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2012 Federal Tax Form 1040

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2012 Federal Tax Form 1040

2012 federal tax form 1040 Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. 2012 federal tax form 1040 Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. 2012 federal tax form 1040 Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. 2012 federal tax form 1040 Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. 2012 federal tax form 1040 However, a joint undertaking merely to share expenses is not a partnership. 2012 federal tax form 1040 For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. 2012 federal tax form 1040 The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. 2012 federal tax form 1040 Organizations formed after 1996. 2012 federal tax form 1040   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. 2012 federal tax form 1040 An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. 2012 federal tax form 1040 An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. 2012 federal tax form 1040 An insurance company. 2012 federal tax form 1040 Certain banks. 2012 federal tax form 1040 An organization wholly owned by a state, local, or foreign government. 2012 federal tax form 1040 An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). 2012 federal tax form 1040 Certain foreign organizations identified in section 301. 2012 federal tax form 1040 7701-2(b)(8) of the regulations. 2012 federal tax form 1040 A tax-exempt organization. 2012 federal tax form 1040 A real estate investment trust. 2012 federal tax form 1040 An organization classified as a trust under section 301. 2012 federal tax form 1040 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. 2012 federal tax form 1040 Any other organization that elects to be classified as a corporation by filing Form 8832. 2012 federal tax form 1040 For more information, see the instructions for Form 8832. 2012 federal tax form 1040 Limited liability company. 2012 federal tax form 1040   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 2012 federal tax form 1040 Unlike a partnership, none of the members of an LLC are personally liable for its debts. 2012 federal tax form 1040 An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. 2012 federal tax form 1040 7701-3. 2012 federal tax form 1040 See Form 8832 and section 301. 2012 federal tax form 1040 7701-3 of the regulations for more details. 2012 federal tax form 1040 A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. 2012 federal tax form 1040 Organizations formed before 1997. 2012 federal tax form 1040   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. 2012 federal tax form 1040 Community property. 2012 federal tax form 1040    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. 2012 federal tax form 1040 They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. 2012 federal tax form 1040 A change in reporting position will be treated for federal tax purposes as a conversion of the entity. 2012 federal tax form 1040   A qualified entity is a business entity that meets all the following requirements. 2012 federal tax form 1040 The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. 2012 federal tax form 1040 No person other than one or both spouses would be considered an owner for federal tax purposes. 2012 federal tax form 1040 The business entity is not treated as a corporation. 2012 federal tax form 1040   For more information about community property, see Publication 555, Community Property. 2012 federal tax form 1040 Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2012 federal tax form 1040 Family Partnership Members of a family can be partners. 2012 federal tax form 1040 However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. 2012 federal tax form 1040 If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. 2012 federal tax form 1040 If capital is not a material income-producing factor, they joined together in good faith to conduct a business. 2012 federal tax form 1040 They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. 2012 federal tax form 1040 Capital is material. 2012 federal tax form 1040   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. 2012 federal tax form 1040 Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. 2012 federal tax form 1040 Capital is not material. 2012 federal tax form 1040   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. 2012 federal tax form 1040 Capital interest. 2012 federal tax form 1040   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. 2012 federal tax form 1040 The owner withdraws from the partnership. 2012 federal tax form 1040 The partnership liquidates. 2012 federal tax form 1040   The mere right to share in earnings and profits is not a capital interest in the partnership. 2012 federal tax form 1040 Gift of capital interest. 2012 federal tax form 1040   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. 2012 federal tax form 1040 It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. 2012 federal tax form 1040 The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. 2012 federal tax form 1040 Purchase. 2012 federal tax form 1040   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. 2012 federal tax form 1040 The fair market value of the purchased interest is considered donated capital. 2012 federal tax form 1040 For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). 2012 federal tax form 1040 Example. 2012 federal tax form 1040 A father sold 50% of his business to his son. 2012 federal tax form 1040 The resulting partnership had a profit of $60,000. 2012 federal tax form 1040 Capital is a material income-producing factor. 2012 federal tax form 1040 The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. 2012 federal tax form 1040 The $24,000 must be allocated to the father as compensation. 2012 federal tax form 1040 Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. 2012 federal tax form 1040 The son's share of partnership profit cannot be more than $18,000. 2012 federal tax form 1040 Business owned and operated by spouses. 2012 federal tax form 1040   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. 2012 federal tax form 1040 If so, they should report income or loss from the business on Form 1065. 2012 federal tax form 1040 They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. 2012 federal tax form 1040 However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. 2012 federal tax form 1040 Qualified Joint Venture Election. 2012 federal tax form 1040   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. 2012 federal tax form 1040 A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. 2012 federal tax form 1040   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. 2012 federal tax form 1040 All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. 2012 federal tax form 1040 Each spouse takes into account his or her respective share of these items as a sole proprietor. 2012 federal tax form 1040 Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). 2012 federal tax form 1040 For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. 2012 federal tax form 1040 e. 2012 federal tax form 1040 , based on their respective interests in the venture). 2012 federal tax form 1040   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. 2012 federal tax form 1040 Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. 2012 federal tax form 1040   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. 2012 federal tax form 1040 However, this may not be true if either spouse exceeds the social security tax limitation. 2012 federal tax form 1040   For more information on qualified joint ventures, go to IRS. 2012 federal tax form 1040 gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. 2012 federal tax form 1040 ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. 2012 federal tax form 1040 The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. 2012 federal tax form 1040 The agreement or modifications can be oral or written. 2012 federal tax form 1040 Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. 2012 federal tax form 1040 This filing date does not include any extension of time. 2012 federal tax form 1040 If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. 2012 federal tax form 1040 Terminating a Partnership A partnership terminates when one of the following events takes place. 2012 federal tax form 1040 All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. 2012 federal tax form 1040 At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. 2012 federal tax form 1040 Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. 