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Aarp Tax Locations

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Aarp Tax Locations

Aarp tax locations 9. Aarp tax locations   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. Aarp tax locations Depletion unit. Aarp tax locations Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. Aarp tax locations The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Aarp tax locations There are two ways of figuring depletion: cost depletion and percentage depletion. Aarp tax locations For mineral property, you generally must use the method that gives you the larger deduction. Aarp tax locations For standing timber, you must use cost depletion. Aarp tax locations Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. Aarp tax locations More than one person can have an economic interest in the same mineral deposit or timber. Aarp tax locations In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Aarp tax locations You have an economic interest if both the following apply. Aarp tax locations You have acquired by investment any interest in mineral deposits or standing timber. Aarp tax locations You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. Aarp tax locations A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. Aarp tax locations A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Aarp tax locations Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. Aarp tax locations Basis adjustment for depletion. Aarp tax locations   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. Aarp tax locations Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). Aarp tax locations For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. Aarp tax locations You can treat two or more separate interests as one property or as separate properties. Aarp tax locations See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. Aarp tax locations There are two ways of figuring depletion on mineral property. Aarp tax locations Cost depletion. Aarp tax locations Percentage depletion. Aarp tax locations Generally, you must use the method that gives you the larger deduction. Aarp tax locations However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. Aarp tax locations See Oil and Gas Wells , later. Aarp tax locations Cost Depletion To figure cost depletion you must first determine the following. Aarp tax locations The property's basis for depletion. Aarp tax locations The total recoverable units of mineral in the property's natural deposit. Aarp tax locations The number of units of mineral sold during the tax year. Aarp tax locations Basis for depletion. Aarp tax locations   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. Aarp tax locations Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. Aarp tax locations The residual value of land and improvements at the end of operations. Aarp tax locations The cost or value of land acquired for purposes other than mineral production. Aarp tax locations Adjusted basis. Aarp tax locations   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. Aarp tax locations Your adjusted basis can never be less than zero. Aarp tax locations See Publication 551, Basis of Assets, for more information on adjusted basis. Aarp tax locations Total recoverable units. Aarp tax locations   The total recoverable units is the sum of the following. Aarp tax locations The number of units of mineral remaining at the end of the year (including units recovered but not sold). Aarp tax locations The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). Aarp tax locations   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. Aarp tax locations You must include ores and minerals that are developed, in sight, blocked out, or assured. Aarp tax locations You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. Aarp tax locations But see Elective safe harbor for owners of oil and gas property , later. Aarp tax locations Number of units sold. Aarp tax locations   You determine the number of units sold during the tax year based on your method of accounting. Aarp tax locations Use the following table to make this determination. Aarp tax locations    IF you  use . Aarp tax locations . Aarp tax locations . Aarp tax locations THEN the units sold during the year are . Aarp tax locations . Aarp tax locations . Aarp tax locations The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). Aarp tax locations An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. Aarp tax locations   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. Aarp tax locations Figuring the cost depletion deduction. Aarp tax locations   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. Aarp tax locations Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Aarp tax locations Rate per unit. Aarp tax locations 2 Multiply the rate per unit by units sold during the tax year. Aarp tax locations Cost depletion deduction. Aarp tax locations You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Aarp tax locations Elective safe harbor for owners of oil and gas property. Aarp tax locations   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. Aarp tax locations If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). Aarp tax locations For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. Aarp tax locations irs. Aarp tax locations gov/pub/irs-irbs/irb04-10. Aarp tax locations pdf. Aarp tax locations   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. Aarp tax locations The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. Aarp tax locations The election, if made, is effective for the tax year in which it is made and all later years. Aarp tax locations It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Aarp tax locations Once revoked, it cannot be re-elected for the next 5 years. Aarp tax locations Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. Aarp tax locations The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . Aarp tax locations Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . Aarp tax locations Gross income. Aarp tax locations   When figuring percentage depletion, subtract from your gross income from the property the following amounts. Aarp tax locations Any rents or royalties you paid or incurred for the property. Aarp tax locations The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. Aarp tax locations A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. Aarp tax locations   Use the following fraction to figure the part of the bonus you must subtract. Aarp tax locations No. Aarp tax locations of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. Aarp tax locations For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. Aarp tax locations Taxable income limit. Aarp tax locations   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. Aarp tax locations   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. Aarp tax locations These deductible items include, but are not limited to, the following. Aarp tax locations Operating expenses. Aarp tax locations