualifying plan. 2009 free tax software Generally, distributions in such cases are deemed to be earned in the country in which the plan is established, without regard to where the services were rendered. 2009 free tax software Social security benefits. 2009 free tax software   U. 2009 free tax software S. 2009 free tax software social security benefits paid to a resident of Canada are taxed in Canada as if they were benefits under the Canada Pension Plan, except that 15% of the amount of the benefit is exempt from Canadian tax. 2009 free tax software Alimony. 2009 free tax software   Alimony and similar amounts (including child support payments) from Canadian sources paid to U. 2009 free tax software S. 2009 free tax software residents are exempt from Canadian tax. 2009 free tax software For purposes of U. 2009 free tax software S. 2009 free tax software tax, these amounts are excluded from income to the same extent they would be excluded from income in Canada if the recipient was a Canadian resident. 2009 free tax software Investment Income From Canadian Sources The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital. 2009 free tax software Dividends (Article X). 2009 free tax software   For Canadian source dividends received by U. 2009 free tax software S. 2009 free tax software residents, the Canadian income tax generally may not be more than 15%. 2009 free tax software   A 5% rate applies to intercorporate dividends paid from a subsidiary to a parent corporation owning at least 10% of the subsidiary's voting stock. 2009 free tax software However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation. 2009 free tax software   These rates do not apply if the owner of the dividends carries on, or has carried on, a business in Canada through a permanent establishment and the holding on which the income is paid is effectively connected with that permanent establishment. 2009 free tax software Interest (Article XI). 2009 free tax software   Generally, Canadian source interest received by U. 2009 free tax software S. 2009 free tax software residents is exempt from Canadian income tax. 2009 free tax software   The exemption does not apply if the owner of the interest carries on, or has carried on, a business in Canada through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. 2009 free tax software Gains from the sale of property (Article XIII). 2009 free tax software   Generally, gains from the sale of personal property by a U. 2009 free tax software S. 2009 free tax software resident having no permanent establishment in Canada are exempt from Canadian income tax. 2009 free tax software However, the exemption from Canadian tax does not apply to gains realized by U. 2009 free tax software S. 2009 free tax software residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada. 2009 free tax software   If the property subject to Canadian tax is a capital asset and was owned by the U. 2009 free tax software S. 2009 free tax software resident on September 26, 1980, not as part of the business property of a permanent establishment in Canada, generally the taxable gain is limited to the appreciation after 1984. 2009 free tax software Royalties (Article XII). 2009 free tax software   The following are exempt from Canadian tax: Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television, which may be taxed at 10%), Payments for the use of, or the right to use, computer software, Payments for the use of, or the right to use, any patent or any information concerning industrial, commercial, or scientific experience (but not within a rental or franchise agreement), and Payments for broadcasting as agreed to in an exchange of notes between the countries. 2009 free tax software   This rate or exemption does not apply if the owner of the royalties carries on, or has carried on, a business in Canada through a permanent establishment and the right or property on which the income is paid is effectively connected with that permanent establishment. 2009 free tax software   This exemption (or lower rate) does not apply to royalties to explore for or to exploit mineral deposits, timber, and other natural resources. 2009 free tax software Other Income Generally, Canadian source income that is not specifically mentioned in the treaty, may be taxed by Canada. 2009 free tax software Gambling losses. 2009 free tax software   Canadian residents may deduct gambling losses in the U. 2009 free tax software S. 2009 free tax software against gambling winnings in the U. 2009 free tax software S. 2009 free tax software in the same manner as a U. 2009 free tax software S. 2009 free tax software resident. 2009 free tax software Charitable Contributions United States income tax return. 2009 free tax software   Under Article XXI, you may deduct contributions to certain qualified Canadian charitable organizations on your United States income tax return. 2009 free tax software Besides being subject to the overall limits applicable to all your charitable contributions under U. 2009 free tax software S. 2009 free tax software tax law, your charitable contributions to Canadian organizations (other than contributions to a college or university at which you or a member of your family is or was enrolled) are subject to the U. 2009 free tax software S. 2009 free tax software percentage limits on charitable contributions, applied to your Canadian source income. 2009 free tax software If your return does not include gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible. 2009 free tax software Example. 2009 free tax software You are a U. 2009 free tax software S. 2009 free tax software citizen living in Canada. 2009 free tax software You have both U. 2009 free tax software S. 2009 free tax software and Canadian source income. 2009 free tax software During your tax year, you contribute to Canadian organizations that would qualify as charitable organizations under U. 2009 free tax software S. 2009 free tax software tax law if they were U. 2009 free tax software S. 2009 free tax software organizations. 2009 free tax software To figure the maximum amount of the contribution to Canadian organizations that you can deduct on your U. 2009 free tax software S. 2009 free tax software income tax return, multiply your adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U. 2009 free tax software S. 2009 free tax software income tax law. 2009 free tax software Then include this amount on your return along with all your domestic charitable contributions, subject to the appropriate percentage limit required for contributions under U. 2009 free tax software S. 2009 free tax software income tax law. 2009 free tax software The appropriate percentage limit for U. 2009 free tax software S. 2009 free tax software tax purposes is applied to your total adjusted gross income from all sources. 2009 free tax software Qualified charities. 2009 free tax software   These Canadian organizations must meet the qualifications that a U. 2009 free tax software S. 2009 free tax software charitable organization must meet under U. 2009 free tax software S. 2009 free tax software tax law. 2009 free tax software Usually an organization will notify you if it qualifies. 2009 free tax software For further information on charitable contributions and the U. 2009 free tax software S. 2009 free tax software percentage limits, see Publication 526, Charitable Contributions. 2009 free tax software Canadian income tax return. 2009 free tax software   Under certain conditions, contributions to qualified U. 2009 free tax software S. 2009 free tax software charitable organizations may also be claimed on your Canadian income tax return if you are a Canadian resident. 2009 free tax software Income Tax Credits The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. 2009 free tax software In general, the United States and Canada both allow a credit against their income tax for the income tax paid to the other country on income from sources in that other country. 2009 free tax software For detailed discussions of the U. 2009 free tax software S. 2009 free tax software income tax treatment of tax paid to foreign countries, see Publication 514, Foreign Tax Credit for Individuals. 2009 free tax software See paragraphs (4) and (5) of Article XXIV for certain provisions that affect the computation of the credit allowed by the United States for Canadian income taxes paid by U. 2009 free tax software S. 2009 free tax software citizens residing in Canada. 2009 free tax software Competent Authority Assistance Under Article XXVI, a U. 2009 free tax software S. 2009 free tax software citizen or resident may request assistance from the U. 2009 free tax software S. 2009 free tax software competent authority when the actions of Canada, the United States, or both, potentially result in double taxation or taxation contrary to the treaty. 2009 free tax software The U. 2009 free tax software S. 2009 free tax software competent authority may then consult with the Canadian competent authority to determine if the double taxation or denial of treaty benefits in question can be avoided. 2009 free tax software If the competent authorities are not able to reach agreement in a case, binding arbitration proceedings may apply. 2009 free tax software It is important that your request for competent authority assistance be made as soon as you have been notified by either Canada or the United States of proposed adjustments that would result in denial of treaty benefits or in double taxation. 2009 free tax software This is so that implementation of any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. 2009 free tax software For information that you should include with your request for competent authority assistance, see Revenue Procedure 2006-54, 2006-49 IRB 1035, available at www. 2009 free tax software irs. 2009 free tax software gov/irb/2006-49_IRB/ar13. 2009 free tax software html. 2009 free tax software The request should be addressed to:  Deputy Commissioner (International) Large Business and International Division Attn: Office of Tax Treaty  Internal Revenue Service 1111 Constitution Ave. 2009 free tax software , NW Routing: MA3-322A Washington, D. 2009 free tax software C. 2009 free tax software 20024 In addition to a timely request for assistance, you should take the following measures: File a timely protective claim for credit or refund of U. 2009 free tax software S. 2009 free tax software taxes on Form 1040X, Form 1120X, or amended Form 1041, whichever is appropriate. 2009 free tax software This will, among other things, give you the benefit of a foreign tax credit in case you do not qualify for the treaty benefit in question. 2009 free tax software For figuring this credit, attach either Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or Form 1118, Foreign Tax Credit — Corporations, as appropriate. 2009 free tax software Attach your protective claim to your request for competent authority assistance. 2009 free tax software Take appropriate action under Canadian procedures to avoid the lapse or termination of your right of appeal under Canadian income tax law. 2009 free tax software How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS and the Canada Revenue Agency in several ways. 2009 free tax software Text of Treaty You can get the text of the U. 2009 free tax software S. 2009 free tax software —Canada income tax treaty from: Superintendent of Documents U. 2009 free tax software S. 2009 free tax software Government Printing Office P. 2009 free tax software O. 2009 free tax software Box 371954 Pittsburgh, PA 15250-7954 The treaty can also be found on the Internet at IRS. 2009 free tax software gov. 2009 free tax software U. 2009 free tax software S. 2009 free tax software Taxation During the filing season, the IRS conducts a taxpayer assistance program in Canada. 2009 free tax software To find out if IRS personnel will be in your area, you should contact the consular office at the nearest U. 2009 free tax software S. 2009 free tax software Embassy or consulate. 2009 free tax software Mail. 2009 free tax software For answers to technical or account questions, you can write to:   Internal Revenue Service International Section Philadelphia, PA 19255-0525 Phone. 2009 free tax software You can call the IRS for help at (267) 941-1000 (not a toll-free call). 2009 free tax software Canadian Taxation You can get information on Canadian taxation from the Canada Revenue Agency. 2009 free tax software The International Tax Services Office can be contacted on 1-800-267-5177 (from anywhere in Canada and the U. 2009 free tax software S. 2009 free tax software ) or on the Internet at www. 2009 free tax software cra-arc. 2009 free tax software gc. 2009 free tax software ca. 2009 free tax software Prev  Up  Next   Home   More Online Publications
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Contact My Local Office in Michigan

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City Street Address Days/Hours of Service Telephone* 
Detroit  500 Woodward Ave.
Detroit, MI 48226 

Monday-Friday - 8:30 a.m.- 4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(313) 628-3722 
Flint  917 N. Saginaw Street
Flint, MI 48503 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 12:30 p.m. - 1:30 p.m.)

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**


Services Provided

(810) 342-6190 
Grand Rapids  3251 N. Evergreen Dr. N.E.
Grand Rapids, MI 49525 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
 

Services Provided

(616) 365-4700 
Marquette  1055 W. Baraga Ave.
Marquette, MI 49855 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 12:30 p.m. - 1:30 p.m.)

 

Services Provided

(906) 228-7845 
Saginaw  4901 Towne Centre
Saginaw, MI 48604 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 12:30 p.m. - 1:30 p.m.)

 

Services Provided

(989) 797-8560 
Traverse City  2040 N. US 31 South
Traverse City, MI 49685 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 12:30 p.m. - 1:30 p.m.)
 

    Services Provided

(231) 932-2192 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call 313-628-3670 in Detroit or 1-877-777-4778 elsewhere, or see Publication 1546, The Taxpayer Advocate Service of the IRS.

For further information, see Tax Topic 104

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
477 Michigan Ave.
Stop 45, Room 2401
Detroit, MI 48226

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The 2009 Free Tax Software

2009 free tax software 6. 2009 free tax software   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. 2009 free tax software Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. 2009 free tax software Also use basis to figure depreciation, amortization, depletion, and casualty losses. 2009 free tax software If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. 2009 free tax software Only the basis allocated to the business or investment use of the property can be depreciated. 2009 free tax software Your original basis in property is adjusted (increased or decreased) by certain events. 2009 free tax software For example, if you make improvements to the property, increase your basis. 2009 free tax software If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. 2009 free tax software Keep accurate records of all items that affect the basis of your assets. 2009 free tax software For information on keeping records, see chapter 1. 2009 free tax software Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. 2009 free tax software Cost Basis The basis of property you buy is usually its cost. 2009 free tax software Cost is the amount you pay in cash, debt obligations, other property, or services. 2009 free tax software Your cost includes amounts you pay for sales tax, freight, installation, and testing. 2009 free tax software The basis of real estate and business assets will include other items, discussed later. 2009 free tax software Basis generally does not include interest payments. 2009 free tax software However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. 2009 free tax software You also may have to capitalize (add to basis) certain other costs related to buying or producing property. 2009 free tax software Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. 2009 free tax software Loans with low or no interest. 2009 free tax software   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. 2009 free tax software You generally have unstated interest if your interest rate is less than the applicable federal rate. 2009 free tax software See the discussion of unstated interest in Publication 537, Installment Sales. 2009 free tax software Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. 2009 free tax software If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. 2009 free tax software Some of these expenses are discussed next. 2009 free tax software Lump sum purchase. 2009 free tax software   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. 2009 free tax software Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. 2009 free tax software Figure the basis of each asset by multiplying the lump sum by a fraction. 2009 free tax software The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 2009 free tax software Fair market value (FMV). 2009 free tax software   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 2009 free tax software Sales of similar property on or about the same date may help in figuring the FMV of the property. 2009 free tax software If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. 2009 free tax software Real estate taxes. 2009 free tax software   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 2009 free tax software   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. 2009 free tax software Whether or not you reimburse the seller, do not include that amount in the basis of your property. 2009 free tax software Settlement costs. 2009 free tax software   Your basis includes the settlement fees and closing costs for buying the property. 2009 free tax software See Publication 551 for a detailed list of items you can and cannot include in basis. 2009 free tax software   Do not include fees and costs for getting a loan on the property. 2009 free tax software Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 2009 free tax software Points. 2009 free tax software   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. 2009 free tax software You may be able to deduct the points currently or over the term of the loan. 2009 free tax software For more information about deducting points, see Points in chapter 4 of Publication 535. 2009 free tax software Assumption of a mortgage. 2009 free tax software   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. 2009 free tax software Example. 2009 free tax software If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. 2009 free tax software Constructing assets. 2009 free tax software   If you build property or have assets built for you, your expenses for this construction are part of your basis. 2009 free tax software Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 2009 free tax software   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. 2009 free tax software You must capitalize them (include them in the asset's basis). 2009 free tax software Employee wages paid for the construction work, reduced by any employment credits allowed. 2009 free tax software Depreciation on equipment you own while it is used in the construction. 2009 free tax software Operating and maintenance costs for equipment used in the construction. 2009 free tax software The cost of business supplies and materials used in the construction. 2009 free tax software    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 2009 free tax software Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. 2009 free tax software To determine the basis of these assets or separate items, there must be an allocation of basis. 2009 free tax software Group of assets acquired. 2009 free tax software   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. 2009 free tax software Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 2009 free tax software You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. 2009 free tax software If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 2009 free tax software Farming business acquired. 2009 free tax software   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. 2009 free tax software Generally, reduce the purchase price by any cash received. 2009 free tax software Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. 2009 free tax software See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. 2009 free tax software Transplanted embryo. 2009 free tax software   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. 2009 free tax software Allocate the rest of the purchase price to the basis of the calf. 2009 free tax software Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. 2009 free tax software Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. 2009 free tax software You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 2009 free tax software Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. 2009 free tax software However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. 2009 free tax software You produce property if you construct, build, install, manufacture, develop, improve, or create the property. 2009 free tax software You are not subject to the uniform capitalization rules if the property is produced for personal use. 2009 free tax software In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. 2009 free tax software Plants. 2009 free tax software   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. 2009 free tax software Animals. 2009 free tax software   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. 2009 free tax software The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. 2009 free tax software Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. 2009 free tax software For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. 2009 free tax software For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. 2009 free tax software Exceptions. 2009 free tax software   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. 2009 free tax software   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. 2009 free tax software See Accrual Method Required under Accounting Methods in chapter 2. 2009 free tax software   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. 2009 free tax software If you make this election, special rules apply. 2009 free tax software This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. 2009 free tax software This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. 2009 free tax software    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. 2009 free tax software See chapter 7, for additional information on depreciation. 2009 free tax software Example. 2009 free tax software You grow trees that have a preproductive period of more than 2 years. 2009 free tax software The trees produce an annual crop. 2009 free tax software You are an individual and the uniform capitalization rules apply to your farming business. 2009 free tax software You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. 2009 free tax software You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. 2009 free tax software Preproductive period of more than 2 years. 2009 free tax software   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. 2009 free tax software Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. 2009 free tax software Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. 2009 free tax software More information. 2009 free tax software   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. 2009 free tax software 263A-4. 2009 free tax software Table 6-1. 2009 free tax software Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. 2009 free tax software Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. 2009 free tax software The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. 2009 free tax software Increases to Basis Increase the basis of any property by all items properly added to a capital account. 2009 free tax software These include the cost of any improvements having a useful life of more than 1 year. 2009 free tax software The following costs increase the basis of property. 2009 free tax software The cost of extending utility service lines to property. 2009 free tax software Legal fees, such as the cost of defending and perfecting title. 2009 free tax software Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. 2009 free tax software Assessments for items such as paving roads and building ditches that increase the value of the property assessed. 2009 free tax software Do not deduct these expenses as taxes. 2009 free tax software However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. 2009 free tax software If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 2009 free tax software See chapter 7. 2009 free tax software Deducting vs. 2009 free tax software capitalizing costs. 2009 free tax software   Do not add to your basis costs you can deduct as current expenses. 2009 free tax software For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. 2009 free tax software However, you can elect either to deduct or to capitalize certain other costs. 2009 free tax software See chapter 7 in Publication 535. 2009 free tax software Decreases to Basis The following are some items that reduce the basis of property. 2009 free tax software Section 179 deduction. 2009 free tax software Deductions previously allowed or allowable for amortization, depreciation, and depletion. 2009 free tax software Alternative motor vehicle credit. 2009 free tax software See Form 8910. 2009 free tax software Alternative fuel vehicle refueling property credit. 2009 free tax software See Form 8911. 2009 free tax software Residential energy efficient property credits. 2009 free tax software See Form 5695. 2009 free tax software Investment credit (part or all) taken. 2009 free tax software Casualty and theft losses and insurance reimbursements. 2009 free tax software Payments you receive for granting an easement. 2009 free tax software Exclusion from income of subsidies for energy conservation measures. 2009 free tax software Certain canceled debt excluded from income. 2009 free tax software Rebates from a manufacturer or seller. 2009 free tax software Patronage dividends received from a cooperative association as a result of a purchase of property. 2009 free tax software See Patronage Dividends in chapter 3. 2009 free tax software Gas-guzzler tax. 2009 free tax software See Form 6197. 2009 free tax software Some of these items are discussed next. 2009 free tax software For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. 2009 free tax software Depreciation and section 179 deduction. 2009 free tax software   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. 2009 free tax software For more information on these deductions, see chapter 7. 2009 free tax software Section 179 deduction. 2009 free tax software   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 2009 free tax software Depreciation. 2009 free tax software   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. 2009 free tax software If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 2009 free tax software If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 2009 free tax software   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. 2009 free tax software   See chapter 7 for information on figuring the depreciation you should have claimed. 2009 free tax software   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. 2009 free tax software Casualty and theft losses. 2009 free tax software   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. 2009 free tax software Also, decrease it by any deductible loss not covered by insurance. 2009 free tax software See chapter 11 for information about figuring your casualty or theft loss. 2009 free tax software   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. 2009 free tax software To make this determination, compare the repaired property to the property before the casualty. 2009 free tax software Easements. 2009 free tax software   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. 2009 free tax software It reduces the basis of the affected part of the property. 2009 free tax software If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 2009 free tax software See Easements and rights-of-way in chapter 3. 2009 free tax software Exclusion from income of subsidies for energy conservation measures. 2009 free tax software   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. 2009 free tax software Reduce the basis of the property by the excluded amount. 2009 free tax software Canceled debt excluded from income. 2009 free tax software   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 2009 free tax software A debt includes any indebtedness for which you are liable or which attaches to property you hold. 2009 free tax software   You can exclude your canceled debt from income if the debt is any of the following. 2009 free tax software Debt canceled in a bankruptcy case or when you are insolvent. 2009 free tax software Qualified farm debt. 2009 free tax software Qualified real property business debt (provided you are not a C corporation). 2009 free tax software Qualified principal residence indebtedness. 2009 free tax software Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. 2009 free tax software If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 2009 free tax software If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. 2009 free tax software   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. 2009 free tax software For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. 2009 free tax software For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. 2009 free tax software For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 2009 free tax software Basis Other Than Cost There are times when you cannot use cost as basis. 2009 free tax software In these situations, the fair market value or the adjusted basis of property may be used. 2009 free tax software Examples are discussed next. 2009 free tax software Property changed from personal to business or rental use. 2009 free tax software   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 2009 free tax software An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. 2009 free tax software   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 2009 free tax software   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. 2009 free tax software The basis for figuring a gain is your adjusted basis in the property when you sell the property. 2009 free tax software Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 2009 free tax software Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . 2009 free tax software Property received for services. 2009 free tax software   If you receive property for services, include the property's FMV in income. 2009 free tax software The amount you include in income becomes your basis. 2009 free tax software If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 2009 free tax software Example. 2009 free tax software George Smith is an accountant and also operates a farming business. 2009 free tax software George agreed to do some accounting work for his neighbor in exchange for a dairy cow. 2009 free tax software The accounting work and the cow are each worth $1,500. 2009 free tax software George must include $1,500 in income for his accounting services. 2009 free tax software George's basis in the cow is $1,500. 2009 free tax software Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. 2009 free tax software A taxable gain or deductible loss also is known as a recognized gain or loss. 2009 free tax software A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. 2009 free tax software If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. 2009 free tax software Example. 2009 free tax software You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. 2009 free tax software You must report a taxable gain of $4,000 for the land. 2009 free tax software The tractor has a basis of $6,000. 2009 free tax software Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. 2009 free tax software Similar or related property. 2009 free tax software   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. 2009 free tax software However, make the following adjustments. 2009 free tax software Decrease the basis by the following amounts. 2009 free tax software Any loss you recognize on the involuntary conversion. 2009 free tax software Any money you receive that you do not spend on similar property. 2009 free tax software Increase the basis by the following amounts. 2009 free tax software Any gain you recognize on the involuntary conversion. 2009 free tax software Any cost of acquiring the replacement property. 2009 free tax software Money or property not similar or related. 2009 free tax software   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. 2009 free tax software Allocating the basis. 2009 free tax software   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 2009 free tax software Basis for depreciation. 2009 free tax software   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. 2009 free tax software For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 2009 free tax software For more information about involuntary conversions, see chapter 11. 2009 free tax software Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 2009 free tax software A nontaxable gain or loss also is known as an unrecognized gain or loss. 2009 free tax software If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 2009 free tax software Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 2009 free tax software For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 2009 free tax software There must also be an exchange of like-kind property. 2009 free tax software For more information, see Like-Kind Exchanges in  chapter 8. 2009 free tax software The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. 2009 free tax software Example 1. 2009 free tax software You traded a truck you used in your farming business for a new smaller truck to use in farming. 2009 free tax software The adjusted basis of the old truck was $10,000. 2009 free tax software The FMV of the new truck is $30,000. 2009 free tax software Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. 2009 free tax software Example 2. 2009 free tax software You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). 2009 free tax software You use both the field cultivator and the planter in your farming business. 2009 free tax software The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. 2009 free tax software   Exchange expenses generally are the closing costs that you pay. 2009 free tax software They include such items as brokerage commissions, attorney fees, and deed preparation fees. 2009 free tax software Add them to the basis of the like-kind property you receive. 2009 free tax software Property plus cash. 2009 free tax software   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. 2009 free tax software Example. 2009 free tax software You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. 2009 free tax software Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). 2009 free tax software Special rules for related persons. 2009 free tax software   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 2009 free tax software Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. 2009 free tax software Each person reports it on the tax return filed for the year in which the later disposition occurred. 2009 free tax software If this rule applies, the basis of the property received in the original exchange will be its FMV. 2009 free tax software For more information, see chapter 8. 2009 free tax software Exchange of business property. 2009 free tax software   Exchanging the property of one business for the property of another business generally is a multiple property exchange. 2009 free tax software For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 2009 free tax software Basis for depreciation. 2009 free tax software   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. 2009 free tax software For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 2009 free tax software Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. 2009 free tax software The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. 2009 free tax software Decrease the basis by the following amounts. 2009 free tax software Any money you receive. 2009 free tax software Any loss you recognize on the exchange. 2009 free tax software Increase the basis by the following amounts. 2009 free tax software Any additional costs you incur. 2009 free tax software Any gain you recognize on the exchange. 2009 free tax software If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 2009 free tax software Example 1. 2009 free tax software You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. 2009 free tax software You realize a gain of $40,000. 2009 free tax software This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). 2009 free tax software Include your gain in income (recognize gain) only to the extent of the cash received. 2009 free tax software Your basis in the land you received is figured as follows. 2009 free tax software Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. 2009 free tax software You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. 2009 free tax software You realize a gain of $7,250. 2009 free tax software This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). 2009 free tax software You include all the gain in your income (recognize gain) because the gain is less than the cash you received. 2009 free tax software Your basis in the truck you received is figured as follows. 2009 free tax software Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. 2009 free tax software   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 2009 free tax software The rest is the basis of the like-kind property. 2009 free tax software Example. 2009 free tax software You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. 2009 free tax software You also received $1,000 cash and a truck that had an FMV of $3,000. 2009 free tax software The truck is unlike property. 2009 free tax software You realized a gain of $1,500. 2009 free tax software This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). 2009 free tax software You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 2009 free tax software Your basis in the properties you received is figured as follows. 2009 free tax software Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). 2009 free tax software This is the truck's FMV. 2009 free tax software The rest ($12,500) is the basis of the tractor. 2009 free tax software Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 2009 free tax software Example. 2009 free tax software You used a tractor on your farm for 3 years. 2009 free tax software Its adjusted basis is $22,000 and its FMV is $40,000. 2009 free tax software You are interested in a new tractor, which sells for $60,000. 2009 free tax software Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. 2009 free tax software Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). 2009 free tax software However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. 2009 free tax software Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). 2009 free tax software Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. 2009 free tax software Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. 2009 free tax software You also must know its FMV at the time it was given to you and any gift tax paid on it. 2009 free tax software FMV equal to or greater than donor's adjusted basis. 2009 free tax software   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. 2009 free tax software Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 2009 free tax software   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. 2009 free tax software See Adjusted Basis , earlier. 2009 free tax software   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. 2009 free tax software Figure the increase by multiplying the gift tax paid by the following fraction. 2009 free tax software Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. 2009 free tax software The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 2009 free tax software Example. 2009 free tax software In 2013, you received a gift of property from your mother that had an FMV of $50,000. 2009 free tax software Her adjusted basis was $20,000. 2009 free tax software The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). 2009 free tax software She paid a gift tax of $7,320. 2009 free tax software Your basis, $26,076, is figured as follows. 2009 free tax software Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . 2009 free tax software 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. 2009 free tax software If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. 2009 free tax software However, your basis cannot exceed the FMV of the gift when it was given to you. 2009 free tax software FMV less than donor's adjusted basis. 2009 free tax software   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 2009 free tax software Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 2009 free tax software Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. 2009 free tax software (See Adjusted Basis , earlier. 2009 free tax software )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. 2009 free tax software Example. 2009 free tax software You received farmland as a gift from your parents when they retired from farming. 2009 free tax software At the time of the gift, the land had an FMV of $80,000. 2009 free tax software Your parents' adjusted basis was $100,000. 2009 free tax software After you received the land, no events occurred that would increase or decrease your basis. 2009 free tax software If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. 2009 free tax software If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. 2009 free tax software If the sales price is between $80,000 and $100,000, you have neither gain nor loss. 2009 free tax software For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. 2009 free tax software If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. 2009 free tax software Business property. 2009 free tax software   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 2009 free tax software Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. 2009 free tax software The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. 2009 free tax software However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. 2009 free tax software The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. 2009 free tax software For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. 2009 free tax software Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. 2009 free tax software If a federal estate return is filed, you can use its appraised value. 2009 free tax software The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. 2009 free tax software For information on the alternate valuation, see the Instructions for Form 706. 2009 free tax software The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. 2009 free tax software If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 2009 free tax software Special-use valuation method. 2009 free tax software   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. 2009 free tax software If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. 2009 free tax software If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. 2009 free tax software The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 2009 free tax software   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 2009 free tax software Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. 2009 free tax software Figure all FMVs without regard to the special-use valuation. 2009 free tax software   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. 2009 free tax software This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. 2009 free tax software The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. 2009 free tax software   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 2009 free tax software To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. 2009 free tax software If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 2009 free tax software The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. 2009 free tax software   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. 2009 free tax software   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. 2009 free tax software Property inherited from a decedent who died in 2010. 2009 free tax software   If you inherited property from a decedent who died in 2010, different rules may apply. 2009 free tax software See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. 2009 free tax software Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. 2009 free tax software Partner's basis. 2009 free tax software   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. 2009 free tax software However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. 2009 free tax software For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. 2009 free tax software Shareholder's basis. 2009 free tax software   The basis of property distributed by a corporation to a shareholder is its fair market value. 2009 free tax software For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 2009 free tax software Prev  Up  Next   Home   More Online 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