2012 federal tax form 1040 See section 1. 2012 federal tax form 1040 708-1(b) of the regulations for more information on the termination of a partnership. 2012 federal tax form 1040 For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. 2012 federal tax form 1040 708-1(c) and 1. 2012 federal tax form 1040 708-1(d) of the regulations. 2012 federal tax form 1040 Date of termination. 2012 federal tax form 1040   The partnership's tax year ends on the date of termination. 2012 federal tax form 1040 For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. 2012 federal tax form 1040 For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. 2012 federal tax form 1040 Short period return. 2012 federal tax form 1040   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. 2012 federal tax form 1040 The return is due the 15th day of the fourth month following the date of termination. 2012 federal tax form 1040 See Partnership Return (Form 1065), later, for information about filing Form 1065. 2012 federal tax form 1040 Conversion of partnership into limited liability company (LLC). 2012 federal tax form 1040   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. 2012 federal tax form 1040 The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. 2012 federal tax form 1040   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. 2012 federal tax form 1040 Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. 2012 federal tax form 1040 If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. 2012 federal tax form 1040 For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. 2012 federal tax form 1040   The same rules apply if an LLC classified as a partnership is converted into a partnership. 2012 federal tax form 1040 IRS e-file (Electronic Filing) Please click here for the text description of the image. 2012 federal tax form 1040 e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). 2012 federal tax form 1040 Other partnerships generally have the option to file electronically. 2012 federal tax form 1040 For details about IRS e-file, see the Form 1065 instructions. 2012 federal tax form 1040 Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. 2012 federal tax form 1040 All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. 2012 federal tax form 1040 However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. 2012 federal tax form 1040 Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. 2012 federal tax form 1040 Investing partnership. 2012 federal tax form 1040   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. 2012 federal tax form 1040 They own the property as co-owners. 2012 federal tax form 1040 They reserve the right separately to take or dispose of their shares of any property acquired or retained. 2012 federal tax form 1040 They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. 2012 federal tax form 1040 Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. 2012 federal tax form 1040 Operating agreement partnership. 2012 federal tax form 1040   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. 2012 federal tax form 1040 They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. 2012 federal tax form 1040 They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. 2012 federal tax form 1040 They do not jointly sell services or the property produced or extracted. 2012 federal tax form 1040 Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. 2012 federal tax form 1040 However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. 2012 federal tax form 1040 Electing the exclusion. 2012 federal tax form 1040   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. 2012 federal tax form 1040 This filing date includes any extension of time. 2012 federal tax form 1040 See Regulations section 1. 2012 federal tax form 1040 761-2(b) for the procedures to follow. 2012 federal tax form 1040 Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. 2012 federal tax form 1040 The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. 2012 federal tax form 1040 The return must be signed by a general partner. 2012 federal tax form 1040 If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. 2012 federal tax form 1040 A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. 2012 federal tax form 1040 See the Instructions for Form 1065 for more information about who must file Form 1065. 2012 federal tax form 1040 Partnership Distributions Partnership distributions include the following. 2012 federal tax form 1040 A withdrawal by a partner in anticipation of the current year's earnings. 2012 federal tax form 1040 A distribution of the current year's or prior years' earnings not needed for working capital. 2012 federal tax form 1040 A complete or partial liquidation of a partner's interest. 2012 federal tax form 1040 A distribution to all partners in a complete liquidation of the partnership. 2012 federal tax form 1040 A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. 2012 federal tax form 1040 If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. 2012 federal tax form 1040 Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. 2012 federal tax form 1040 Effect on partner's basis. 2012 federal tax form 1040   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. 2012 federal tax form 1040 See Adjusted Basis under Basis of Partner's Interest, later. 2012 federal tax form 1040 Effect on partnership. 2012 federal tax form 1040   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. 2012 federal tax form 1040 The partnership may be able to elect to adjust the basis of its undistributed property. 2012 federal tax form 1040 Certain distributions treated as a sale or exchange. 2012 federal tax form 1040   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. 2012 federal tax form 1040 Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. 2012 federal tax form 1040 Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. 2012 federal tax form 1040   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. 2012 federal tax form 1040   This treatment does not apply to the following distributions. 2012 federal tax form 1040 A distribution of property to the partner who contributed the property to the partnership. 2012 federal tax form 1040 Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. 2012 federal tax form 1040 Substantially appreciated inventory items. 2012 federal tax form 1040   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. 2012 federal tax form 1040 However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. 2012 federal tax form 1040 Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. 2012 federal tax form 1040 Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. 2012 federal tax form 1040 If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. 2012 federal tax form 1040 For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. 2012 federal tax form 1040 Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 The adjusted basis of Jo's partnership interest is $14,000. 2012 federal tax form 1040 She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. 2012 federal tax form 1040 Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. 2012 federal tax form 1040 Any gain on the land will be recognized when she sells or otherwise disposes of it. 2012 federal tax form 1040 The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. 2012 federal tax form 1040 Marketable securities treated as money. 2012 federal tax form 1040   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. 2012 federal tax form 1040 This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. 2012 federal tax form 1040   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). 2012 federal tax form 1040   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. 2012 federal tax form 1040 Loss on distribution. 2012 federal tax form 1040   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. 2012 federal tax form 1040 The adjusted basis of the partner's interest in the partnership exceeds the distribution. 2012 federal tax form 1040 The partner's entire interest in the partnership is liquidated. 2012 federal tax form 1040 The distribution is in money, unrealized receivables, or inventory items. 2012 federal tax form 1040   There are exceptions to these general rules. 2012 federal tax form 1040 See the following discussions. 2012 federal tax form 1040 Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. 2012 federal tax form 1040 Distribution of partner's debt. 2012 federal tax form 1040   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). 2012 federal tax form 1040   The partner is treated as having satisfied the debt for its fair market value. 2012 federal tax form 1040 If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. 2012 federal tax form 1040   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. 2012 federal tax form 1040 Net precontribution gain. 2012 federal tax form 1040   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. 2012 federal tax form 1040   The gain recognized is the lesser of the following amounts. 2012 federal tax form 1040 The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. 2012 federal tax form 1040 The “net precontribution gain” of the partner. 2012 federal tax form 1040 This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. 2012 federal tax form 1040 For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. 2012 federal tax form 1040   The character of the gain is determined by reference to the character of the net precontribution gain. 2012 federal tax form 1040 This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. 2012 federal tax form 1040 For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. 2012 federal tax form 1040 Effect on basis. 2012 federal tax form 1040   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. 2012 federal tax form 1040 Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. 2012 federal tax form 1040 See Basis of Partner's Interest , later. 2012 federal tax form 1040   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. 2012 federal tax form 1040 Exceptions. 2012 federal tax form 1040   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. 2012 federal tax form 1040 For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. 2012 federal tax form 1040   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. 2012 federal tax form 1040 Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. 2012 federal tax form 1040 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. 2012 federal tax form 1040 Example 1. 2012 federal tax form 1040 The adjusted basis of Emily's partnership interest is $30,000. 2012 federal tax form 1040 She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. 2012 federal tax form 1040 Her basis for the property is $20,000. 2012 federal tax form 1040 Example 2. 2012 federal tax form 1040 The adjusted basis of Steve's partnership interest is $10,000. 2012 federal tax form 1040 He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. 2012 federal tax form 1040 His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). 2012 federal tax form 1040 Complete liquidation of partner's interest. 2012 federal tax form 1040   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. 2012 federal tax form 1040 Partner's holding period. 2012 federal tax form 1040   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. 2012 federal tax form 1040 If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. 2012 federal tax form 1040 Basis divided among properties. 2012 federal tax form 1040   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. 2012 federal tax form 1040 For property distributed after August 5, 1997, allocate the basis using the following rules. 2012 federal tax form 1040 Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. 2012 federal tax form 1040 If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. 2012 federal tax form 1040 Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. 2012 federal tax form 1040 If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. 2012 federal tax form 1040 If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. 2012 federal tax form 1040 Allocating a basis increase. 2012 federal tax form 1040   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. 2012 federal tax form 1040 If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. 2012 federal tax form 1040 Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Eun's basis in her partnership interest is $55,000. 2012 federal tax form 1040 In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. 2012 federal tax form 1040 Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. 2012 federal tax form 1040 Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. 2012 federal tax form 1040 To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). 2012 federal tax form 1040 This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). 2012 federal tax form 1040 She first allocates $35,000 to property A (its unrealized appreciation). 2012 federal tax form 1040 The remaining $5,000 is allocated between the properties based on their fair market values. 2012 federal tax form 1040 $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. 2012 federal tax form 1040 Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). 2012 federal tax form 1040 Allocating a basis decrease. 2012 federal tax form 1040   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. 2012 federal tax form 1040 Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. 2012 federal tax form 1040 If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. 2012 federal tax form 1040 Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Armando's basis in his partnership interest is $20,000. 2012 federal tax form 1040 In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. 2012 federal tax form 1040 Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. 2012 federal tax form 1040 Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. 2012 federal tax form 1040 To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). 2012 federal tax form 1040 This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). 2012 federal tax form 1040 He allocates the entire $10,000 to property D (its unrealized depreciation). 2012 federal tax form 1040 Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). 2012 federal tax form 1040 Distributions before August 6, 1997. 2012 federal tax form 1040   For property distributed before August 6, 1997, allocate the basis using the following rules. 2012 federal tax form 1040 Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. 2012 federal tax form 1040 If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. 2012 federal tax form 1040 Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. 2012 federal tax form 1040 Partner's interest more than partnership basis. 2012 federal tax form 1040   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. 2012 federal tax form 1040 Special adjustment to basis. 2012 federal tax form 1040   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. 2012 federal tax form 1040 To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. 2012 federal tax form 1040 Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. 2012 federal tax form 1040   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. 2012 federal tax form 1040 However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. 2012 federal tax form 1040   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. 2012 federal tax form 1040 If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. 2012 federal tax form 1040   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. 2012 federal tax form 1040 The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Chin Ho purchased a 25% interest in X partnership for $17,000 cash. 2012 federal tax form 1040 At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. 2012 federal tax form 1040 Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. 2012 federal tax form 1040 Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. 2012 federal tax form 1040 The value of the inventory received was 25% of the value of all partnership inventory. 2012 federal tax form 1040 (It is immaterial whether the inventory he received was on hand when he acquired his interest. 2012 federal tax form 1040 ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. 2012 federal tax form 1040 His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). 2012 federal tax form 1040 The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. 2012 federal tax form 1040 The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). 2012 federal tax form 1040 His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). 2012 federal tax form 1040 The remaining $11,500 is allocated to his new basis for the other property he received. 2012 federal tax form 1040 Mandatory adjustment. 2012 federal tax form 1040   A partner does not always have a choice of making this special adjustment to basis. 2012 federal tax form 1040 The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. 2012 federal tax form 1040 The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. 2012 federal tax form 1040 If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. 2012 federal tax form 1040 The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. 2012 federal tax form 1040 Required statement. 2012 federal tax form 1040   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. 2012 federal tax form 1040 The statement must provide information necessary for the partner to compute the special basis adjustment. 2012 federal tax form 1040 Marketable securities. 2012 federal tax form 1040   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. 2012 federal tax form 1040 See Marketable securities treated as money under Partner's Gain or Loss, earlier. 2012 federal tax form 1040 The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. 2012 federal tax form 1040 Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. 2012 federal tax form 1040 These transactions include the following. 2012 federal tax form 1040 Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. 2012 federal tax form 1040 Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. 2012 federal tax form 1040 Payments by accrual basis partnership to cash basis partner. 2012 federal tax form 1040   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. 2012 federal tax form 1040 However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. 2012 federal tax form 1040 Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. 2012 federal tax form 1040 A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. 2012 federal tax form 1040 This treatment is for purposes of determining gross income and deductible business expenses only. 2012 federal tax form 1040 For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. 2012 federal tax form 1040 Guaranteed payments are not subject to income tax withholding. 2012 federal tax form 1040 The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. 2012 federal tax form 1040 They are also listed on Schedules K and K-1 of the partnership return. 2012 federal tax form 1040 The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. 2012 federal tax form 1040 Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. 2012 federal tax form 1040 Generally, organizational and syndication expenses are not deductible by the partnership. 2012 federal tax form 1040 However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). 2012 federal tax form 1040 Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. 2012 federal tax form 1040 Minimum payment. 2012 federal tax form 1040   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. 2012 federal tax form 1040 The partnership has net income of $20,000. 2012 federal tax form 1040 Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). 2012 federal tax form 1040 The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). 2012 federal tax form 1040 Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. 2012 federal tax form 1040 If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. 2012 federal tax form 1040 Self-employed health insurance premiums. 2012 federal tax form 1040   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. 2012 federal tax form 1040 The partnership can deduct the payments as a business expense, and the partner must include them in gross income. 2012 federal tax form 1040 However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. 2012 federal tax form 1040   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. 2012 federal tax form 1040 The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. 2012 federal tax form 1040 For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. 2012 federal tax form 1040 Including payments in partner's income. 2012 federal tax form 1040   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. 2012 federal tax form 1040 Example 1. 2012 federal tax form 1040 Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. 2012 federal tax form 1040 Her distributive share of the partnership income is 10%. 2012 federal tax form 1040 The partnership has $50,000 of ordinary income after deducting the guaranteed payment. 2012 federal tax form 1040 She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. 2012 federal tax form 1040 Example 2. 2012 federal tax form 1040 Lamont is a calendar year taxpayer who is a partner in a partnership. 2012 federal tax form 1040 The partnership uses a fiscal year that ended January 31, 2013. 2012 federal tax form 1040 Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. 2012 federal tax form 1040 He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. 2012 federal tax form 1040 Payments resulting in loss. 2012 federal tax form 1040   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. 2012 federal tax form 1040 The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. 2012 federal tax form 1040 Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. 2012 federal tax form 1040 Losses. 2012 federal tax form 1040   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. 2012 federal tax form 1040   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. 2012 federal tax form 1040   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. 2012 federal tax form 1040   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. 2012 federal tax form 1040 If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. 2012 federal tax form 1040 Gains. 2012 federal tax form 1040   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. 2012 federal tax form 1040 More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). 2012 federal tax form 1040 The property in the hands of the transferee immediately after the transfer is not a capital asset. 2012 federal tax form 1040 Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. 2012 federal tax form 1040 More than 50% ownership. 2012 federal tax form 1040   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. 2012 federal tax form 1040 An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. 2012 federal tax form 1040 An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. 2012 federal tax form 1040 For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. 2012 federal tax form 1040 If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. 2012 federal tax form 1040 However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Individuals A and B and Trust T are equal partners in Partnership ABT. 2012 federal tax form 1040 A's husband, AH, is the sole beneficiary of Trust T. 2012 federal tax form 1040 Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. 2012 federal tax form 1040 As a result, A is a more-than-50% partner. 2012 federal tax form 1040 This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. 2012 federal tax form 1040 More information. 2012 federal tax form 1040   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. 2012 federal tax form 1040 Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. 2012 federal tax form 1040 This applies whether a partnership is being formed or is already operating. 2012 federal tax form 1040 The partnership's holding period for the property includes the partner's holding period. 2012 federal tax form 1040 The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. 2012 federal tax form 1040 The exchange is not subject to the rules explained later under Disposition of Partner's Interest. 2012 federal tax form 1040 Disguised sales. 2012 federal tax form 1040   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. 2012 federal tax form 1040 The distribution would not have been made but for the contribution. 2012 federal tax form 1040 The partner's right to the distribution does not depend on the success of partnership operations. 2012 federal tax form 1040   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. 2012 federal tax form 1040 However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. 2012 federal tax form 1040 If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. 2012 federal tax form 1040 Form 8275 required. 2012 federal tax form 1040   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. 2012 federal tax form 1040 For exceptions to this requirement, see section 1. 2012 federal tax form 1040 707-3(c)(2) of the regulations. 2012 federal tax form 1040   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. 2012 federal tax form 1040   Form 8275 must include the following information. 2012 federal tax form 1040 A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. 2012 federal tax form 1040 A description of the transferred property or money, including its value. 2012 federal tax form 1040 A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. 2012 federal tax form 1040 See section 1. 2012 federal tax form 1040 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. 2012 federal tax form 1040 Contribution to partnership treated as investment company. 2012 federal tax form 1040   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. 2012 federal tax form 1040   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. 2012 federal tax form 1040 These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. 2012 federal tax form 1040 For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. 2012 federal tax form 1040 Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. 2012 federal tax form 1040   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. 2012 federal tax form 1040 Contribution to foreign partnership. 2012 federal tax form 1040   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. 2012 federal tax form 1040 Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. 2012 federal tax form 1040 The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. 2012 federal tax form 1040   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. 2012 federal tax form 1040 See the form instructions for more information. 2012 federal tax form 1040 Basis of contributed property. 2012 federal tax form 1040   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. 2012 federal tax form 1040 Allocations to account for built-in gain or loss. 2012 federal tax form 1040   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. 2012 federal tax form 1040 The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. 2012 federal tax form 1040 This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. 2012 federal tax form 1040   The partnership can use different allocation methods for different items of contributed property. 2012 federal tax form 1040 A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. 2012 federal tax form 1040 See section 1. 2012 federal tax form 1040 704-3 of the regulations for allocation methods generally considered reasonable. 2012 federal tax form 1040   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. 2012 federal tax form 1040 If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. 2012 federal tax form 1040 However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Areta and Sofia formed an equal partnership. 2012 federal tax form 1040 Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. 2012 federal tax form 1040 The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. 2012 federal tax form 1040 In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. 2012 federal tax form 1040 Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. 2012 federal tax form 1040 To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. 2012 federal tax form 1040 However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. 2012 federal tax form 1040 The entire $400 must be allocated to Areta. 2012 federal tax form 1040 Distribution of contributed property to another partner. 2012 federal tax form 1040   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. 2012 federal tax form 1040   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. 2012 federal tax form 1040 This amount is the difference between the property's basis and its fair market value at the time of contribution. 2012 federal tax form 1040 The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. 2012 federal tax form 1040 Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. 2012 federal tax form 1040 Disposition of certain contributed property. 2012 federal tax form 1040   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. 2012 federal tax form 1040 Unrealized receivables. 2012 federal tax form 1040 If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. 2012 federal tax form 1040 Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. 2012 federal tax form 1040 When reading the definition, substitute “partner” for “partnership. 2012 federal tax form 1040 ” Inventory items. 2012 federal tax form 1040 If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. 2012 federal tax form 1040 Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. 2012 federal tax form 1040 Capital loss property. 2012 federal tax form 1040 If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. 2012 federal tax form 1040 The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. 2012 federal tax form 1040 Substituted basis property. 2012 federal tax form 1040 If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. 2012 federal tax form 1040 Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. 2012 federal tax form 1040 Capital interest. 2012 federal tax form 1040   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. 2012 federal tax form 1040 This determination generally is made at the time of receipt of the partnership interest. 2012 federal tax form 1040 The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. 2012 federal tax form 1040 The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. 2012 federal tax form 1040   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. 2012 federal tax form 1040 Profits interest. 2012 federal tax form 1040   A profits interest is a partnership interest other than a capital interest. 2012 federal tax form 1040 If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. 2012 federal tax form 1040 However, this does not apply in the following situations. 2012 federal tax form 1040 The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. 2012 federal tax form 1040 Within 2 years of receipt, the partner disposes of the profits interest. 2012 federal tax form 1040 The profits interest is a limited partnership interest in a publicly traded partnership. 2012 federal tax form 1040   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. 2012 federal tax form 1040 Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. 2012 federal tax form 1040 If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. 2012 federal tax form 1040 Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. 2012 federal tax form 1040 Interest acquired by gift, etc. 2012 federal tax form 1040   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. 2012 federal tax form 1040 Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). 2012 federal tax form 1040 The basis of an interest in a partnership is increased or decreased by certain items. 2012 federal tax form 1040 Increases. 2012 federal tax form 1040   A partner's basis is increased by the following items. 2012 federal tax form 1040 The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. 2012 federal tax form 1040 The partner's distributive share of taxable and nontaxable partnership income. 2012 federal tax form 1040 The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. 2012 federal tax form 1040 Decreases. 2012 federal tax form 1040   The partner's basis is decreased (but never below zero) by the following items. 2012 federal tax form 1040 The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. 2012 federal tax form 1040 The partner's distributive share of the partnership losses (including capital losses). 2012 federal tax form 1040 The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. 2012 federal tax form 1040 This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. 2012 federal tax form 1040 The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. 2012 federal tax form 1040 Partner's liabilities assumed by partnership. 2012 federal tax form 1040   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. 2012 federal tax form 1040 This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. 2012 federal tax form 1040 The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. 2012 federal tax form 1040 See Effect of Partnership Liabilities , later. 2012 federal tax form 1040 Example 1. 2012 federal tax form 1040 Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. 2012 federal tax form 1040 The partnership assumed payment of the mortgage. 2012 federal tax form 1040 The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. 2012 federal tax form 1040 If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. 2012 federal tax form 1040 The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. 2012 federal tax form 1040 However, this gain would not increase the basis of his partnership interest. 2012 federal tax form 1040 Book value of partner's interest. 2012 federal tax form 1040   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. 2012 federal tax form 1040 His partner contributes $1,000 cash. 2012 federal tax form 1040 While each partner has increased his capital account by $1,000, which will be re
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Office of Vocational and Adult Education (OVAE)

OVAE administers and coordinates programs that are related to adult education and literacy, career and technical education, and community colleges.

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The 2012 Federal Tax Form 1040

2012 federal tax form 1040 1. 2012 federal tax form 1040   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. 2012 federal tax form 1040 Generally, each year you will report all income and deduct all out-of-pocket expenses in full. 2012 federal tax form 1040 The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. 2012 federal tax form 1040 If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). 2012 federal tax form 1040 Rental Income In most cases, you must include in your gross income all amounts you receive as rent. 2012 federal tax form 1040 Rental income is any payment you receive for the use or occupation of property. 2012 federal tax form 1040 In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. 2012 federal tax form 1040 When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. 2012 federal tax form 1040 Most individual taxpayers use the cash method. 2012 federal tax form 1040 Cash method. 2012 federal tax form 1040   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. 2012 federal tax form 1040 You constructively receive income when it is made available to you, for example, by being credited to your bank account. 2012 federal tax form 1040 Accrual method. 2012 federal tax form 1040    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. 2012 federal tax form 1040 You generally deduct your expenses when you incur them, rather than when you pay them. 2012 federal tax form 1040 More information. 2012 federal tax form 1040   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. 2012 federal tax form 1040 Types of Income The following are common types of rental income. 2012 federal tax form 1040 Advance rent. 2012 federal tax form 1040   Advance rent is any amount you receive before the period that it covers. 2012 federal tax form 1040 Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 On March 18, 2013, you signed a 10-year lease to rent your property. 2012 federal tax form 1040 During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. 2012 federal tax form 1040 You must include $19,200 in your rental income in the first year. 2012 federal tax form 1040 Canceling a lease. 2012 federal tax form 1040   If your tenant pays you to cancel a lease, the amount you receive is rent. 2012 federal tax form 1040 Include the payment in your income in the year you receive it regardless of your method of accounting. 2012 federal tax form 1040 Expenses paid by tenant. 2012 federal tax form 1040   If your tenant pays any of your expenses, those payments are rental income. 2012 federal tax form 1040 Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. 2012 federal tax form 1040 For more information, see Rental Expenses , later. 2012 federal tax form 1040 Example 1. 2012 federal tax form 1040 Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. 2012 federal tax form 1040 Under the terms of the lease, your tenant does not have to pay this bill. 2012 federal tax form 1040 Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. 2012 federal tax form 1040 You can deduct the utility payment made by your tenant as a rental expense. 2012 federal tax form 1040 Example 2. 2012 federal tax form 1040 While you are out of town, the furnace in your rental property stops working. 2012 federal tax form 1040 Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. 2012 federal tax form 1040 Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. 2012 federal tax form 1040 You can deduct the repair payment made by your tenant as a rental expense. 2012 federal tax form 1040 Property or services. 2012 federal tax form 1040   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. 2012 federal tax form 1040   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Your tenant is a house painter. 2012 federal tax form 1040 He offers to paint your rental property instead of paying 2 months rent. 2012 federal tax form 1040 You accept his offer. 2012 federal tax form 1040 Include in your rental income the amount the tenant would have paid for 2 months rent. 2012 federal tax form 1040 You can deduct that same amount as a rental expense for painting your property. 2012 federal tax form 1040 Security deposits. 2012 federal tax form 1040   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. 2012 federal tax form 1040 But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. 2012 federal tax form 1040    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. 2012 federal tax form 1040 Include it in your income when you receive it. 2012 federal tax form 1040 Other Sources of Rental Income Lease with option to buy. 2012 federal tax form 1040   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. 2012 federal tax form 1040 If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. 2012 federal tax form 1040 Part interest. 2012 federal tax form 1040   If you own a part interest in rental property, you must report your part of the rental income from the property. 2012 federal tax form 1040 Rental of property also used as your home. 2012 federal tax form 1040   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. 2012 federal tax form 1040 However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. 2012 federal tax form 1040 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). 2012 federal tax form 1040 Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. 2012 federal tax form 1040 Personal use of rental property. 2012 federal tax form 1040   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. 2012 federal tax form 1040 Also, your rental expense deductions may be limited. 2012 federal tax form 1040 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). 2012 federal tax form 1040 Part interest. 2012 federal tax form 1040   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Roger owns a one-half undivided interest in a rental house. 2012 federal tax form 1040 Last year he paid $968 for necessary repairs on the property. 2012 federal tax form 1040 Roger can deduct $484 (50% × $968) as a rental expense. 2012 federal tax form 1040 He is entitled to reimbursement for the remaining half from the co-owner. 2012 federal tax form 1040 When To Deduct You generally deduct your rental expenses in the year you pay them. 2012 federal tax form 1040 If you use the accrual method, see Publication 538 for more information. 2012 federal tax form 1040 Types of Expenses Listed below are the most common rental expenses. 2012 federal tax form 1040 Advertising. 2012 federal tax form 1040 Auto and travel expenses. 2012 federal tax form 1040 Cleaning and maintenance. 2012 federal tax form 1040 Commissions. 2012 federal tax form 1040 Depreciation. 2012 federal tax form 1040 Insurance. 2012 federal tax form 1040 Interest (other). 2012 federal tax form 1040 Legal and other professional fees. 2012 federal tax form 1040 Local transportation expenses. 2012 federal tax form 1040 Management fees. 2012 federal tax form 1040 Mortgage interest paid to banks, etc. 2012 federal tax form 1040 Points. 2012 federal tax form 1040 Rental payments. 2012 federal tax form 1040 Repairs. 2012 federal tax form 1040 Taxes. 2012 federal tax form 1040 Utilities. 2012 federal tax form 1040 Some of these expenses, as well as other less common ones, are discussed below. 2012 federal tax form 1040 Depreciation. 2012 federal tax form 1040   Depreciation is a capital expense. 2012 federal tax form 1040 It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. 2012 federal tax form 1040   You can begin to depreciate rental property when it is ready and available for rent. 2012 federal tax form 1040 See Placed in Service under When Does Depreciation Begin and End in chapter 2. 2012 federal tax form 1040 Insurance premiums paid in advance. 2012 federal tax form 1040   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. 2012 federal tax form 1040 You cannot deduct the total premium in the year you pay it. 2012 federal tax form 1040 See chapter 6 of Publication 535 for information on deductible premiums. 2012 federal tax form 1040 Interest expense. 2012 federal tax form 1040   You can deduct mortgage interest you pay on your rental property. 2012 federal tax form 1040 When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. 2012 federal tax form 1040 Chapter 4 of Publication 535 explains mortgage interest in detail. 2012 federal tax form 1040 Expenses paid to obtain a mortgage. 2012 federal tax form 1040   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. 2012 federal tax form 1040 These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. 2012 federal tax form 1040 Form 1098, Mortgage Interest Statement. 2012 federal tax form 1040   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. 2012 federal tax form 1040 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, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. 2012 federal tax form 1040 Attach a statement to your return showing the name and address of the other person. 2012 federal tax form 1040 On the dotted line next to line 13, enter “See attached. 2012 federal tax form 1040 ” Legal and other professional fees. 2012 federal tax form 1040   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. 2012 federal tax form 1040 For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. 2012 federal tax form 1040 You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. 2012 federal tax form 1040 Local benefit taxes. 2012 federal tax form 1040   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. 2012 federal tax form 1040 These charges are nondepreciable capital expenditures and must be added to the basis of your property. 2012 federal tax form 1040 However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. 2012 federal tax form 1040 Local transportation expenses. 2012 federal tax form 1040   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. 2012 federal tax form 1040 However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. 2012 federal tax form 1040 See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. 2012 federal tax form 1040   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. 2012 federal tax form 1040 For 2013, the standard mileage rate for business use is 56. 2012 federal tax form 1040 5 cents per mile. 2012 federal tax form 1040 For more information, see chapter 4 of Publication 463. 2012 federal tax form 1040    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. 2012 federal tax form 1040 In addition, you must complete Form 4562, Part V, and attach it to your tax return. 2012 federal tax form 1040 Pre-rental expenses. 2012 federal tax form 1040   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. 2012 federal tax form 1040 Rental of equipment. 2012 federal tax form 1040   You can deduct the rent you pay for equipment that you use for rental purposes. 2012 federal tax form 1040 However, in some cases, lease contracts are actually purchase contracts. 2012 federal tax form 1040 If so, you cannot deduct these payments. 2012 federal tax form 1040 You can recover the cost of purchased equipment through depreciation. 2012 federal tax form 1040 Rental of property. 2012 federal tax form 1040   You can deduct the rent you pay for property that you use for rental purposes. 2012 federal tax form 1040 If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. 2012 federal tax form 1040 Travel expenses. 2012 federal tax form 1040   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. 2012 federal tax form 1040 You must properly allocate your expenses between rental and nonrental activities. 2012 federal tax form 1040 You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. 2012 federal tax form 1040 The cost of improvements is recovered by taking depreciation. 2012 federal tax form 1040 For information on travel expenses, see chapter 1 of Publication 463. 2012 federal tax form 1040    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. 2012 federal tax form 1040 Uncollected rent. 2012 federal tax form 1040   If you are a cash basis taxpayer, do not deduct uncollected rent. 2012 federal tax form 1040 Because you have not included it in your income, it is not deductible. 2012 federal tax form 1040   If you use an accrual method, report income when you earn it. 2012 federal tax form 1040 If you are unable to collect the rent, you may be able to deduct it as a business bad debt. 2012 federal tax form 1040 See chapter 10 of Publication 535 for more information about business bad debts. 2012 federal tax form 1040 Vacant rental property. 2012 federal tax form 1040   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. 2012 federal tax form 1040 However, you cannot deduct any loss of rental income for the period the property is vacant. 2012 federal tax form 1040 Vacant while listed for sale. 2012 federal tax form 1040   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. 2012 federal tax form 1040 If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. 2012 federal tax form 1040 Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. 2012 federal tax form 1040 These charges are also called loan origination fees, maximum loan charges, or premium charges. 2012 federal tax form 1040 Any of these charges (points) that are solely for the use of money are interest. 2012 federal tax form 1040 Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. 2012 federal tax form 1040 The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. 2012 federal tax form 1040 In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). 2012 federal tax form 1040 The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. 2012 federal tax form 1040 If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. 2012 federal tax form 1040 De minimis OID. 2012 federal tax form 1040   The OID is de minimis if it is less than one-fourth of 1% (. 2012 federal tax form 1040 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). 2012 federal tax form 1040   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. 2012 federal tax form 1040 On a constant-yield basis over the term of the loan. 2012 federal tax form 1040 On a straight line basis over the term of the loan. 2012 federal tax form 1040 In proportion to stated interest payments. 2012 federal tax form 1040 In its entirety at maturity of the loan. 2012 federal tax form 1040 You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. 2012 federal tax form 1040 Example. 2012 federal tax form 1040 Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. 2012 federal tax form 1040 The loan is to be repaid over 30 years. 2012 federal tax form 1040 During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. 2012 federal tax form 1040 When the loan was made, she paid $1,500 in points to the lender. 2012 federal tax form 1040 The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. 2012 federal tax form 1040 Carol determines that the points (OID) she paid are de minimis based on the following computation. 2012 federal tax form 1040 Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. 2012 federal tax form 1040 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). 2012 federal tax form 1040 Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. 2012 federal tax form 1040 Under the straight line method, she can deduct $50 each year for 30 years. 2012 federal tax form 1040 Constant-yield method. 2012 federal tax form 1040   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. 2012 federal tax form 1040   You figure your deduction for the first year in the following manner. 2012 federal tax form 1040 Determine the issue price of the loan. 2012 federal tax form 1040 If you paid points on the loan, the issue price generally is the difference between the principal and the points. 2012 federal tax form 1040 Multiply the result in (1) by the yield to maturity (defined later). 2012 federal tax form 1040 Subtract any qualified stated interest payments (defined later) from the result in (2). 2012 federal tax form 1040 This is the OID you can deduct in the first year. 2012 federal tax form 1040 Yield to maturity (YTM). 2012 federal tax form 1040   This rate is generally shown in the literature you receive from your lender. 2012 federal tax form 1040 If you do not have this information, consult your lender or tax advisor. 2012 federal tax form 1040 In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. 2012 federal tax form 1040 Qualified stated interest (QSI). 2012 federal tax form 1040   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. 2012 federal tax form 1040 Example—Year 1. 2012 federal tax form 1040 The facts are the same as in the previous example. 2012 federal tax form 1040 The yield to maturity on Carol's loan is 10. 2012 federal tax form 1040 2467%, compounded annually. 2012 federal tax form 1040 She figured the amount of points (OID) she could deduct in 2013 as follows. 2012 federal tax form 1040 Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . 2012 federal tax form 1040 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. 2012 federal tax form 1040 To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. 2012 federal tax form 1040 Then follow steps (2) and (3), earlier. 2012 federal tax form 1040 Example—Year 2. 2012 federal tax form 1040 Carol figured the deduction for 2014 as follows. 2012 federal tax form 1040 Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . 2012 federal tax form 1040 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. 2012 federal tax form 1040    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. 2012 federal tax form 1040 A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. 2012 federal tax form 1040 However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. 2012 federal tax form 1040 Points when loan refinance is more than the previous outstanding balance. 2012 federal tax form 1040   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. 2012 federal tax form 1040 For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. 2012 federal tax form 1040 Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. 2012 federal tax form 1040 Improvements. 2012 federal tax form 1040   You must capitalize any expense you pay to improve your rental property. 2012 federal tax form 1040 An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. 2012 federal tax form 1040 Betterments. 2012 federal tax form 1040   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. 2012 federal tax form 1040 Restoration. 2012 federal tax form 1040   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. 2012 federal tax form 1040 Adaptation. 2012 federal tax form 1040   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. 2012 federal tax form 1040 Separate the costs of repairs and improvements, and keep accurate records. 2012 federal tax form 1040 You will need to know the cost of improvements when you sell or depreciate your property. 2012 federal tax form 1040 The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. 2012 federal tax form 1040 Table 1-1. 2012 federal tax form 1040 Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications