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2012 Tax Form 1040

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2012 Tax Form 1040

2012 tax form 1040 14. 2012 tax form 1040   Sale of Property Table of Contents Reminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities Reminder Foreign income. 2012 tax form 1040  If you are a U. 2012 tax form 1040 S. 2012 tax form 1040 citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U. 2012 tax form 1040 S. 2012 tax form 1040 law. 2012 tax form 1040 This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer. 2012 tax form 1040 Introduction This chapter discusses the tax consequences of selling or trading investment property. 2012 tax form 1040 It explains the following. 2012 tax form 1040 What a sale or trade is. 2012 tax form 1040 Figuring gain or loss. 2012 tax form 1040 Nontaxable trades. 2012 tax form 1040 Related party transactions. 2012 tax form 1040 Capital gains or losses. 2012 tax form 1040 Capital assets and noncapital assets. 2012 tax form 1040 Holding period. 2012 tax form 1040 Rollover of gain from publicly traded securities. 2012 tax form 1040 Other property transactions. 2012 tax form 1040   Certain transfers of property are not discussed here. 2012 tax form 1040 They are discussed in other IRS publications. 2012 tax form 1040 These include the following. 2012 tax form 1040 Sales of a main home, covered in chapter 15. 2012 tax form 1040 Installment sales, covered in Publication 537, Installment Sales. 2012 tax form 1040 Transactions involving business property, covered in Publication 544, Sales and Other Dispositions of Assets. 2012 tax form 1040 Dispositions of an interest in a passive activity, covered in Publication 925, Passive Activity and At-Risk Rules. 2012 tax form 1040    Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), provides a more detailed discussion about sales and trades of investment property. 2012 tax form 1040 Publication 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. 2012 tax form 1040 It also discusses investment-related expenses. 2012 tax form 1040 Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 8949 Sales and Other Dispositions of Capital Assets 8824 Like-Kind Exchanges Sales and Trades If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. 2012 tax form 1040 Generally, you should receive the statement by February 15 of the next year. 2012 tax form 1040 It will show the gross proceeds from the sale. 2012 tax form 1040 If you sold a covered security in 2013, your 1099-B (or substitute statement) will show your basis. 2012 tax form 1040 Generally, a covered security is a security you acquired after 2010, with certain exceptions. 2012 tax form 1040 See the Instructions for Form 8949. 2012 tax form 1040 The IRS will also get a copy of Form 1099-B from the broker. 2012 tax form 1040 Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. 2012 tax form 1040 What Is a Sale or Trade? This section explains what is a sale or trade. 2012 tax form 1040 It also explains certain transactions and events that are treated as sales or trades. 2012 tax form 1040 A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. 2012 tax form 1040 A trade is a transfer of property for other property or services and may be taxed in the same way as a sale. 2012 tax form 1040 Sale and purchase. 2012 tax form 1040   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. 2012 tax form 1040 The sale and purchase are two separate transactions. 2012 tax form 1040 But see Like-kind exchanges under Nontaxable Trades, later. 2012 tax form 1040 Redemption of stock. 2012 tax form 1040   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. 2012 tax form 1040 Dividend versus sale or trade. 2012 tax form 1040   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. 2012 tax form 1040 Both direct and indirect ownership of stock will be considered. 2012 tax form 1040 The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend (see chapter 8), There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. 2012 tax form 1040 Redemption or retirement of bonds. 2012 tax form 1040   A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade. 2012 tax form 1040   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. 2012 tax form 1040 For details, see Regulations section 1. 2012 tax form 1040 1001-3. 2012 tax form 1040 Surrender of stock. 2012 tax form 1040   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. 2012 tax form 1040 The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. 2012 tax form 1040 Worthless securities. 2012 tax form 1040    Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. 2012 tax form 1040 This affects whether your capital loss is long term or short term. 2012 tax form 1040 See Holding Period , later. 2012 tax form 1040   Worthless securities also include securities that you abandon after March 12, 2008. 2012 tax form 1040 To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. 2012 tax form 1040 All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. 2012 tax form 1040    If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. 2012 tax form 1040 Do not deduct them in the year the stock became worthless. 2012 tax form 1040 How to report loss. 2012 tax form 1040    Report worthless securities in Part I or Part II, whichever applies, of Form 8949. 2012 tax form 1040 In column (a), enter “Worthless. 2012 tax form 1040 ”    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. 2012 tax form 1040 See Form 8949 and the Instructions for Form 8949. 2012 tax form 1040 For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. 2012 tax form 1040 See also Schedule D (Form 1040), Form 8949, and their separate instructions. 2012 tax form 1040 Filing a claim for refund. 2012 tax form 1040   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. 2012 tax form 1040 You must use Form 1040X, Amended U. 2012 tax form 1040 S. 2012 tax form 1040 Individual Income Tax Return, to amend your return for the year the security became worthless. 2012 tax form 1040 You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. 2012 tax form 1040 For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. 2012 tax form 1040 How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. 2012 tax form 1040 Gain. 2012 tax form 1040   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. 2012 tax form 1040 Loss. 2012 tax form 1040   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. 2012 tax form 1040 Adjusted basis. 2012 tax form 1040   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. 2012 tax form 1040 See chapter 13 for more information about determining the adjusted basis of property. 2012 tax form 1040 Amount realized. 2012 tax form 1040   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). 2012 tax form 1040 Amount realized includes the money you receive plus the fair market value of any property or services you receive. 2012 tax form 1040 If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized. 2012 tax form 1040 If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. 2012 tax form 1040 For more information, see Publication 537. 2012 tax form 1040 Fair market value. 2012 tax form 1040   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. 2012 tax form 1040 Example. 2012 tax form 1040 You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. 2012 tax form 1040 Your gain is $3,000 ($10,000 − $7,000). 2012 tax form 1040 Debt paid off. 2012 tax form 1040    A debt against the property, or against you, that is paid off as a part of the transaction, or that is assumed by the buyer, must be included in the amount realized. 2012 tax form 1040 This is true even if neither you nor the buyer is personally liable for the debt. 2012 tax form 1040 For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. 2012 tax form 1040 Example. 2012 tax form 1040 You sell stock that you had pledged as security for a bank loan of $8,000. 2012 tax form 1040 Your basis in the stock is $6,000. 2012 tax form 1040 The buyer pays off your bank loan and pays you $20,000 in cash. 2012 tax form 1040 The amount realized is $28,000 ($20,000 + $8,000). 2012 tax form 1040 Your gain is $22,000 ($28,000 − $6,000). 2012 tax form 1040 Payment of cash. 2012 tax form 1040   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. 2012 tax form 1040 Determine your gain or loss by subtracting the cash you pay plus the adjusted basis of the property you trade in from the amount you realize. 2012 tax form 1040 If the result is a positive number, it is a gain. 2012 tax form 1040 If the result is a negative number, it is a loss. 2012 tax form 1040 No gain or loss. 2012 tax form 1040   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. 2012 tax form 1040 In this case, you may have neither a gain nor a loss. 2012 tax form 1040 See Basis Other Than Cost in chapter 13. 2012 tax form 1040 Nontaxable Trades This section discusses trades that generally do not result in a taxable gain or deductible loss. 2012 tax form 1040 For more information on nontaxable trades, see chapter 1 of Publication 544. 2012 tax form 1040 Like-kind exchanges. 2012 tax form 1040   If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. 2012 tax form 1040 To be nontaxable, a trade must meet all six of the following conditions. 2012 tax form 1040 The property must be business or investment property. 2012 tax form 1040 You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. 2012 tax form 1040 Neither property may be property used for personal purposes, such as your home or family car. 2012 tax form 1040 The property must not be held primarily for sale. 2012 tax form 1040 The property you trade and the property you receive must not be property you sell to customers, such as merchandise. 2012 tax form 1040 The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. 2012 tax form 1040 However, see Special rules for mutual ditch, reservoir, or irrigation company stock, in chapter 4 of Publication 550 for an exception. 2012 tax form 1040 Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later. 2012 tax form 1040 There must be a trade of like property. 2012 tax form 1040 The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. 2012 tax form 1040 The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. 2012 tax form 1040 The trade of a piece of machinery for a store building is not a trade of like property. 2012 tax form 1040 Real property located in the United States and real property located outside the United States are not like property. 2012 tax form 1040 Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property. 2012 tax form 1040 The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. 2012 tax form 1040 The property to be received must be received by the earlier of: The 180th day after the date on which you transfer the property given up in the trade, or The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. 2012 tax form 1040    If you trade property with a related party in a like-kind exchange, a special rule may apply. 2012 tax form 1040 See Related Party Transactions , later in this chapter. 2012 tax form 1040 Also, see chapter 1 of Publication 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties. 2012 tax form 1040 Partly nontaxable exchange. 2012 tax form 1040   If you receive money or unlike property in addition to like property, and the above six conditions are met, you have a partly nontaxable trade. 2012 tax form 1040 You are taxed on any gain you realize, but only up to the amount of the money and the fair market value of the unlike property you receive. 2012 tax form 1040 You cannot deduct a loss. 2012 tax form 1040 Like property and unlike property transferred. 2012 tax form 1040   If you give up unlike property in addition to the like property, you must recognize gain or loss on the unlike property you give up. 2012 tax form 1040 The gain or loss is the difference between the adjusted basis of the unlike property and its fair market value. 2012 tax form 1040 Like property and money transferred. 2012 tax form 1040   If all of the above conditions (1) – (6) are met, you have a nontaxable trade even if you pay money in addition to the like property. 2012 tax form 1040 Basis of property received. 2012 tax form 1040   To figure the basis of the property received, see Nontaxable Exchanges in chapter 13. 2012 tax form 1040 How to report. 2012 tax form 1040   You must report the trade of like property on Form 8824. 2012 tax form 1040 If you figure a recognized gain or loss on Form 8824, report it on Schedule D (Form 1040), or on Form 4797, Sales of Business Property, whichever applies. 2012 tax form 1040 See the instructions for Line 22 in the Instructions for Form 8824. 2012 tax form 1040   For information on using Form 4797, see chapter 4 of Publication 544. 2012 tax form 1040 Corporate stocks. 2012 tax form 1040   The following trades of corporate stocks generally do not result in a taxable gain or a deductible loss. 2012 tax form 1040 Corporate reorganizations. 2012 tax form 1040   In some instances, a company will give you common stock for preferred stock, preferred stock for common stock, or stock in one corporation for stock in another corporation. 2012 tax form 1040 If this is a result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you do not recognize gain or loss. 2012 tax form 1040 Stock for stock of the same corporation. 2012 tax form 1040   You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having a recognized gain or loss. 2012 tax form 1040 This is true for a trade between two stockholders as well as a trade between a stockholder and the corporation. 2012 tax form 1040 Convertible stocks and bonds. 2012 tax form 1040   You generally will not have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate. 2012 tax form 1040 Property for stock of a controlled corporation. 2012 tax form 1040   If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you ordinarily will not recognize a gain or loss. 2012 tax form 1040 This rule applies both to individuals and to groups who transfer property to a corporation. 2012 tax form 1040 It does not apply if the corporation is an investment company. 2012 tax form 1040   For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation. 2012 tax form 1040   If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. 2012 tax form 1040 For details, see Regulations section 1. 2012 tax form 1040 351-3. 2012 tax form 1040 Additional information. 2012 tax form 1040   For more information on trades of stock, see Nontaxable Trades in chapter 4 of Publication 550. 2012 tax form 1040 Insurance policies and annuities. 2012 tax form 1040   You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade: A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract, An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract, An annuity contract for annuity contract or for a qualified long-term care insurance contract, or A qualified long-term care insurance contract for a qualified long-term care insurance contract. 2012 tax form 1040   You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. 2012 tax form 1040 For transfers completed before October 24, 2011, see Revenue Ruling 2003-76 in Internal Revenue Bulletin 2003-33 and Revenue Procedure 2008-24 in Internal Revenue Bulletin 2008-13. 2012 tax form 1040 Revenue Ruling 2003-76 is available at www. 2012 tax form 1040 irs. 2012 tax form 1040 gov/irb/2003-33_IRB/ar11. 2012 tax form 1040 html. 2012 tax form 1040 Revenue Procedure 2008-24 is available at www. 2012 tax form 1040 irs. 2012 tax form 1040 gov/irb/2008-13_IRB/ar13. 2012 tax form 1040 html. 2012 tax form 1040 For transfers completed on or after October 24, 2011, see Revenue Ruling 2003-76, above, and Revenue Procedure 2011-38, in Internal Revenue Bulletin 2011-30. 2012 tax form 1040 Revenue Procedure 2011-38 is available at www. 2012 tax form 1040 irs. 2012 tax form 1040 gov/irb/2011-30_IRB/ar09. 2012 tax form 1040 html. 2012 tax form 1040   For tax years beginning after December 31, 2010, amounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. 2012 tax form 1040 A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. 2012 tax form 1040 The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts are not received as an annuity. 2012 tax form 1040   Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. 2012 tax form 1040 Demutualization of life insurance companies. 2012 tax form 1040   If you received stock in exchange for your equity interest as a policyholder or an annuitant, you generally will not have a recognized gain or loss. 2012 tax form 1040 See Demutualization of Life Insurance Companies in Publication 550. 2012 tax form 1040 U. 2012 tax form 1040 S. 2012 tax form 1040 Treasury notes or bonds. 2012 tax form 1040   You can trade certain issues of U. 2012 tax form 1040 S. 2012 tax form 1040 Treasury obligations for other issues designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. 2012 tax form 1040 See Savings bonds traded in chapter 1 of Publication 550 for more information. 2012 tax form 1040 Transfers Between Spouses Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. 2012 tax form 1040 This nonrecognition rule does not apply in the following situations. 2012 tax form 1040 The recipient spouse or former spouse is a nonresident alien. 2012 tax form 1040 Property is transferred in trust and liability exceeds basis. 2012 tax form 1040 Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property. 2012 tax form 1040 For other situations, see Transfers Between Spouses in chapter 4 of Publication 550. 2012 tax form 1040 Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and is not considered a sale or exchange. 2012 tax form 1040 The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 2012 tax form 1040 This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. 2012 tax form 1040 This rule applies for purposes of determining loss as well as gain. 2012 tax form 1040 Any gain recognized on a transfer in trust increases the basis. 2012 tax form 1040 A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage. 2012 tax form 1040 Related Party Transactions Special rules apply to the sale or trade of property between related parties. 2012 tax form 1040 Gain on sale or trade of depreciable property. 2012 tax form 1040   Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. 2012 tax form 1040 See chapter 3 of Publication 544 for more information. 2012 tax form 1040 Like-kind exchanges. 2012 tax form 1040   Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. 2012 tax form 1040 See Like-kind exchanges , earlier, under Nontaxable Trades. 2012 tax form 1040   This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. 2012 tax form 1040 However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. 2012 tax form 1040 See Related Party Transactions in chapter 4 of Publication 550 for exceptions. 2012 tax form 1040 Losses on sales or trades of property. 2012 tax form 1040   You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties. 2012 tax form 1040 Members of your family. 2012 tax form 1040 This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. 2012 tax form 1040 ), and lineal descendants (children, grandchildren, etc. 2012 tax form 1040 ). 2012 tax form 1040 A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. 2012 tax form 1040 A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. 2012 tax form 1040 (See Constructive ownership of stock , later. 2012 tax form 1040 ) A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. 2012 tax form 1040   In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties. 2012 tax form 1040 A grantor and fiduciary, or the fiduciary and beneficiary, of any trust. 2012 tax form 1040 Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. 2012 tax form 1040 A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust. 2012 tax form 1040 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership. 2012 tax form 1040 Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 2012 tax form 1040 Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. 2012 tax form 1040 An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest). 2012 tax form 1040 Two corporations that are members of the same controlled group. 2012 tax form 1040 (Under certain conditions, however, these losses are not disallowed but must be deferred. 2012 tax form 1040 ) Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships. 2012 tax form 1040 Multiple property sales or trades. 2012 tax form 1040   If you sell or trade to a related party a number of blocks of stock or pieces of property in a lump sum, you must figure the gain or loss separately for each block of stock or piece of property. 2012 tax form 1040 The gain on each item may be taxable. 2012 tax form 1040 However, you cannot deduct the loss on any item. 2012 tax form 1040 Also, you cannot reduce gains from the sales of any of these items by losses on the sales of any of the other items. 2012 tax form 1040 Indirect transactions. 2012 tax form 1040   You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. 2012 tax form 1040 This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged. 2012 tax form 1040 Constructive ownership of stock. 2012 tax form 1040   In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. 2012 tax form 1040 Rule 1. 2012 tax form 1040   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. 2012 tax form 1040 Rule 2. 2012 tax form 1040   An individual is considered to own the stock directly or indirectly owned by or for his or her family. 2012 tax form 1040 Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. 2012 tax form 1040 Rule 3. 2012 tax form 1040   An individual owning, other than by applying rule 2, any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. 2012 tax form 1040 Rule 4. 2012 tax form 1040   When applying rule 1, 2, or 3, stock constructively owned by a person under rule 1 is treated as actually owned by that person. 2012 tax form 1040 But stock constructively owned by an individual under rule 2 or rule 3 is not treated as owned by that individual for again applying either rule 2 or rule 3 to make another person the constructive owner of the stock. 2012 tax form 1040 Property received from a related party. 2012 tax form 1040    If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. 2012 tax form 1040 This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. 2012 tax form 1040 This rule does not apply if the related party's loss was disallowed because of the wash sale rules described in chapter 4 of Publication 550 under Wash Sales. 2012 tax form 1040   If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party. 2012 tax form 1040 Example 1. 2012 tax form 1040 Your brother sells you stock for $7,600. 2012 tax form 1040 His cost basis is $10,000. 2012 tax form 1040 Your brother cannot deduct the loss of $2,400. 2012 tax form 1040 Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. 2012 tax form 1040 Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother). 2012 tax form 1040 Example 2. 2012 tax form 1040 If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). 2012 tax form 1040 You cannot deduct the loss that was not allowed to your brother. 2012 tax form 1040 Capital Gains and Losses This section discusses the tax treatment of gains and losses from different types of investment transactions. 2012 tax form 1040 Character of gain or loss. 2012 tax form 1040   You need to classify your gains and losses as either ordinary or capital gains or losses. 2012 tax form 1040 You then need to classify your capital gains and losses as either short term or long term. 2012 tax form 1040 If you have long-term gains and losses, you must identify your 28% rate gains and losses. 2012 tax form 1040 If you have a net capital gain, you must also identify any unrecaptured section 1250 gain. 2012 tax form 1040   The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. 2012 tax form 1040 Reporting capital gains and losses is explained in chapter 16. 2012 tax form 1040 Capital or Ordinary Gain or Loss If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. 2012 tax form 1040 Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. 2012 tax form 1040 A sale or trade of a noncapital asset generally results in ordinary gain or loss. 2012 tax form 1040 Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. 2012 tax form 1040 In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss. 2012 tax form 1040 Capital Assets and Noncapital Assets For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. 2012 tax form 1040 Some examples are: Stocks or bonds held in your personal account, A house owned and used by you and your family, Household furnishings, A car used for pleasure or commuting, Coin or stamp collections, Gems and jewelry, and Gold, silver, or any other metal. 2012 tax form 1040 Any property you own is a capital asset, except the following noncapital assets. 2012 tax form 1040 Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. 2012 tax form 1040 For an exception, see Capital Asset Treatment for Self-Created Musical Works , later. 2012 tax form 1040 Depreciable property used in your trade or business, even if fully depreciated. 2012 tax form 1040 Real property used in your trade or business. 2012 tax form 1040 A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is: Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. 2012 tax form 1040 For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later. 2012 tax form 1040 Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1). 2012 tax form 1040 U. 2012 tax form 1040 S. 2012 tax form 1040 Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price. 2012 tax form 1040 Certain commodities derivative financial instruments held by commodities derivatives dealers. 2012 tax form 1040 Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. 2012 tax form 1040 Supplies of a type you regularly use or consume in the ordinary course of your trade or business. 2012 tax form 1040 Investment Property Investment property is a capital asset. 2012 tax form 1040 Any gain or loss from its sale or trade is generally a capital gain or loss. 2012 tax form 1040 Gold, silver, stamps, coins, gems, etc. 2012 tax form 1040   These are capital assets except when they are held for sale by a dealer. 2012 tax form 1040 Any gain or loss you have from their sale or trade generally is a capital gain or loss. 2012 tax form 1040 Stocks, stock rights, and bonds. 2012 tax form 1040   All of these (including stock received as a dividend) are capital assets except when held for sale by a securities dealer. 2012 tax form 1040 However, if you own small business stock, see Losses on Section 1244 (Small Business) Stock , later, and Losses on Small Business Investment Company Stock, in chapter 4 of Publication 550. 2012 tax form 1040 Personal Use Property Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. 2012 tax form 1040 However, you cannot deduct a loss from selling personal use property. 2012 tax form 1040 Capital Asset Treatment for Self-Created Musical Works You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if: Your personal efforts created the property, or You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. 2012 tax form 1040 You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. 2012 tax form 1040 You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. 2012 tax form 1040 You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D (Form 1040), and their separate instructions. 2012 tax form 1040 For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. 2012 tax form 1040 See also Schedule D (Form 1040), Form 8949, and their separate instructions. 2012 tax form 1040 You can revoke the election if you have IRS approval. 2012 tax form 1040 To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. 2012 tax form 1040 See, for example, Rev. 2012 tax form 1040 Proc. 2012 tax form 1040 2013-1, corrected by Announcement 2013–9, and amplified and modified by Rev. 2012 tax form 1040 Proc. 2012 tax form 1040 2013–32, available at www. 2012 tax form 1040 irs. 2012 tax form 1040 gov/irb/2013-01_IRB/ar06. 2012 tax form 1040 html. 2012 tax form 1040 Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital asset. 2012 tax form 1040 Discounted Debt Instruments Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions. 2012 tax form 1040 Short-term government obligations. 2012 tax form 1040   Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. 2012 tax form 1040 This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. 2012 tax form 1040 Acquisition discount is the stated redemption price at maturity minus your basis in the obligation. 2012 tax form 1040   However, do not treat these gains as income to the extent you previously included the discount in income. 2012 tax form 1040 See Discount on Short-Term Obligations in chapter 1 of Publication 550. 2012 tax form 1040 Short-term nongovernment obligations. 2012 tax form 1040   Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of original issue discount (OID). 2012 tax form 1040 This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue. 2012 tax form 1040   However, to the extent you previously included the discount in income, you do not have to include it in income again. 2012 tax form 1040 See Discount on Short-Term Obligations in chapter 1 of Publication 550. 2012 tax form 1040 Tax-exempt state and local government bonds. 2012 tax form 1040   If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. 2012 tax form 1040 To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID. 2012 tax form 1040   If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. 2012 tax form 1040 For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Publication 550. 2012 tax form 1040   Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. 2012 tax form 1040 If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. 2012 tax form 1040 If you bought the bonds after April 30, 1993, the gain is ordinary income. 2012 tax form 1040   You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. 2012 tax form 1040 For more information, see Market Discount Bonds in chapter 1 of Publication 550. 2012 tax form 1040    A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss. 2012 tax form 1040 Redeemed before maturity. 2012 tax form 1040   If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID is not taxable to you. 2012 tax form 1040   If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. 2012 tax form 1040 However, you must report the unearned part of OID as a capital gain. 2012 tax form 1040 Example. 2012 tax form 1040 On July 2, 2002, the date of issue, you bought a 20-year, 6% municipal bond for $800. 2012 tax form 1040 The face amount of the bond was $1,000. 2012 tax form 1040 The $200 discount was OID. 2012 tax form 1040 At the time the bond was issued, the issuer had no intention of redeeming it before it matured. 2012 tax form 1040 The bond was callable at its face amount beginning 10 years after the issue date. 2012 tax form 1040 The issuer redeemed the bond at the end of 11 years (July 2, 2013) for its face amount of $1,000 plus accrued annual interest of $60. 2012 tax form 1040 The OID earned during the time you held the bond, $73, is not taxable. 2012 tax form 1040 The $60 accrued annual interest also is not taxable. 2012 tax form 1040 However, you must report the unearned part of OID ($127) as a capital gain. 2012 tax form 1040 Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument). 2012 tax form 1040   If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of the OID at the time of the sale or redemption is ordinary income. 2012 tax form 1040 The rest of the gain is capital gain. 2012 tax form 1040 If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. 2012 tax form 1040 This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter. 2012 tax form 1040 Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument). 2012 tax form 1040   If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. 2012 tax form 1040 Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. 2012 tax form 1040 See Original Issue Discount (OID) in chapter 7 for information about OID that you must report on your tax return. 2012 tax form 1040   If you sell or trade the debt instrument before maturity, your gain is a capital gain. 2012 tax form 1040 However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. 2012 tax form 1040 In this case, the rest of the gain is capital gain. 2012 tax form 1040 Market discount bonds. 2012 tax form 1040   If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. 2012 tax form 1040 If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. 2012 tax form 1040 The rest of the gain is capital gain. 2012 tax form 1040 See Market Discount Bonds in chapter 1 of Publication 550. 2012 tax form 1040   A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. 2012 tax form 1040 See Market discount bonds under Discounted Debt Instruments in chapter 4 of Publication 550. 2012 tax form 1040 Retirement of debt instrument. 2012 tax form 1040   Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument. 2012 tax form 1040 Notes of individuals. 2012 tax form 1040   If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. 2012 tax form 1040 An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met. 2012 tax form 1040 The lender is not in the business of lending money. 2012 tax form 1040 The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less. 2012 tax form 1040 Avoiding federal tax is not one of the principal purposes of the loan. 2012 tax form 1040   If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. 2012 tax form 1040 When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. 2012 tax form 1040 The rest of the gain, if any, is capital gain. 2012 tax form 1040 Any loss on the sale or redemption is capital loss. 2012 tax form 1040 Deposit in Insolvent or Bankrupt Financial Institution If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways. 2012 tax form 1040 Ordinary loss. 2012 tax form 1040 Casualty loss. 2012 tax form 1040 Nonbusiness bad debt (short-term capital loss). 2012 tax form 1040  For more information, see Deposit in Insolvent or Bankrupt Financial Institution, in chapter 4 of Publication 550. 2012 tax form 1040 Sale of Annuity The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income. 2012 tax form 1040 Losses on Section 1244 (Small Business) Stock You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. 2012 tax form 1040 Report the loss on Form 4797, line 10. 2012 tax form 1040 Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. 2012 tax form 1040 Report the gain on Form 8949. 2012 tax form 1040 See Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. 2012 tax form 1040 For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. 2012 tax form 1040 See also Schedule D (Form 1040), Form 8949, and their separate instructions. 2012 tax form 1040 Holding Period If you sold or traded investment property, you must determine your holding period for the property. 2012 tax form 1040 Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. 2012 tax form 1040 Long-term or short-term. 2012 tax form 1040   If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. 2012 tax form 1040 If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. 2012 tax form 1040   To determine how long you held the investment property, begin counting on the date after the day you acquired the property. 2012 tax form 1040 The day you disposed of the property is part of your holding period. 2012 tax form 1040 Example. 2012 tax form 1040 If you bought investment property on February 6, 2012, and sold it on February 6, 2013, your holding period is not more than 1 year and you have a short-term capital gain or loss. 2012 tax form 1040 If you sold it on February 7, 2013, your holding period is more than 1 year and you will have a long-term capital gain or loss. 2012 tax form 1040 Securities traded on established market. 2012 tax form 1040   For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them. 2012 tax form 1040    Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made. 2012 tax form 1040 Example. 2012 tax form 1040 You are a cash method, calendar year taxpayer. 2012 tax form 1040 You sold stock at a gain on December 30, 2013. 2012 tax form 1040 According to the rules of the stock exchange, the sale was closed by delivery of the stock 4 trading days after the sale, on January 6, 2014. 2012 tax form 1040 You received payment of the sales price on that same day. 2012 tax form 1040 Report your gain on your 2013 return, even though you received the payment in 2014. 2012 tax form 1040 The gain is long term or short term depending on whether you held the stock more than 1 year. 2012 tax form 1040 Your holding period ended on December 30. 2012 tax form 1040 If you had sold the stock at a loss, you would also report it on your 2013 return. 2012 tax form 1040 U. 2012 tax form 1040 S. 2012 tax form 1040 Treasury notes and bonds. 2012 tax form 1040   The holding period of U. 2012 tax form 1040 S. 2012 tax form 1040 Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. 2012 tax form 1040 The holding period of U. 2012 tax form 1040 S. 2012 tax form 1040 Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted. 2012 tax form 1040 Automatic investment service. 2012 tax form 1040   In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. 2012 tax form 1040 Your holding period starts on the day after the bank's purchase date. 2012 tax form 1040 If a share was bought over more than one purchase date, your holding period for that share is a split holding period. 2012 tax form 1040 A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds. 2012 tax form 1040 Nontaxable trades. 2012 tax form 1040   If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property. 2012 tax form 1040 Property received as a gift. 2012 tax form 1040   If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started. 2012 tax form 1040   If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift. 2012 tax form 1040 Inherited property. 2012 tax form 1040   Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. 2012 tax form 1040 This is true regardless of how long you actually held the property. 2012 tax form 1040 However, if you inherited property from someone who died in 2010, see the information below. 2012 tax form 1040 Inherited property from someone who died in 2010. 2012 tax form 1040   If you inherit investment property from a decedent who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your holding period. 2012 tax form 1040 Real property bought. 2012 tax form 1040   To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. 2012 tax form 1040 However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. 2012 tax form 1040 The holding period cannot start until there is an actual contract of sale. 2012 tax form 1040 The holding period of the seller cannot end before that time. 2012 tax form 1040 Real property repossessed. 2012 tax form 1040   If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. 2012 tax form 1040 Your holding period does not include the time between the original sale and the repossession. 2012 tax form 1040 That is, it does not include the period during which the first buyer held the property. 2012 tax form 1040 Stock dividends. 2012 tax form 1040   The holding period for stock you received as a taxable stock dividend begins on the date of distribution. 2012 tax form 1040   The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. 2012 tax form 1040 This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation. 2012 tax form 1040 Nontaxable stock rights. 2012 tax form 1040   Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. 2012 tax form 1040 The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised. 2012 tax form 1040 Nonbusiness Bad Debts If someone owes you money that you cannot collect, you have a bad debt. 2012 tax form 1040 You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. 2012 tax form 1040 Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. 2012 tax form 1040 To be deductible, nonbusiness bad debts must be totally worthless. 2012 tax form 1040 You cannot deduct a partly worthless nonbusiness debt. 2012 tax form 1040 Genuine debt required. 2012 tax form 1040   A debt must be genuine for you to deduct a loss. 2012 tax form 1040 A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. 2012 tax form 1040 Basis in bad debt required. 2012 tax form 1040    To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. 2012 tax form 1040 For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. 2012 tax form 1040 If you are a cash method taxpayer (as most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items. 2012 tax form 1040 When deductible. 2012 tax form 1040   You can take a bad debt deduction only in the year the debt becomes worthless. 2012 tax form 1040 You do not have to wait until a debt is due to determine whether it is worthless. 2012 tax form 1040 A debt becomes worthless when there is no longer any chance that the amount owed will be paid. 2012 tax form 1040   It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. 2012 tax form 1040 You must only show that you have taken reasonable steps to collect the debt. 2012 tax form 1040 Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. 2012 tax form 1040 How to report bad debts. 2012 tax form 1040    Deduct nonbusiness bad debts as short-term capital losses on Form 8949. 2012 tax form 1040    Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949, Part I, with box C checked. 2012 tax form 1040    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. 2012 tax form 1040 See also Schedule D (Form 1040), Form 8949, and their separate instructions. 2012 tax form 1040   For each bad debt, attach a statement to your return that contains: A description of the debt, including the amount, and the date it became due, The name of the debtor, and any business or family relationship between you and the debtor, The efforts you made to collect the debt, and Why you decided the debt was worthless. 2012 tax form 1040 For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. 2012 tax form 1040 Filing a claim for refund. 2012 tax form 1040    If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. 2012 tax form 1040 To do this, use Form 1040X to amend your return for the year the debt became worthless. 2012 tax form 1040 You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. 2012 tax form 1040 For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. 2012 tax form 1040 Additional information. 2012 tax form 1040   For more information, see Nonbusiness Bad Debts in Publication 550. 2012 tax form 1040 For information on business bad debts, see chapter 10 of Publication 535, Business Expenses. 2012 tax form 1040 Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale. 2012 tax form 1040 A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. 2012 tax form 1040 If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). 2012 tax form 1040 The result is your basis in the new stock or securities. 2012 tax form 1040 This adjustment postpones the loss deduction until the disposition of the new stock or securities. 2012 tax form 1040 Your holding period for the new stock or securities includes the holding period of the stock or securities sold. 2012 tax form 1040 For more information, see Wash Sales, in chapter 4 of Publication 550. 2012 tax form 1040 Rollover of Gain From Publicly Traded Securities You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. 2012 tax form 1040 This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain. 2012 tax form 1040 You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. 2012 tax form 1040 This postpones your gain until the year you dispose of the replacement property. 2012 tax form 1040 You qualify to make this choice if you meet all the following tests. 2012 tax form 1040 You sell publicly traded securities at a gain. 2012 tax form 1040 Publicly traded securities are securities traded on an established securities market. 2012 tax form 1040 Your gain from the sale is a capital gain. 2012 tax form 1040 During the 60-day period beginning on the date of the sale, you buy replacement property. 2012 tax form 1040 This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). 2012 tax form 1040 This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993. 2012 tax form 1040 Amount of gain recognized. 2012 tax form 1040   If you make the choice described in this section, you must recognize gain only up to the following amount. 2012 tax form 1040 The amount realized on the sale, minus The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities). 2012 tax form 1040  If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. 2012 tax form 1040 If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. 2012 tax form 1040 Limit on gain postponed. 2012 tax form 1040   The amount of gain you can postpone each year is limited to the smaller of: $50,000 ($25,000 if you are married and file a separate return), or $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years. 2012 tax form 1040 Basis of replacement property. 2012 tax form 1040   You must subtract the amount of postponed gain from the basis of your replacement property. 2012 tax form 1040 How to report and postpone gain. 2012 tax form 1040    See How to report and postpone gain under Rollover of Gain From Publicly Traded Securities in chapter 4 of 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The 2012 Tax Form 1040

2012 tax form 1040 3. 2012 tax form 1040   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. 2012 tax form 1040 Form 4797. 2012 tax form 1040 Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. 2012 tax form 1040 Granting the right to remove deposits. 2012 tax form 1040 Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. 2012 tax form 1040 You must report the income from all the different sources on your tax return, unless it is excluded by law. 2012 tax form 1040 Where you report the income on your tax return depends on its source. 2012 tax form 1040 This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. 2012 tax form 1040 For information on where to report other income, see the Instructions for Form 1040, U. 2012 tax form 1040 S. 2012 tax form 1040 Individual Income Tax Return. 2012 tax form 1040 Accounting method. 2012 tax form 1040   The rules discussed in this chapter assume you use the cash method of accounting. 2012 tax form 1040 Under the cash method, you generally include an item of income in gross income in the year you receive it. 2012 tax form 1040 See Cash Method in chapter 2. 2012 tax form 1040   If you use an accrual method of accounting, different rules may apply to your situation. 2012 tax form 1040 See Accrual Method in chapter 2. 2012 tax form 1040 Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. 2012 tax form 1040 Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. 2012 tax form 1040 Use this schedule to figure the net profit or loss from regular farming operations. 2012 tax form 1040 Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. 2012 tax form 1040 This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. 2012 tax form 1040 It also includes income from the sale of crop shares if you materially participate in producing the crop. 2012 tax form 1040 See Rents (Including Crop Shares) , later. 2012 tax form 1040 Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. 2012 tax form 1040 Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. 2012 tax form 1040 Land. 2012 tax form 1040 Depreciable farm equipment. 2012 tax form 1040 Buildings and structures. 2012 tax form 1040 Livestock held for draft, breeding, sport, or dairy purposes. 2012 tax form 1040 Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. 2012 tax form 1040 Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. 2012 tax form 1040 Sales of Farm Products Where to report. 2012 tax form 1040    Table 3-1 shows where to report the sale of farm products on your tax return. 2012 tax form 1040 Schedule F. 2012 tax form 1040   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. 2012 tax form 1040 This includes money and the fair market value of any property or services you receive. 2012 tax form 1040 When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). 2012 tax form 1040 See chapter 6 for information on the basis of assets. 2012 tax form 1040 You generally report these amounts on Schedule F for the year you receive payment. 2012 tax form 1040 Example. 2012 tax form 1040 In 2012, you bought 20 feeder calves for $11,000 for resale. 2012 tax form 1040 You sold them in 2013 for $21,000. 2012 tax form 1040 You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. 2012 tax form 1040 Form 4797. 2012 tax form 1040   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. 2012 tax form 1040 In either case, you should always report these sales on Form 4797 instead of Schedule F. 2012 tax form 1040 See Livestock under Ordinary or Capital Gain or Loss in chapter 8. 2012 tax form 1040 Animals you do not hold primarily for sale are considered business assets of your farm. 2012 tax form 1040 Table 3-1. 2012 tax form 1040 Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. 2012 tax form 1040   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. 2012 tax form 1040 This applies even if your agent pays you in a later year. 2012 tax form 1040 For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. 2012 tax form 1040 Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. 2012 tax form 1040 You must meet all the following conditions to qualify. 2012 tax form 1040 Your principal trade or business is farming. 2012 tax form 1040 You use the cash method of accounting. 2012 tax form 1040 You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. 2012 tax form 1040 The weather-related condition caused an area to be designated as eligible for assistance by the federal government. 2012 tax form 1040 Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. 2012 tax form 1040 The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. 2012 tax form 1040 A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. 2012 tax form 1040 See Other Involuntary Conversions in chapter 11. 2012 tax form 1040 Usual business practice. 2012 tax form 1040   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. 2012 tax form 1040 Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. 2012 tax form 1040 If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. 2012 tax form 1040 Connection with affected area. 2012 tax form 1040   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. 2012 tax form 1040 However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. 2012 tax form 1040 This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. 2012 tax form 1040 Classes of livestock. 2012 tax form 1040   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. 2012 tax form 1040 Do not separate animals into classes based on age, sex, or breed. 2012 tax form 1040 Amount to be postponed. 2012 tax form 1040   Follow these steps to figure the amount of gain to be postponed for each class of animals. 2012 tax form 1040 Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. 2012 tax form 1040 For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. 2012 tax form 1040 Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. 2012 tax form 1040 Example. 2012 tax form 1040 You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. 2012 tax form 1040 As a result of drought, you sold 135 head during 2012. 2012 tax form 1040 You realized $70,200 from the sale. 2012 tax form 1040 On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. 2012 tax form 1040 The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. 2012 tax form 1040 How to postpone gain. 2012 tax form 1040   To postpone gain, attach a statement to your tax return for the year of the sale. 2012 tax form 1040 The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. 2012 tax form 1040 A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). 2012 tax form 1040 Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. 2012 tax form 1040 A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. 2012 tax form 1040 The number of animals sold in each of the 3 preceding years. 2012 tax form 1040 The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. 2012 tax form 1040 The total number of animals sold and the number sold because of weather-related conditions during the tax year. 2012 tax form 1040 A computation, as described above, of the income to be postponed for each class of livestock. 2012 tax form 1040   Generally, you must file the statement and the return by the due date of the return, including extensions. 2012 tax form 1040 However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. 2012 tax form 1040 For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). 2012 tax form 1040 Attach the statement to the amended return and write “Filed pursuant to section 301. 2012 tax form 1040 9100-2” at the top of the amended return. 2012 tax form 1040 File the amended return at the same address you filed the original return. 2012 tax form 1040 Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. 2012 tax form 1040 Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. 2012 tax form 1040 However, if you materially participate in farming operations on the land, the rent is farm income. 2012 tax form 1040 See Landlord Participation in Farming in chapter 12. 2012 tax form 1040 Pasture income and rental. 2012 tax form 1040   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. 2012 tax form 1040 You must enter it as Other income on Schedule F. 2012 tax form 1040 If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. 2012 tax form 1040 Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. 2012 tax form 1040 It does not matter whether you use the cash method of accounting or an accrual method of accounting. 2012 tax form 1040 If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. 2012 tax form 1040 See Landlord Participation in Farming in chapter 12. 2012 tax form 1040 Report the rental income on Schedule F. 2012 tax form 1040 If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). 2012 tax form 1040 The income is not included in self-employment income. 2012 tax form 1040 Crop shares you use to feed livestock. 2012 tax form 1040   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. 2012 tax form 1040 You must include the fair market value of the crop shares in income at that time. 2012 tax form 1040 You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. 2012 tax form 1040 Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. 2012 tax form 1040 See  chapter 12. 2012 tax form 1040 Crop shares you give to others (gift). 2012 tax form 1040   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. 2012 tax form 1040 You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. 2012 tax form 1040 Example. 2012 tax form 1040 A tenant farmed part of your land under a crop-share arrangement. 2012 tax form 1040 The tenant harvested and delivered the crop in your name to an elevator company. 2012 tax form 1040 Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. 2012 tax form 1040 They sell their crop shares in the following year and the elevator company makes payments directly to your children. 2012 tax form 1040 In this situation, you are considered to have received rental income and then made a gift of that income. 2012 tax form 1040 You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. 2012 tax form 1040 Crop share loss. 2012 tax form 1040   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. 2012 tax form 1040 See Publication 925 for information on these rules. 2012 tax form 1040 Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. 2012 tax form 1040 However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. 2012 tax form 1040 See Cost-Sharing Exclusion (Improvements) , later. 2012 tax form 1040 Report the agricultural program payment on the appropriate line of Schedule F, Part I. 2012 tax form 1040 Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. 2012 tax form 1040 However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. 2012 tax form 1040 Claim the deduction on Schedule F for the year of repayment or reduction. 2012 tax form 1040 Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. 2012 tax form 1040 However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. 2012 tax form 1040 You do not need approval from the IRS to adopt this method of reporting CCC loans. 2012 tax form 1040 Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. 2012 tax form 1040 However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. 2012 tax form 1040 For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. 2012 tax form 1040 Revenue Procedure 2008-52, 2008-36 I. 2012 tax form 1040 R. 2012 tax form 1040 B. 2012 tax form 1040 587, is available at  www. 2012 tax form 1040 irs. 2012 tax form 1040 gov/irb/2008-36_IRB/ar09. 2012 tax form 1040 html. 2012 tax form 1040 You can request income tax withholding from CCC loan payments you receive. 2012 tax form 1040 Use Form W-4V, Voluntary Withholding Request. 2012 tax form 1040 See chapter 16 for information about ordering the form. 2012 tax form 1040 To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. 2012 tax form 1040 Attach a statement to your return showing the details of the loan. 2012 tax form 1040 You must file the statement and the return by the due date of the return, including extensions. 2012 tax form 1040 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2012 tax form 1040 Attach the statement to the amended return and write “Filed pursuant to section 301. 2012 tax form 1040 9100-2” at the top of the return. 2012 tax form 1040 File the amended return at the same address you filed the original return. 2012 tax form 1040 When you make this election, the amount you report as income becomes your basis in the commodity. 2012 tax form 1040 See chapter 6 for information on the basis of assets. 2012 tax form 1040 If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. 2012 tax form 1040 If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. 2012 tax form 1040 If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. 2012 tax form 1040 If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. 2012 tax form 1040 Form 1099-A. 2012 tax form 1040   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. 2012 tax form 1040 “CCC” should be shown in box 6. 2012 tax form 1040 The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. 2012 tax form 1040 Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. 2012 tax form 1040 If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. 2012 tax form 1040 Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. 2012 tax form 1040 Market gain should be reported as follows. 2012 tax form 1040 If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. 2012 tax form 1040 However, adjust the basis of the commodity for the amount of the market gain. 2012 tax form 1040 If you did not include the CCC loan in income in the year received, include the market gain in your income. 2012 tax form 1040 The following examples show how to report market gain. 2012 tax form 1040 Example 1. 2012 tax form 1040 Mike Green is a cotton farmer. 2012 tax form 1040 He uses the cash method of accounting and files his tax return on a calendar year basis. 2012 tax form 1040 He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. 2012 tax form 1040 In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. 2012 tax form 1040 00 per pound). 2012 tax form 1040 In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. 2012 tax form 1040 50 per pound (lower than the loan amount). 2012 tax form 1040 Later in 2013, he sold the cotton for $2,500. 2012 tax form 1040 The market gain on the redemption was $. 2012 tax form 1040 50 ($2. 2012 tax form 1040 00 – $1. 2012 tax form 1040 50) per pound. 2012 tax form 1040 Mike realized total market gain of $500 ($. 2012 tax form 1040 50 x 1,000 pounds). 2012 tax form 1040 How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. 2012 tax form 1040 Included CCC loan. 2012 tax form 1040   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. 2012 tax form 1040 The $500 market gain is not recognized on the redemption. 2012 tax form 1040 He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 2012 tax form 1040   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. 2012 tax form 1040 His gain from the sale is $1,000 ($2,500 – $1,500). 2012 tax form 1040 He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. 2012 tax form 1040 Excluded CCC loan. 2012 tax form 1040   Mike has income of $500 from market gain in 2013. 2012 tax form 1040 He reports it on Schedule F, lines 4a and 4b. 2012 tax form 1040 His basis in the cotton is zero, so his gain from its sale is $2,500. 2012 tax form 1040 He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. 2012 tax form 1040 Example 2. 2012 tax form 1040 The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. 2012 tax form 1040 Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. 2012 tax form 1040 In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. 2012 tax form 1040 How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. 2012 tax form 1040 Included CCC loan. 2012 tax form 1040   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. 2012 tax form 1040 The $500 market gain is not recognized on the redemption. 2012 tax form 1040 Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 2012 tax form 1040   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. 2012 tax form 1040 Mike has no gain or loss on its sale to the cotton buyer for that amount. 2012 tax form 1040 Excluded CCC loan. 2012 tax form 1040   As in Example 1, Mike has income of $500 from market gain in 2013. 2012 tax form 1040 He reports it on Schedule F, lines 4a and 4b. 2012 tax form 1040 His basis in the cotton is zero, so his gain from its sale is $1,500. 2012 tax form 1040 He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. 2012 tax form 1040 Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. 2012 tax form 1040 You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. 2012 tax form 1040 Cost-share payments you receive may qualify for the cost-sharing exclusion. 2012 tax form 1040 See Cost-Sharing Exclusion (Improvements) , later. 2012 tax form 1040 CRP payments are reported to you on Form 1099-G. 2012 tax form 1040 Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. 2012 tax form 1040 See the instructions for Schedule SE (Form 1040). 2012 tax form 1040 Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. 2012 tax form 1040 You generally include them in the year you receive them. 2012 tax form 1040 Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. 2012 tax form 1040 You can request income tax withholding from crop disaster payments you receive from the federal government. 2012 tax form 1040 Use Form W-4V, Voluntary Withholding Request. 2012 tax form 1040 See chapter 16 for information about ordering the form. 2012 tax form 1040 Election to postpone reporting until the following year. 2012 tax form 1040   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. 2012 tax form 1040 You use the cash method of accounting. 2012 tax form 1040 You receive the crop insurance proceeds in the same tax year the crops are damaged. 2012 tax form 1040 You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. 2012 tax form 1040   Deferral is not permitted for proceeds received from revenue insurance policies. 2012 tax form 1040   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. 2012 tax form 1040 Check the box on line 8c and attach a statement to your tax return. 2012 tax form 1040 The statement must include your name and address and contain the following information. 2012 tax form 1040 A statement that you are making an election under IRC section 451(d) and Regulations section 1. 2012 tax form 1040 451-6. 2012 tax form 1040 The specific crop or crops physically destroyed or damaged. 2012 tax form 1040 A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. 2012 tax form 1040 The cause of the physical destruction or damage and the date or dates it occurred. 2012 tax form 1040 The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. 2012 tax form 1040 The name of each insurance carrier from whom you received payments. 2012 tax form 1040   One election covers all crops representing a single trade or business. 2012 tax form 1040 If you have more than one farming business, make a separate election for each one. 2012 tax form 1040 For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. 2012 tax form 1040   An election is binding for the year unless the IRS approves your request to change it. 2012 tax form 1040 To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. 2012 tax form 1040 Ogden Submission Processing Center P. 2012 tax form 1040 O. 2012 tax form 1040 Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. 2012 tax form 1040 These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. 2012 tax form 1040 They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. 2012 tax form 1040 Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. 2012 tax form 1040 You must include these benefits in income in the year you receive them. 2012 tax form 1040 You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. 2012 tax form 1040 Report the benefits on Schedule F, Part I, as agricultural program payments. 2012 tax form 1040 You can usually take a current deduction for the same amount as a feed expense. 2012 tax form 1040 Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. 2012 tax form 1040 A payment is any economic benefit you get as a result of an improvement. 2012 tax form 1040 However, this exclusion applies only to that part of a payment that meets all three of the following tests. 2012 tax form 1040 It was for a capital expense. 2012 tax form 1040 You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. 2012 tax form 1040 You must include the payment for a deductible expense in income, and you can take any offsetting deduction. 2012 tax form 1040 See chapter 5 for information on deducting soil and water conservation expenses. 2012 tax form 1040 It does not substantially increase your annual income from the property for which it is made. 2012 tax form 1040 An increase in annual income is substantial if it is more than the greater of the following amounts. 2012 tax form 1040 10% of the average annual income derived from the affected property before receiving the improvement. 2012 tax form 1040 $2. 2012 tax form 1040 50 times the number of affected acres. 2012 tax form 1040 The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 2012 tax form 1040 Qualifying programs. 2012 tax form 1040   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. 2012 tax form 1040 The rural clean water program authorized by the Federal Water Pollution Control Act. 2012 tax form 1040 The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. 2012 tax form 1040 The water bank program authorized by the Water Bank Act. 2012 tax form 1040 The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. 2012 tax form 1040 The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. 2012 tax form 1040 The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. 2012 tax form 1040 The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. 2012 tax form 1040 Certain small watershed programs, listed later. 2012 tax form 1040 Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 2012 tax form 1040 Several state programs have been approved. 2012 tax form 1040 For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). 2012 tax form 1040 Small watershed programs. 2012 tax form 1040   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. 2012 tax form 1040 The programs under the Watershed Protection and Flood Prevention Act. 2012 tax form 1040 The flood prevention projects under the Flood Control Act of 1944. 2012 tax form 1040 The Emergency Watershed Protection Program under the Flood Control Act of 1950. 2012 tax form 1040 Certain programs under the Colorado River Basin Salinity Control Act. 2012 tax form 1040 The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. 2012 tax form 1040 The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 2012 tax form 1040 The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 2012 tax form 1040 The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 2012 tax form 1040 The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 2012 tax form 1040 The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. 2012 tax form 1040 The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. 2012 tax form 1040 The Conservation Security Program authorized by the Food Security Act of 1985. 2012 tax form 1040 The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. 2012 tax form 1040 Income realized. 2012 tax form 1040   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). 2012 tax form 1040 Value of the improvement. 2012 tax form 1040   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. 2012 tax form 1040 The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. 2012 tax form 1040 Any government payments under a program not listed earlier. 2012 tax form 1040 Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. 2012 tax form 1040 Any government payment to you for rent or for your services. 2012 tax form 1040 The denominator of the fraction is the total cost of the improvement. 2012 tax form 1040 Excludable portion. 2012 tax form 1040   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. 2012 tax form 1040 10% of the prior average annual income from the affected acreage. 2012 tax form 1040 The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. 2012 tax form 1040 $2. 2012 tax form 1040 50 times the number of affected acres. 2012 tax form 1040 The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. 2012 tax form 1040 You may need to consult your tax advisor for assistance. 2012 tax form 1040 Example. 2012 tax form 1040 One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. 2012 tax form 1040 The total cost of the improvement was $500,000. 2012 tax form 1040 The USDA paid $490,000. 2012 tax form 1040 You paid $10,000. 2012 tax form 1040 The value of the cost-sharing improvement is $15,000. 2012 tax form 1040 The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. 2012 tax form 1040 The excludable portion is the greater amount, $1,550. 2012 tax form 1040 You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. 2012 tax form 1040   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. 2012 tax form 1040 Any payment excluded from income is not part of your basis. 2012 tax form 1040 In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. 2012 tax form 1040   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. 2012 tax form 1040 How to report the exclusion. 2012 tax form 1040   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. 2012 tax form 1040 The statement must include the following information. 2012 tax form 1040 The dollar amount of the cost funded by the government payment. 2012 tax form 1040 The value of the improvement. 2012 tax form 1040 The amount you are excluding. 2012 tax form 1040   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. 2012 tax form 1040 Recapture. 2012 tax form 1040   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. 2012 tax form 1040 In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. 2012 tax form 1040 You must report the recapture on Form 4797. 2012 tax form 1040 See Section 1255 property under Other Gains in chapter 9. 2012 tax form 1040 Electing not to exclude payments. 2012 tax form 1040   You can elect not to exclude all or part of any payments you receive under these programs. 2012 tax form 1040 If you make this election for all of these payments, none of the above restrictions and rules apply. 2012 tax form 1040 You must make this election by the due date, including extensions, for filing your return. 2012 tax form 1040 In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. 2012 tax form 1040 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2012 tax form 1040 Write “Filed pursuant to section 301. 2012 tax form 1040 9100-2” at the top of the amended return and file it at the same address you filed the original return. 2012 tax form 1040 Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. 2012 tax form 1040 You must include these payments on Schedule F, lines 4a and 4b. 2012 tax form 1040 The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. 2012 tax form 1040 You must include these payments on Schedule F, lines 6a and 6b. 2012 tax form 1040 The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. 2012 tax form 1040 Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. 2012 tax form 1040 As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. 2012 tax form 1040 If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 2012 tax form 1040 If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 2012 tax form 1040 Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. 2012 tax form 1040 Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. 2012 tax form 1040 The gain or loss is capital or ordinary depending on how you used the quota. 2012 tax form 1040 See Capital or ordinary gain or loss , later. 2012 tax form 1040 Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. 2012 tax form 1040 Adjusted basis. 2012 tax form 1040   The adjusted basis of your quota is determined differently depending on how you obtained the quota. 2012 tax form 1040 The basis of a quota derived from an original grant by the federal government is zero. 2012 tax form 1040 The basis of a purchased quota is the purchase price. 2012 tax form 1040 The basis of a quota received as a gift is generally the same as the donor's basis. 2012 tax form 1040 However, under certain circumstances, the basis is increased by the amount of gift taxes paid. 2012 tax form 1040 If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. 2012 tax form 1040 The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. 2012 tax form 1040 Reduction of basis. 2012 tax form 1040   You are required to reduce the basis of your tobacco quota by the following amounts. 2012 tax form 1040 Deductions you took for amortization, depletion, or depreciation. 2012 tax form 1040 Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. 2012 tax form 1040 The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). 2012 tax form 1040 Amount treated as interest. 2012 tax form 1040   You must reduce your tobacco quota buyout program payment by the amount treated as interest. 2012 tax form 1040 The interest is reportable as ordinary income. 2012 tax form 1040 If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. 2012 tax form 1040   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. 2012 tax form 1040 You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. 2012 tax form 1040 For more information, see Notice 2005-57, 2005-32 I. 2012 tax form 1040 R. 2012 tax form 1040 B. 2012 tax form 1040 267, available at www. 2012 tax form 1040 irs. 2012 tax form 1040 gov/irb/2005-32_IRB/ar13. 2012 tax form 1040 html. 2012 tax form 1040 Installment method. 2012 tax form 1040   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. 2012 tax form 1040 Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. 2012 tax form 1040 See chapter 10 for more information. 2012 tax form 1040 Capital or ordinary gain or loss. 2012 tax form 1040   Whether your gain or loss is ordinary or capital depends on how you used the quota. 2012 tax form 1040 Quota used in the trade or business of farming. 2012 tax form 1040   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. 2012 tax form 1040 See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. 2012 tax form 1040 Quota held for investment. 2012 tax form 1040   If you held the quota for investment purposes, any gain or loss is capital gain or loss. 2012 tax form 1040 The same result also applies if you held the quota for the production of income, though not connected with a trade or business. 2012 tax form 1040 Gain treated as ordinary income. 2012 tax form 1040   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. 2012 tax form 1040 Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. 2012 tax form 1040 The cost of acquiring a quota. 2012 tax form 1040 Amounts for amortization, depletion, or depreciation. 2012 tax form 1040 Amounts to reflect a reduction in the quota pounds. 2012 tax form 1040   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. 2012 tax form 1040 Self-employment income. 2012 tax form 1040   The tobacco quota buyout payments are not self-employment income. 2012 tax form 1040 Income averaging for farmers. 2012 tax form 1040   The gain or loss resulting from the quota payments does not qualify for income averaging. 2012 tax form 1040 A tobacco quota is considered an interest in land. 2012 tax form 1040 Income averaging is not available for gain or loss arising from the sale or other disposition of land. 2012 tax form 1040 Involuntary conversion. 2012 tax form 1040   The buyout of the tobacco quota is not an involuntary conversion. 2012 tax form 1040 Form 1099-S. 2012 tax form 1040   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. 2012 tax form 1040 The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. 2012 tax form 1040 Like-kind exchange of quota. 2012 tax form 1040   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. 2012 tax form 1040 See Notice 2005-57 for more information. 2012 tax form 1040 Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. 2012 tax form 1040 Taxation of payments to tobacco growers. 2012 tax form 1040   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. 2012 tax form 1040 Individuals will generally report the payments as an Agricultural program payment on Schedule F. 2012 tax form 1040 If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. 2012 tax form 1040 Self-employment income. 2012 tax form 1040   Payments to growers generally represent self-employment income. 2012 tax form 1040 If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. 2012 tax form 1040 Income averaging for farmers. 2012 tax form 1040   Payments to growers who are individuals qualify for farm income averaging. 2012 tax form 1040 Form 1099-G. 2012 tax form 1040   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. 2012 tax form 1040 Other Payments You must include most other government program payments in income. 2012 tax form 1040 Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. 2012 tax form 1040 How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. 2012 tax form 1040 Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. 2012 tax form 1040 You must also capitalize the full cost of the improvement. 2012 tax form 1040 Since you have included the payments in income, they do not reduce your basis. 2012 tax form 1040 However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. 2012 tax form 1040 National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. 2012 tax form 1040 You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. 2012 tax form 1040 If you produce a tobacco crop, report the payments as income from farming on your Schedule F. 2012 tax form 1040 If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. 2012 tax form 1040 Payment to More Than One Person The USDA reports program payments to the IRS. 2012 tax form 1040 It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). 2012 tax form 1040 If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. 2012 tax form 1040 You should file Form 1099-G to report the identity of the actual recipient to the IRS. 2012 tax form 1040 You should also give this information to the recipient. 2012 tax form 1040 You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. 2012 tax form 1040 Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. 2012 tax form 1040 However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. 2012 tax form 1040 See chapter 16 for information about ordering Form 1099-G. 2012 tax form 1040 Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). 2012 tax form 1040 If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. 2012 tax form 1040 Form 1099-PATR. 2012 tax form 1040   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. 2012 tax form 1040 Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. 2012 tax form 1040 For information on the alternative minimum tax, see the Instructions for Form 6251. 2012 tax form 1040 Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. 2012 tax form 1040 They include the following items. 2012 tax form 1040 Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). 2012 tax form 1040 The stated dollar value of qualified written notices of allocation. 2012 tax form 1040 The fair market value of other property. 2012 tax form 1040 Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. 2012 tax form 1040 You must reduce the cost or other basis of these items by the amount of such patronage dividends received. 2012 tax form 1040 Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. 2012 tax form 1040 If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. 2012 tax form 1040 Qualified written notice of allocation. 2012 tax form 1040   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. 2012 tax form 1040 A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. 2012 tax form 1040 The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. 2012 tax form 1040 You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. 2012 tax form 1040 Signing and giving a written agreement to the cooperative. 2012 tax form 1040 Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. 2012 tax form 1040 The cooperative must notify you in writing of this bylaw and give you a copy. 2012 tax form 1040 Endorsing and cashing a qualified check paid as part of the same patronage dividend. 2012 tax form 1040 You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. 2012 tax form 1040 Qualified check. 2012 tax form 1040   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. 2012 tax form 1040 It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. 2012 tax form 1040 It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. 2012 tax form 1040 Loss on redemption. 2012 tax form 1040   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. 2012 tax form 1040 The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. 2012 tax form 1040 Nonqualified notice of allocation. 2012 tax form 1040   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. 2012 tax form 1040 Your basis in the notice is zero. 2012 tax form 1040 You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. 2012 tax form 1040 Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. 2012 tax form 1040 However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. 2012 tax form 1040   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. 2012 tax form 1040 For example, if it represents interest income, report it on your return as interest. 2012 tax form 1040 Buying or selling capital assets or depreciable property. 2012 tax form 1040   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. 2012 tax form 1040 You must, however, reduce the basis of these assets by the dividends. 2012 tax form 1040 This reduction is taken into account as of the first day of the tax year in which the dividends are received. 2012 tax form 1040 If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. 2012 tax form 1040   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. 2012 tax form 1040 Example. 2012 tax form 1040 On July 1, 2012, Mr. 2012 tax form 1040 Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. 2012 tax form 1040 The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). 2012 tax form 1040 Mr. 2012 tax form 1040 Brown files his return on a calendar year basis. 2012 tax form 1040 For 2012, he claimed a depreciation deduction of $311, using the 10. 2012 tax form 1040 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). 2012 tax form 1040 On July 2, 2013, the cooperative association paid Mr. 2012 tax form 1040 Brown a $300 cash patronage dividend for buying the machine. 2012 tax form 1040 Mr. 2012 tax form 1040 Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. 2012 tax form 1040 Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. 2012 tax form 1040 38% × 1. 2012 tax form 1040 5 = 23. 2012 tax form 1040 07% Depreciation deduction for 2013 ($2,289 × 23. 2012 tax form 1040 07%) $528 Exceptions. 2012 tax form 1040   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. 2012 tax form 1040 If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. 2012 tax form 1040 If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). 2012 tax form 1040   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. 2012 tax form 1040 Personal purchases. 2012 tax form 1040   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). 2012 tax form 1040 This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. 2012 tax form 1040 Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. 2012 tax form 1040 A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. 2012 tax form 1040 These allocations can be paid in money, other property, or qualified certificates. 2012 tax form 1040 Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. 2012 tax form 1040 Qualified certificates. 2012 tax form 1040   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. 2012 tax form 1040 The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. 2012 tax form 1040 If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. 2012 tax form 1040 Nonqualified certificates. 2012 tax form 1040   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. 2012 tax form 1040 Your basis in the certificate is zero. 2012 tax form 1040 You must include in income any amount you receive from its sale, redemption, or other disposition. 2012 tax form 1040 Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. 2012 tax form 1040 Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. 2012 tax form 1040 For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. 2012 tax form 1040 General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. 2012 tax form 1040 Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. 2012 tax form 1040 It is excluded from taxable income (see Exclusions , later). 2012 tax form 1040 Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. 2012 tax form 1040 If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. 2012 tax form 1040 Election to defer income from discharge of indebtedness. 2012 tax form 1040   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. 2012 tax form 1040 Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. 2012 tax form 1040 See IRC section 108(i) and Publication 4681 for details. 2012 tax form 1040 Form 1099-C. 2012 tax form 1040   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. 2012 tax form 1040 The amount of debt canceled is shown in box 2. 2012 tax form 1040 Exceptions The following discussion covers some exceptions to the general rule for canceled debt. 2012 tax form 1040 These exceptions apply before the exclusions discussed below. 2012 tax form 1040 Price reduced after purchase. 2012 tax form 1040   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. 2012 tax form 1040 Reduce your basis in the property by the amount of the reduction in the debt. 2012 tax form 1040 The rules that apply to bankruptcy and insolvency are explained below under Exclusions . 2012 tax form 1040 Deductible debt. 2012 tax form 1040   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. 2012 tax form 1040 This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. 2012 tax form 1040 Example. 2012 tax form 1040 You get accounting services for your farm on credit. 2012 tax form 1040 Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. 2012 tax form 1040 Your accountant forgives part of the amount you owe for the accounting services. 2012 tax form 1040 How you treat the canceled debt depends on your method of accounting. 2012 tax form 1040 Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. 2012 tax form 1040 Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. 2012 tax form 1040 Exclusions Do not include canceled debt in income in the following situations. 2012 tax form 1040 The cancellation takes place in a bankruptcy case under title 11 of the U. 2012 tax form 1040 S. 2012 tax form 1040 Code. 2012 tax form 1040 The cancellation takes place when you are insolvent. 2012 tax form 1040 The canceled debt is a qualified farm debt. 2012 tax form 1040 The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). 2012 tax form 1040 See Publication 334, Tax Guide for Small Business, chapter 5. 2012 tax form 1040 The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. 2012 tax form 1040 The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. 2012 tax form 1040 If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. 2012 tax form 1040 If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. 2012 tax form 1040 See Form 982 , later, for information on how to claim an exclusion for a canceled debt. 2012 tax form 1040 Debt. 2012 tax form 1040   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. 2012 tax form 1040 Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. 2012 tax form 1040 Bankruptcy. 2012 tax form 1040   A bankruptcy case is a case under title 11 of the U. 2012 tax form 1040 S. 2012 tax form 1040 Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. 2012 tax form 1040   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. 2012 tax form 1040 Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . 2012 tax form 1040 Insolvency. 2012 tax form 1040   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. 2012 tax form 1040   You can exclude canceled debt from gross income up to the amount by which you are insolvent. 2012 tax form 1040 If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. 2012 tax form 1040 Otherwise, you include the difference in gross income. 2012 tax form 1040 Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . 2012 tax form 1040 You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. 2012 tax form 1040 Example. 2012 tax form 1040 You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. 2012 tax form 1040 Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. 2012 tax form 1040 Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). 2012 tax form 1040 You can exclude this amount from income. 2012 tax form 1040 The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. 2012 tax form 1040 If not, you must include it in income. 2012 tax form 1040 Reduction of tax attributes. 2012 tax form 1040   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. 2012 tax form 1040 Order of reduction. 2012 tax form 1040   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. 2012 tax form 1040 Net operating loss (NOL). 2012 tax form 1040 Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. 2012 tax form 1040 Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. 2012 tax form 1040 General business credit carryover. 2012 tax form 1040 Reduce the credit carryover to or from the tax year of the debt cancellation. 2012 tax form 1040 Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. 2012 tax form 1040 Minimum tax credit. 2012 tax form 1040 Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. 2012 tax form 1040 Reduce the credit 331/3 cents for each dollar of excluded canceled debt. 2012 tax form 1040 Capital loss. 2012 tax form 1040 Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. 2012 tax form 1040 Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. 2012 tax form 1040 Basis. 2012 tax form 1040 Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. 2012 tax form 1040 Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. 2012 tax form 1040 Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. 2012 tax form 1040 Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. 2012 tax form 1040 Inventory and accounts and notes receivable. 2012 tax form 1040 Other property. 2012 tax form 1040 Reduce the basis one dollar for each dollar of excluded canceled debt. 2012 tax form 1040 However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. 2012 tax form 1040 For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. 2012 tax form 1040 1017-1(b)(2). 2012 tax form 1040 Also see Electing to reduce the basis of depreciable property