Certain selling expenses. Aarp tax locations Administrative and financial overhead. Aarp tax locations Depreciation. Aarp tax locations Intangible drilling and development costs. Aarp tax locations Exploration and development expenditures. Aarp tax locations Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. Aarp tax locations Losses sustained. Aarp tax locations   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. Aarp tax locations Do not deduct any net operating loss deduction from the gross income from the property. Aarp tax locations Corporations do not deduct charitable contributions from the gross income from the property. Aarp tax locations If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. Aarp tax locations See section 1. Aarp tax locations 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. Aarp tax locations Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. Aarp tax locations You are either an independent producer or a royalty owner. Aarp tax locations The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. Aarp tax locations If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. Aarp tax locations For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. Aarp tax locations Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. Aarp tax locations However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. Aarp tax locations For information on figuring the deduction, see Figuring percentage depletion , later. Aarp tax locations Refiners who cannot claim percentage depletion. Aarp tax locations   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. Aarp tax locations The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. Aarp tax locations Related person. Aarp tax locations   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. Aarp tax locations For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. Aarp tax locations A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. Aarp tax locations For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. Aarp tax locations The value of the outstanding stock of a corporation. Aarp tax locations The interest in the profits or capital of a partnership. Aarp tax locations The beneficial interests in an estate or trust. Aarp tax locations Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. Aarp tax locations Retailers who cannot claim percentage depletion. Aarp tax locations   You cannot claim percentage depletion if both the following apply. Aarp tax locations You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. Aarp tax locations Through a retail outlet operated by you or a related person. Aarp tax locations To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. Aarp tax locations To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. Aarp tax locations The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. Aarp tax locations   For the purpose of determining if this rule applies, do not count the following. Aarp tax locations Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. Aarp tax locations Bulk sales of aviation fuels to the Department of Defense. Aarp tax locations Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. Aarp tax locations Related person. Aarp tax locations   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. Aarp tax locations Sales through a related person. Aarp tax locations   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. Aarp tax locations   You are not considered to be selling through a related person who is a retailer if all the following apply. Aarp tax locations You do not have a significant ownership interest in the retailer. Aarp tax locations You sell your production to persons who are not related to either you or the retailer. Aarp tax locations The retailer does not buy oil or natural gas from your customers or persons related to your customers. Aarp tax locations There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. Aarp tax locations Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. Aarp tax locations Transferees who cannot claim percentage depletion. Aarp tax locations   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. Aarp tax locations For a definition of the term “transfer,” see section 1. Aarp tax locations 613A-7(n) of the regulations. Aarp tax locations For a definition of the term “interest in proven oil or gas property,” see section 1. Aarp tax locations 613A-7(p) of the regulations. Aarp tax locations Figuring percentage depletion. Aarp tax locations   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. Aarp tax locations If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. Aarp tax locations If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. Aarp tax locations   In addition, there is a limit on the percentage depletion deduction. Aarp tax locations See Taxable income limit , later. Aarp tax locations Average daily production. Aarp tax locations   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. Aarp tax locations Partial interest. Aarp tax locations   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. Aarp tax locations   You have a partial interest in the production from a property if you have a net profits interest in the property. Aarp tax locations To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. Aarp tax locations To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. Aarp tax locations Then multiply the total production from the property by your percentage participation to figure your share of the production. Aarp tax locations Example. Aarp tax locations Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. Aarp tax locations During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Aarp tax locations Javier had expenses of $90,000 attributable to the property. Aarp tax locations The property generated a net profit of $110,000 ($200,000 − $90,000). Aarp tax locations Pablo received income of $22,000 ($110,000 × . Aarp tax locations 20) for his net profits interest. Aarp tax locations Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). Aarp tax locations Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). Aarp tax locations Depletable oil or natural gas quantity. Aarp tax locations   Generally, your depletable oil quantity is 1,000 barrels. Aarp tax locations Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. Aarp tax locations If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. Aarp tax locations Example. Aarp tax locations You have both oil and natural gas production. Aarp tax locations To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. Aarp tax locations Your depletable natural gas quantity is 2. Aarp tax locations 16 million cubic feet of gas (360 × 6000). Aarp tax locations You must reduce your depletable oil quantity to 640 barrels (1000 − 360). Aarp tax locations If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. Aarp tax locations Also, see Notice 2012-50, available at www. Aarp tax locations irs. Aarp tax locations gov/irb/2012–31_IRB/index. Aarp tax locations html. Aarp tax locations Business entities and family members. Aarp tax locations   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. Aarp tax locations Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). Aarp tax locations You and your spouse and minor children. Aarp tax locations A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. Aarp tax locations Controlled group of corporations. Aarp tax locations   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. Aarp tax locations They share the depletable quantity. Aarp tax locations A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. Aarp tax locations ” Gross income from the property. Aarp tax locations   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. Aarp tax locations If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. Aarp tax locations   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. Aarp tax locations   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. Aarp tax locations Average daily production exceeds depletable quantities. Aarp tax locations   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. Aarp tax locations Figure your average daily production of oil or natural gas for the year. Aarp tax locations Figure your depletable oil or natural gas quantity for the year. Aarp tax locations Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. Aarp tax locations Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). Aarp tax locations This is your depletion allowance for that property for the year. Aarp tax locations Taxable income limit. Aarp tax locations   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. Aarp tax locations 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. Aarp tax locations For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. Aarp tax locations 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. Aarp tax locations You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Aarp tax locations Add it to your depletion allowance (before applying any limits) for the following year. Aarp tax locations Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. Aarp tax locations (However, see Electing large partnerships must figure depletion allowance , later. Aarp tax locations ) Each partner or shareholder must decide whether to use cost or percentage depletion. Aarp tax locations If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. Aarp tax locations Partner's or shareholder's adjusted basis. Aarp tax locations   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. Aarp tax locations The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. Aarp tax locations   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. Aarp tax locations However, in some cases, it is figured according to the partner's interest in partnership income. Aarp tax locations   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. Aarp tax locations Recordkeeping. Aarp tax locations Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. Aarp tax locations The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. Aarp tax locations The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. Aarp tax locations Reporting the deduction. Aarp tax locations   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). Aarp tax locations Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). Aarp tax locations The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. Aarp tax locations The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. Aarp tax locations Form 6198, At-Risk Limitations. Aarp tax locations Form 8582, Passive Activity Loss Limitations. Aarp tax locations Electing large partnerships must figure depletion allowance. Aarp tax locations   An electing large partnership, rather than each partner, generally must figure the depletion allowance. Aarp tax locations The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. Aarp tax locations Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. Aarp tax locations   An electing large partnership is one that meets both the following requirements. Aarp tax locations The partnership had 100 or more partners in the preceding year. Aarp tax locations The partnership chooses to be an electing large partnership. Aarp tax locations Disqualified persons. Aarp tax locations   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. Aarp tax locations Disqualified persons must figure it themselves, as explained earlier. Aarp tax locations   All the following are disqualified persons. Aarp tax locations Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Aarp tax locations Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Aarp tax locations Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. Aarp tax locations Average daily production is discussed earlier. Aarp tax locations Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. Aarp tax locations Natural gas sold under a fixed contract. Aarp tax locations   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. Aarp tax locations This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. Aarp tax locations The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Aarp tax locations Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. Aarp tax locations Natural gas from geopressured brine. Aarp tax locations   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. Aarp tax locations This is natural gas that is both the following. Aarp tax locations Produced from a well you began to drill after September 1978 and before 1984. Aarp tax locations Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. Aarp tax locations Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. Aarp tax locations Mines and other natural deposits. Aarp tax locations   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. Aarp tax locations   The following is a list of the percentage depletion rates for the more common minerals. Aarp tax locations DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. Aarp tax locations Corporate deduction for iron ore and coal. Aarp tax locations   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Aarp tax locations Gross income from the property. Aarp tax locations   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Aarp tax locations Mining includes all the following. Aarp tax locations Extracting ores or minerals from the ground. Aarp tax locations Applying certain treatment processes described later. Aarp tax locations Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. Aarp tax locations Excise tax. Aarp tax locations   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. Aarp tax locations Extraction. Aarp tax locations   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. Aarp tax locations This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. Aarp tax locations Treatment processes. Aarp tax locations   The processes included as mining depend on the ore or mineral mined. Aarp tax locations To qualify as mining, the treatment processes must be applied by the mine owner or operator. Aarp tax locations For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. Aarp tax locations Transportation of more than 50 miles. Aarp tax locations   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. Aarp tax locations    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. Aarp tax locations Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. Aarp tax locations For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. Aarp tax locations irs. Aarp tax locations gov/irb/2013-01_IRB/ar11. Aarp tax locations html. Aarp tax locations Disposal of coal or iron ore. Aarp tax locations   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. Aarp tax locations You disposed of it after holding it for more than 1 year. Aarp tax locations You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Aarp tax locations Treat any gain on the disposition as a capital gain. Aarp tax locations Disposal to related person. Aarp tax locations   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. Aarp tax locations A related person (as listed in chapter 2 of Publication 544). Aarp tax locations A person owned or controlled by the same interests that own or control you. Aarp tax locations Geothermal deposits. Aarp tax locations   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. Aarp tax locations A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. Aarp tax locations For percentage depletion purposes, a geothermal deposit is not considered a gas well. Aarp tax locations   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. Aarp tax locations See Gross income from the property , earlier, under Oil and Gas Wells. Aarp tax locations Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. Aarp tax locations Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Aarp tax locations A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Aarp tax locations Bonuses and advanced royalties. Aarp tax locations   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. Aarp tax locations If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. Aarp tax locations Figuring cost depletion. Aarp tax locations   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. Aarp tax locations To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. Aarp tax locations Figuring percentage depletion. Aarp tax locations   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . Aarp tax locations Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. Aarp tax locations However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. Aarp tax locations Ending the lease. Aarp tax locations   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. Aarp tax locations Do this for the year the lease ends or is abandoned. Aarp tax locations Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. Aarp tax locations   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. Aarp tax locations Include this amount in income for the year the lease ends. Aarp tax locations Increase your adjusted basis in the property by the amount you include in income. Aarp tax locations Delay rentals. Aarp tax locations   These are payments for deferring development of the property. Aarp tax locations Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. Aarp tax locations These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Aarp tax locations Timber You can figure timber depletion only by the cost method. Aarp tax locations Percentage depletion does not apply to timber. Aarp tax locations Base your depletion on your cost or other basis in the timber. Aarp tax locations Your cost does not include the cost of land or any amounts recoverable through depreciation. Aarp tax locations Depletion takes place when you cut standing timber. Aarp tax locations You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. Aarp tax locations Figuring cost depletion. Aarp tax locations   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Aarp tax locations Timber units. Aarp tax locations   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. Aarp tax locations You measure the timber using board feet, log scale, cords, or other units. Aarp tax locations If you later determine that you have more or less units of timber, you must adjust the original estimate. Aarp tax locations   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. Aarp tax locations Depletion unit. Aarp tax locations   You figure your depletion unit each year by taking the following steps. Aarp tax locations Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Aarp tax locations Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. Aarp tax locations Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. Aarp tax locations Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. Aarp tax locations Divide the result of (2) by the result of (3). Aarp tax locations This is your depletion unit. Aarp tax locations Example. Aarp tax locations You bought a timber tract for $160,000 and the land was worth as much as the timber. Aarp tax locations Your basis for the timber is $80,000. Aarp tax locations Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). Aarp tax locations If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). Aarp tax locations When to claim depletion. Aarp tax locations   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). Aarp tax locations Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. Aarp tax locations The inventory is your basis for determining gain or loss in the tax year you sell the timber products. Aarp tax locations Example. Aarp tax locations The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. Aarp tax locations You would deduct $20,000 of the $40,000 depletion that year. Aarp tax locations You would add the remaining $20,000 depletion to your closing inventory of timber products. Aarp tax locations Electing to treat the cutting of timber as a sale or exchange. Aarp tax locations   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. Aarp tax locations You must make the election on your income tax return for the tax year to which it applies. Aarp tax locations If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. Aarp tax locations You generally report the gain as long-term capital gain. Aarp tax locations The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. Aarp tax locations For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Aarp tax locations   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. Aarp tax locations The prior election (and revocation) is disregarded for purposes of making a subsequent election. Aarp tax locations See Form T (Timber), Forest Activities Schedule, for more information. Aarp tax locations Form T. Aarp tax locations   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. Aarp tax locations Prev  Up  Next   Home   More Online Publications
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The Department of Agriculture's Rural Utilities Service provides funding, through grants, loans, loan guarantees, and payments, for the development of rural utilities infrastructure such as water, waste management, power and telecommunications.

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The Aarp Tax Locations

Aarp tax locations 4. Aarp tax locations   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Aarp tax locations However, the information shown on the filled-in forms is not from any actual person or scenario. Aarp tax locations Example 1—Mortgage loan modification. Aarp tax locations    In 2007, Nancy Oak bought a main home for $435,000. Aarp tax locations Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Aarp tax locations The loan was secured by the home. Aarp tax locations The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Aarp tax locations In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Aarp tax locations    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Aarp tax locations The FMV of Nancy's home at the time of the refinancing was $500,000. Aarp tax locations Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Aarp tax locations After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Aarp tax locations   In 2013, Nancy was unable to make her mortgage loan payments. Aarp tax locations On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Aarp tax locations Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Aarp tax locations   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Aarp tax locations Identifiable event code "F" appears in box 6. Aarp tax locations This box shows the reason the creditor has filed Form 1099-C. Aarp tax locations To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Aarp tax locations Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Aarp tax locations   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Aarp tax locations Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Aarp tax locations Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Aarp tax locations Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Aarp tax locations   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Aarp tax locations Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Aarp tax locations Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Aarp tax locations You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Aarp tax locations Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Aarp tax locations Please click the link to view the image. Aarp tax locations Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Aarp tax locations Please click the link to view the image. Aarp tax locations Form 1040, U. Aarp tax locations S. Aarp tax locations Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Aarp tax locations Please click the link to view the image. Aarp tax locations Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Aarp tax locations    In 2005, John and Mary Elm bought a main home for $335,000. Aarp tax locations John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Aarp tax locations The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Aarp tax locations   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Aarp tax locations Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Aarp tax locations   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Aarp tax locations Identifiable event code "D" appears in box 6. Aarp tax locations This box shows the reason the creditor has filed Form 1099-C. Aarp tax locations In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Aarp tax locations In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Aarp tax locations Their sample Form 1099-C is shown on this page. Aarp tax locations   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Aarp tax locations However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Aarp tax locations   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Aarp tax locations Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Aarp tax locations Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Aarp tax locations As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Aarp tax locations Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Aarp tax locations Thus, John and Mary leave line 10b of Form 982 blank. Aarp tax locations   John and Mary must also determine whether they have a gain or loss from the foreclosure. Aarp tax locations John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Aarp tax locations Because this loss relates to their home, it is a nondeductible loss. Aarp tax locations   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Aarp tax locations John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Aarp tax locations Please click the link to view the image. Aarp tax locations Form 1099-C, Cancellation of Debt Table 1-1. Aarp tax locations Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Aarp tax locations Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Aarp tax locations Otherwise, go to Part 2. Aarp tax locations 1. Aarp tax locations Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Aarp tax locations 00 2. Aarp tax locations Enter the fair market value of the transferred property $290,000. Aarp tax locations 00 3. Aarp tax locations Ordinary income from the cancellation of debt upon foreclosure or repossession. Aarp tax locations * Subtract line 2 from line 1. Aarp tax locations If less than zero, enter zero. Aarp tax locations Next, go to Part 2 $ 25,000. Aarp tax locations 00 Part 2. Aarp tax locations Gain or loss from foreclosure or repossession. Aarp tax locations   4. Aarp tax locations Enter the smaller of line 1 or line 2. Aarp tax locations If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Aarp tax locations 00 5. Aarp tax locations Enter any proceeds you received from the foreclosure sale   6. Aarp tax locations Add line 4 and line 5 $290,000. Aarp tax locations 00 7. Aarp tax locations Enter the adjusted basis of the transferred property $335,000. Aarp tax locations 00 8. Aarp tax locations Gain or loss from foreclosure or repossession. Aarp tax locations Subtract line 7 from line 6 ($ 45,000. Aarp tax locations 00) * The income may not be taxable. Aarp tax locations See chapter 1 for more details. Aarp tax locations Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Aarp tax locations Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Aarp tax locations Credit card debt $ 5,500 2. Aarp tax locations Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Aarp tax locations Car and other vehicle loans $ 4. Aarp tax locations Medical bills owed $ 5. Aarp tax locations Student loans $ 6. Aarp tax locations Accrued or past-due mortgage interest $ 7. Aarp tax locations Accrued or past-due real estate taxes $ 8. Aarp tax locations Accrued or past-due utilities (water, gas, electric) $ 9. Aarp tax locations Accrued or past-due child care costs $ 10. Aarp tax locations Federal or state income taxes remaining due (for prior tax years) $ 11. Aarp tax locations Judgments $ 12. Aarp tax locations Business debts (including those owed as a sole proprietor or partner) $ 13. Aarp tax locations Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Aarp tax locations Other liabilities (debts) not included above $ 15. Aarp tax locations Total liabilities immediately before the cancellation. Aarp tax locations Add lines 1 through 14. Aarp tax locations $ 320,500 Part II. Aarp tax locations Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Aarp tax locations Cash and bank account balances $ 6,000 17. Aarp tax locations Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Aarp tax locations Cars and other vehicles $ 19. Aarp tax locations Computers $ 20. Aarp tax locations Household goods and furnishings (for example, appliances, electronics, furniture, etc. Aarp tax locations ) $ 21. Aarp tax locations Tools $ 22. Aarp tax locations Jewelry $ 23. Aarp tax locations Clothing $ 24. Aarp tax locations Books $ 25. Aarp tax locations Stocks and bonds $ 26. Aarp tax locations Investments in coins, stamps, paintings, or other collectibles $ 27. Aarp tax locations Firearms, sports, photographic, and other hobby equipment $ 28. Aarp tax locations Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Aarp tax locations Interest in a pension plan $ 30. Aarp tax locations Interest in education accounts $ 31. Aarp tax locations Cash value of life insurance $ 32. Aarp tax locations Security deposits with landlords, utilities, and others $ 33. Aarp tax locations Interests in partnerships $ 34. Aarp tax locations Value of investment in a business $ 35. Aarp tax locations Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Aarp tax locations Other assets not included above $ 37. Aarp tax locations FMV of total assets immediately before the cancellation. Aarp tax locations Add lines 16 through 36. Aarp tax locations $ 309,000 Part III. Aarp tax locations Insolvency 38. Aarp tax locations Amount of Insolvency. Aarp tax locations Subtract line 37 from line 15. Aarp tax locations If zero or less, you are not insolvent. Aarp tax locations $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Aarp tax locations Please click the link to view the image. Aarp tax locations Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Aarp tax locations    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Aarp tax locations Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Aarp tax locations Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Aarp tax locations   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Aarp tax locations The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Aarp tax locations On December 26, 2013, the lender canceled the remaining debt. Aarp tax locations Kathy and Frank have no tax attributes other than basis of personal-use property. Aarp tax locations   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Aarp tax locations Identifiable event code "D" appears in box 6. Aarp tax locations This box shows the reason the creditor has filed Form 1099-C. Aarp tax locations Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Aarp tax locations Kathy and Frank are filing a joint return for 2013. Aarp tax locations   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Aarp tax locations Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Aarp tax locations Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Aarp tax locations Because this loss relates to their home, it is a nondeductible loss. Aarp tax locations   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Aarp tax locations Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Aarp tax locations Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Aarp tax locations The household furnishings originally cost $30,000. Aarp tax locations The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Aarp tax locations Kathy and Frank had no adjustments to the cost basis of the car. Aarp tax locations Kathy and Frank had no other assets or liabilities at the time of the cancellation. Aarp tax locations Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Aarp tax locations   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Aarp tax locations Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Aarp tax locations Kathy and Frank had no other assets or liabilities at that time. Aarp tax locations Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Aarp tax locations   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Aarp tax locations The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Aarp tax locations The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Aarp tax locations Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Aarp tax locations Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Aarp tax locations This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Aarp tax locations   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Aarp tax locations Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Aarp tax locations Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Aarp tax locations Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Aarp tax locations   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Aarp tax locations Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Aarp tax locations Thus, Kathy and Frank leave line 10b of Form 982 blank. Aarp tax locations However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Aarp tax locations As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Aarp tax locations Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Aarp tax locations Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Aarp tax locations Kathy and Frank reduce the basis in the car by $14,956. Aarp tax locations 52 ($43,000 x $16,000/$46,000). Aarp tax locations And they reduce the basis in the household furnishings by $28,043. Aarp tax locations 48 ($43,000 x $30,000/$46,000). Aarp tax locations   Following are Kathy and Frank's sample forms and worksheets. Aarp tax locations Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Aarp tax locations Please click the link to view the image. Aarp tax locations Form 1099-C, Cancellation of Debt Table 1-1. Aarp tax locations Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Aarp tax locations Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Aarp tax locations Otherwise, go to Part 2. Aarp tax locations 1. Aarp tax locations Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Aarp tax locations 00 2. Aarp tax locations Enter the fair market value of the transferred property $1,750,000. Aarp tax locations 00 3. Aarp tax locations Ordinary income from the cancellation of debt upon foreclosure or repossession. Aarp tax locations * Subtract line 2 from line 1. Aarp tax locations If less than zero, enter zero. Aarp tax locations Next, go to Part 2 $0. Aarp tax locations 00 Part 2. Aarp tax locations Gain or loss from foreclosure or repossession. Aarp tax locations   4. Aarp tax locations Enter the smaller of line 1 or line 2. Aarp tax locations If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Aarp tax locations $1,750,000. Aarp tax locations 00 5. Aarp tax locations Enter any proceeds you received from the foreclosure sale   6. Aarp tax locations Add line 4 and line 5 $1,750,000. Aarp tax locations 00 7. Aarp tax locations Enter the adjusted basis of the transferred property $3,000,000. Aarp tax locations 00 8. Aarp tax locations Gain or loss from foreclosure or repossession. Aarp tax locations Subtract line 7 from line 6 ($1,250,000. Aarp tax locations 00) * The income may not be taxable. Aarp tax locations See chapter 1 for more details. Aarp tax locations    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Aarp tax locations Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Aarp tax locations Credit card debt $ 18,000 2. Aarp tax locations Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Aarp tax locations Car and other vehicle loans $ 4. Aarp tax locations Medical bills owed $ 5. Aarp tax locations Student loans $ 6. Aarp tax locations Accrued or past-due mortgage interest $ 7. Aarp tax locations Accrued or past-due real estate taxes $ 8. Aarp tax locations Accrued or past-due utilities (water, gas, electric) $ 9. Aarp tax locations Accrued or past-due child care costs $ 10. Aarp tax locations Federal or state income taxes remaining due (for prior tax years) $ 11. Aarp tax locations Judgments $ 12. Aarp tax locations Business debts (including those owed as a sole proprietor or partner) $ 13. Aarp tax locations Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Aarp tax locations Other liabilities (debts) not included above $ 15. Aarp tax locations Total liabilities immediately before the cancellation. Aarp tax locations Add lines 1 through 14. Aarp tax locations $ 768,000 Part II. Aarp tax locations Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Aarp tax locations Cash and bank account balances $ 15,000 17. Aarp tax locations Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Aarp tax locations Cars and other vehicles $ 10,000 19. Aarp tax locations Computers $ 20. Aarp tax locations Household goods and furnishings (for example, appliances, electronics, furniture, etc. Aarp tax locations ) $ 17,000 21. Aarp tax locations Tools $ 22. Aarp tax locations Jewelry $ 23. Aarp tax locations Clothing $ 24. Aarp tax locations Books $ 25. Aarp tax locations Stocks and bonds $ 26. Aarp tax locations Investments in coins, stamps, paintings, or other collectibles $ 27. Aarp tax locations Firearms, sports, photographic, and other hobby equipment $ 28. Aarp tax locations Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Aarp tax locations Interest in a pension plan $ 30. Aarp tax locations Interest in education accounts $ 31. Aarp tax locations Cash value of life insurance $ 32. Aarp tax locations Security deposits with landlords, utilities, and others $ 33. Aarp tax locations Interests in partnerships $ 34. Aarp tax locations Value of investment in a business $ 35. Aarp tax locations Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Aarp tax locations Other assets not included above $ 37. Aarp tax locations FMV of total assets immediately before the cancellation. Aarp tax locations Add lines 16 through 36. Aarp tax locations $ 42,000 Part III. Aarp tax locations Insolvency 38. Aarp tax locations Amount of Insolvency. Aarp tax locations Subtract line 37 from line 15. Aarp tax locations If zero or less, you are not insolvent. Aarp tax locations $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Aarp tax locations Please click the link to view the image. Aarp tax locations Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications