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Amend taxes online Publication 554 - Introductory Material Table of Contents What's New Reminders IntroductionVolunteer Income Tax Assistance and Tax Counseling for the Elderly. Amend taxes online Ordering forms and publications. Amend taxes online Tax questions. Amend taxes online What's New Alternative minimum tax exemption increased. Amend taxes online  The AMT exemption amount has increased to $51,900 ($80,800 if married filing jointly or qualifying widow(er); $40,400 if married filing separately). Amend taxes online Earned income credit. Amend taxes online  The maximum amount of income you can earn and still get the credit has increased. Amend taxes online You may be able to take the credit if you earn less than: $14,340 ($19,680 if married filing jointly), do not have a qualifying child, and are at least 25 years old and under 65, $37,870 ($43,210 if married filing jointly), and you have one qualifying child, $43,038 ($48,378 if married filing jointly), and you have two qualifying children, or $46,227 ($51,567 if married filing jointly), and you have three or more qualifying children. Amend taxes online For more information, see Earned Income Credit , later. Amend taxes online Exemption phaseout. Amend taxes online  You lose at least part of the benefit of your exemptions if your adjusted gross income is above a certain amount. Amend taxes online For 2013, the phaseout begins at $150,000 for married individuals filing separate returns; $250,000 for single individuals; $275,000 for heads of household; and $300,000 for married individuals filing joint returns or qualifying widow(er)s. Amend taxes online For more information, see Phaseout of Exemptions in Publication 501. Amend taxes online Limit on itemized deductions. Amend taxes online   Beginning January 1, 2013, itemized deductions for taxpayers with adjusted gross incomes above $150,000 may be reduced. Amend taxes online See Overall limitation , later. Amend taxes online Medical and dental expenses. Amend taxes online   Beginning January 1, 2013, taxpayers 65 and older can deduct only the part of their medical and dental expenses that exceed 7. Amend taxes online 5% of their adjusted gross income (10% for taxpayers under 65). Amend taxes online Same-sex marriages. Amend taxes online  If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage. Amend taxes online For more information, see Publication 501. Amend taxes online Reminders Future developments. Amend taxes online  For the latest information about developments related to Publication 554, such as legislation enacted after it was published, go to www. Amend taxes online irs. Amend taxes online gov/pub554. Amend taxes online Tax return preparers. Amend taxes online  Choose your preparer carefully. Amend taxes online If you pay someone to prepare your return, the preparer is required, under the law, to sign the return and fill in the other blanks in the Paid Preparer's area of your return. Amend taxes online Remember, however, that you are still responsible for the accuracy of every item entered on your return. Amend taxes online If there is any underpayment, you are responsible for paying it, plus any interest and penalty that may be due. Amend taxes online Sale of home by surviving spouse. Amend taxes online  If you are an unmarried widow or widower, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Amend taxes online For more information, see Sale of Home , later. Amend taxes online Third party designee. Amend taxes online  You can check the “Yes” box in the Third Party Designee area of your return to authorize the IRS to discuss your return with your preparer, a friend, family member, or any other person you choose. Amend taxes online This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. Amend taxes online It also allows your designee to perform certain actions. Amend taxes online See your income tax return instructions for details. Amend taxes online Employment tax withholding. Amend taxes online  Your wages are subject to withholding for income tax, social security tax, and Medicare tax even if you are receiving social security benefits. Amend taxes online Photographs of missing children. Amend taxes online  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Amend taxes online Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Amend taxes online You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Amend taxes online Introduction The purpose of this publication is to provide a general overview of selected topics that are of interest to older taxpayers. Amend taxes online The publication will help you determine if you need to file a return and, if so, what items to report on your return. Amend taxes online Each topic is discussed only briefly, so you will find references to other free IRS publications that provide more detail on these topics if you need it. Amend taxes online Table I has a list of questions you may have about filing your federal tax return. Amend taxes online To the right of each question is the location of the answer in this publication. Amend taxes online Also, at the back of this publication there is an index to help you search for the topic you need. Amend taxes online While most federal income tax laws apply equally to all taxpayers, regardless of age, there are some provisions that give special treatment to older taxpayers. Amend taxes online The following are some examples. Amend taxes online Higher gross income threshold for filing. Amend taxes online You must be age 65 or older at the end of the year to get this benefit. Amend taxes online You are considered age 65 on the day before your 65th birthday. Amend taxes online Therefore, you are considered age 65 at the end of the year if your 65th birthday is on or before January 1 of the following year. Amend taxes online Higher standard deduction. Amend taxes online If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. Amend taxes online You are considered age 65 at the end of the year if your 65th birthday is on or before January 1 of the following year. Amend taxes online Credit for the elderly or the disabled. Amend taxes online If you qualify, you may benefit from the credit for the elderly or the disabled. Amend taxes online To determine if you qualify and how to figure this credit, see Credit for the Elderly or the Disabled , later. Amend taxes online Return preparation assistance. Amend taxes online   The IRS wants to make it easier for you to file your federal tax return. Amend taxes online You may find it helpful to visit a Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), or American Association of Retired Persons (AARP) Tax-Aide site near you. Amend taxes online Volunteer Income Tax Assistance and Tax Counseling for the Elderly. Amend taxes online   These programs provide free help for low-income taxpayers and taxpayers age 60 or older to fill in and file their returns. Amend taxes online For the VITA/TCE site nearest you, contact your local IRS office. Amend taxes online For more information, see Free help with your tax return under How To Get Tax Help. Amend taxes online   For the location of an AARP Tax-Aide site in your community, call 1-888-227-7669. Amend taxes online When asked, be ready to press in or speak your 5-digit ZIP code. Amend taxes online Or, you can visit their website on the Internet at www. Amend taxes online aarp. Amend taxes online org/money/taxaide. Amend taxes online Comments and suggestions. Amend taxes online   We welcome your comments about this publication and your suggestions for future editions. Amend taxes online   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Amend taxes online NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Amend taxes online Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Amend taxes online   You can send your comments from www. Amend taxes online irs. Amend taxes online gov/formspubs/. Amend taxes online Click on “More Information” and then on “Comment on Tax Forms and Publications. Amend taxes online ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Amend taxes online Ordering forms and publications. Amend taxes online   Visit www. Amend taxes online irs. Amend taxes online gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 business days after your request is received. Amend taxes online Internal Revenue Service 1201 N. Amend taxes online Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Amend taxes online   If you have a tax question, check the information available on IRS. Amend taxes online gov or call 1-800-829-1040. Amend taxes online We cannot answer tax questions sent to either of the above addresses. Amend taxes online Table I. Amend taxes online What You Should Know About Federal Taxes Note. Amend taxes online The following is a list of questions you may have about filling out your federal income tax return. Amend taxes online  To the right of each question is the location of the answer in this publication. Amend taxes online What I Should Know Where To Find the Answer Do I need to file a return? See chapter 1. Amend taxes online Is my income taxable or nontaxable?  If it is nontaxable, must I still report it? See chapter 2. Amend taxes online How do I report benefits I received from the Social Security Administration or the Railroad Retirement Board?  Are these benefits taxable? See Social Security and Equivalent Railroad Retirement Benefits in chapter 2. Amend taxes online Must I report the sale of my home?  If I had a gain, is any part of it taxable? See Sale of Home in chapter 2. Amend taxes online What are some of the items that I can deduct to reduce my income? See chapters 3 and 4. Amend taxes online How do I report the amounts I set aside for my IRA? See Individual Retirement Arrangement (IRA) Contributions and Deductions in chapter 3. Amend taxes online Would it be better for me to claim the standard deduction or itemize my deductions? See chapter 4. Amend taxes online What are some of the credits I can claim to reduce my tax? See chapter 5 for discussions on the credit for the elderly or the disabled, the child and dependent care credit, and the earned income credit. Amend taxes online Must I make estimated tax payments? See chapter 6. Amend taxes online How do I contact the IRS or get more information? See chapter 7. Amend taxes online Prev  Up  Next   Home   More Online Publications
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Amend taxes online 3. Amend taxes online   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Amend taxes online Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Amend taxes online Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Amend taxes online When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Amend taxes online Any remaining gain is a section 1231 gain. Amend taxes online Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Amend taxes online Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Amend taxes online Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Amend taxes online If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Amend taxes online Do not take that gain into account as section 1231 gain. Amend taxes online Section 1231 transactions. Amend taxes online   The following transactions result in gain or loss subject to section 1231 treatment. Amend taxes online Sales or exchanges of real property or depreciable personal property. Amend taxes online This property must be used in a trade or business and held longer than 1 year. Amend taxes online Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Amend taxes online Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Amend taxes online Sales or exchanges of leaseholds. Amend taxes online The leasehold must be used in a trade or business and held longer than 1 year. Amend taxes online Sales or exchanges of cattle and horses. Amend taxes online The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Amend taxes online Sales or exchanges of other livestock. Amend taxes online This livestock does not include poultry. Amend taxes online It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Amend taxes online Sales or exchanges of unharvested crops. Amend taxes online The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Amend taxes online You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Amend taxes online Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Amend taxes online Cutting of timber or disposal of timber, coal, or iron ore. Amend taxes online The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Amend taxes online Condemnations. Amend taxes online The condemned property must have been held longer than 1 year. Amend taxes online It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Amend taxes online It cannot be property held for personal use. Amend taxes online Casualties and thefts. Amend taxes online The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Amend taxes online You must have held the property longer than 1 year. Amend taxes online However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Amend taxes online For more information on casualties and thefts, see Publication 547. Amend taxes online Property for sale to customers. Amend taxes online   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Amend taxes online If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Amend taxes online Example. Amend taxes online You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Amend taxes online Customers make deposits on the reels, which you refund if the reels are returned within a year. Amend taxes online If they are not returned, you keep each deposit as the agreed-upon sales price. Amend taxes online Most reels are returned within the 1-year period. Amend taxes online You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Amend taxes online Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Amend taxes online Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Amend taxes online Copyrights. Amend taxes online    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Amend taxes online The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Amend taxes online Treatment as ordinary or capital. Amend taxes online   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Amend taxes online If you have a net section 1231 loss, it is ordinary loss. Amend taxes online If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Amend taxes online The rest, if any, is long-term capital gain. Amend taxes online Nonrecaptured section 1231 losses. Amend taxes online   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Amend taxes online Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Amend taxes online These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Amend taxes online Example. Amend taxes online In 2013, Ben has a $2,000 net section 1231 gain. Amend taxes online To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Amend taxes online From 2008 through 2012 he had the following section 1231 gains and losses. Amend taxes online Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Amend taxes online 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Amend taxes online To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Amend taxes online This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Amend taxes online On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Amend taxes online Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Amend taxes online Whether the adjusted basis was figured using depreciation or amortization another person claimed. Amend taxes online Corporate distributions. Amend taxes online   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Amend taxes online General asset accounts. Amend taxes online   Different rules apply to dispositions of property you depreciated using a general asset account. Amend taxes online For information on these rules, see Publication 946. Amend taxes online Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Amend taxes online See Gain Treated as Ordinary Income, later. Amend taxes online Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Amend taxes online See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Amend taxes online Section 1245 property defined. Amend taxes online   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Amend taxes online Personal property (either tangible or intangible). Amend taxes online Other tangible property (except buildings and their structural components) used as any of the following. Amend taxes online See Buildings and structural components below. Amend taxes online An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Amend taxes online A research facility in any of the activities in (a). Amend taxes online A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Amend taxes online That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Amend taxes online Amortization of certified pollution control facilities. Amend taxes online The section 179 expense deduction. Amend taxes online Deduction for clean-fuel vehicles and certain refueling property. Amend taxes online Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Amend taxes online Deduction for certain qualified refinery property. Amend taxes online Deduction for qualified energy efficient commercial building property. Amend taxes online Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Amend taxes online (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Amend taxes online ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Amend taxes online Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Amend taxes online Deduction for qualified tertiary injectant expenses. Amend taxes online Certain reforestation expenditures. Amend taxes online Deduction for election to expense qualified advanced mine safety equipment property. Amend taxes online Single purpose agricultural (livestock) or horticultural structures. Amend taxes online Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Amend taxes online Any railroad grading or tunnel bore. Amend taxes online Buildings and structural components. Amend taxes online   Section 1245 property does not include buildings and structural components. Amend taxes online The term building includes a house, barn, warehouse, or garage. Amend taxes online The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Amend taxes online   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Amend taxes online Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Amend taxes online   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Amend taxes online Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Amend taxes online Facility for bulk storage of fungible commodities. Amend taxes online   This term includes oil or gas storage tanks and grain storage bins. Amend taxes online Bulk storage means the storage of a commodity in a large mass before it is used. Amend taxes online For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Amend taxes online To be fungible, a commodity must be such that one part may be used in place of another. Amend taxes online   Stored materials that vary in composition, size, and weight are not fungible. Amend taxes online Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Amend taxes online For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Amend taxes online Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Amend taxes online The depreciation and amortization allowed or allowable on the property. Amend taxes online The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Amend taxes online A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Amend taxes online For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Amend taxes online See Gifts and Transfers at Death, later. Amend taxes online Use Part III of Form 4797 to figure the ordinary income part of the gain. Amend taxes online Depreciation taken on other property or taken by other taxpayers. Amend taxes online   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Amend taxes online Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Amend taxes online Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Amend taxes online Depreciation and amortization. Amend taxes online   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Amend taxes online Ordinary depreciation deductions. Amend taxes online Any special depreciation allowance you claimed. Amend taxes online Amortization deductions for all the following costs. Amend taxes online Acquiring a lease. Amend taxes online Lessee improvements. Amend taxes online Certified pollution control facilities. Amend taxes online Certain reforestation expenses. Amend taxes online Section 197 intangibles. Amend taxes online Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Amend taxes online Franchises, trademarks, and trade names acquired before August 11, 1993. Amend taxes online The section 179 deduction. Amend taxes online Deductions for all the following costs. Amend taxes online Removing barriers to the disabled and the elderly. Amend taxes online Tertiary injectant expenses. Amend taxes online Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Amend taxes online Environmental cleanup costs. Amend taxes online Certain reforestation expenses. Amend taxes online Qualified disaster expenses. Amend taxes online Any basis reduction for the investment credit (minus any basis increase for credit recapture). Amend taxes online Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Amend taxes online Example. Amend taxes online You file your returns on a calendar year basis. Amend taxes online In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Amend taxes online You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Amend taxes online You did not take the section 179 deduction. Amend taxes online You sold the truck in May 2013 for $7,000. Amend taxes online The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Amend taxes online Figure the gain treated as ordinary income as follows. Amend taxes online 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Amend taxes online   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Amend taxes online   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Amend taxes online Depreciation allowed or allowable. Amend taxes online   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Amend taxes online However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Amend taxes online If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Amend taxes online   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Amend taxes online Multiple asset accounts. Amend taxes online   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Amend taxes online Example. Amend taxes online In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Amend taxes online All of the depreciation was recorded in a single depreciation account. Amend taxes online After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Amend taxes online You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Amend taxes online However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Amend taxes online Normal retirement. Amend taxes online   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Amend taxes online Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Amend taxes online To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Amend taxes online Section 1250 property defined. Amend taxes online   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Amend taxes online It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Amend taxes online A fee simple interest in land is not included because it is not depreciable. Amend taxes online   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Amend taxes online Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Amend taxes online For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Amend taxes online For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Amend taxes online If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Amend taxes online You will not have additional depreciation if any of the following conditions apply to the property disposed of. Amend taxes online You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Amend taxes online In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Amend taxes online The property was residential low-income rental property you held for 162/3 years or longer. Amend taxes online For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Amend taxes online You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Amend taxes online The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Amend taxes online These properties are depreciated using the straight line method. Amend taxes online In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Amend taxes online Depreciation taken by other taxpayers or on other property. Amend taxes online   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Amend taxes online Example. Amend taxes online Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Amend taxes online Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Amend taxes online On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Amend taxes online At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Amend taxes online Depreciation allowed or allowable. Amend taxes online   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Amend taxes online If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Amend taxes online Retired or demolished property. Amend taxes online   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Amend taxes online Example. Amend taxes online A wing of your building is totally destroyed by fire. Amend taxes online The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Amend taxes online Figuring straight line depreciation. Amend taxes online   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Amend taxes online If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Amend taxes online   Salvage value and useful life are not used for the ACRS method of depreciation. Amend taxes online Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Amend taxes online   The straight line method is applied without any basis reduction for the investment credit. Amend taxes online Property held by lessee. Amend taxes online   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Amend taxes online This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Amend taxes online The same rule applies to the cost of acquiring a lease. Amend taxes online   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Amend taxes online However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Amend taxes online Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Amend taxes online The percentages for these types of real property are as follows. Amend taxes online Nonresidential real property. Amend taxes online   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Amend taxes online For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Amend taxes online Residential rental property. Amend taxes online   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Amend taxes online The percentage for periods before 1976 is zero. Amend taxes online Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Amend taxes online Low-income housing. Amend taxes online    Low-income housing includes all the following types of residential rental property. Amend taxes online Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Amend taxes online Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Amend taxes online Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. Amend taxes online Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Amend taxes online   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Amend taxes online If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Amend taxes online Foreclosure. Amend taxes online   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Amend taxes online Example. Amend taxes online On June 1, 2001, you acquired low-income housing property. Amend taxes online On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Amend taxes online The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Amend taxes online The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Amend taxes online Therefore, 70% of the additional depreciation is treated as ordinary income. Amend taxes online Holding period. Amend taxes online   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Amend taxes online For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Amend taxes online If you sold it on January 2, 2013, the holding period is exactly 192 full months. Amend taxes online The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Amend taxes online Holding period for constructed, reconstructed, or erected property. Amend taxes online   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Amend taxes online Property acquired by gift or received in a tax-free transfer. Amend taxes online   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Amend taxes online   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Amend taxes online See Low-Income Housing With Two or More Elements, next. Amend taxes online Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Amend taxes online The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Amend taxes online The following are the types of separate elements. Amend taxes online A separate improvement (defined below). Amend taxes online The basic section 1250 property plus improvements not qualifying as separate improvements. Amend taxes online The units placed in service at different times before all the section 1250 property is finished. Amend taxes online For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Amend taxes online As a result, the apartment house consists of three separate elements. Amend taxes online The 36-month test for separate improvements. Amend taxes online   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Amend taxes online Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Amend taxes online Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Amend taxes online $5,000. Amend taxes online The 1-year test. Amend taxes online   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Amend taxes online The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Amend taxes online In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Amend taxes online Example. Amend taxes online The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Amend taxes online During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Amend taxes online The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Amend taxes online However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Amend taxes online Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Amend taxes online Addition to the capital account. Amend taxes online   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Amend taxes online   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Amend taxes online For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Amend taxes online The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Amend taxes online The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Amend taxes online   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Amend taxes online If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Amend taxes online Unadjusted basis. Amend taxes online   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Amend taxes online However, the cost of components retired before that date is not included in the unadjusted basis. Amend taxes online Holding period. Amend taxes online   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Amend taxes online The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Amend taxes online The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Amend taxes online The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Amend taxes online   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Amend taxes online Use the first day of a calendar month that is closest to the middle of the tax year. Amend taxes online If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Amend taxes online Figuring ordinary income attributable to each separate element. Amend taxes online   Figure ordinary income attributable to each separate element as follows. Amend taxes online   Step 1. Amend taxes online Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Amend taxes online   Step 2. Amend taxes online Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Amend taxes online   Step 3. Amend taxes online Multiply the result in Step 2 by the applicable percentage for the element. Amend taxes online Example. Amend taxes online You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Amend taxes online The property consisted of four elements (W, X, Y, and Z). Amend taxes online Step 1. Amend taxes online The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Amend taxes online The sum of the additional depreciation for all the elements is $24,000. Amend taxes online Step 2. Amend taxes online The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Amend taxes online Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Amend taxes online $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Amend taxes online Step 3. Amend taxes online The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Amend taxes online From these facts, the sum of the ordinary income for each element is figured as follows. Amend taxes online   Step 1 Step 2 Step 3 Ordinary Income W . Amend taxes online 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Amend taxes online 25 5,000 92% 4,600 Z . Amend taxes online 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Amend taxes online In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Amend taxes online In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Amend taxes online Figure the additional depreciation for the periods after 1975. Amend taxes online Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Amend taxes online Stop here if this is residential rental property or if (2) is equal to or more than (1). Amend taxes online This is the gain treated as ordinary income because of additional depreciation. Amend taxes online Subtract (2) from (1). Amend taxes online Figure the additional depreciation for periods after 1969 but before 1976. Amend taxes online Add the lesser of (4) or (5) to the result in (3). Amend taxes online This is the gain treated as ordinary income because of additional depreciation. Amend taxes online A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Amend taxes online Use Form 4797, Part III, to figure the ordinary income part of the gain. Amend taxes online Corporations. Amend taxes online   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Amend taxes online The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Amend taxes online Report this additional ordinary income on Form 4797, Part III, line 26 (f). Amend taxes online Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Amend taxes online This applies even if no payments are received in that year. Amend taxes online If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Amend taxes online For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Amend taxes online If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Amend taxes online To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Amend taxes online Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Amend taxes online For a detailed discussion of installment sales, see Publication 537. Amend taxes online Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Amend taxes online However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Amend taxes online For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Amend taxes online See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Amend taxes online Part gift and part sale or exchange. Amend taxes online   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Amend taxes online If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Amend taxes online However, see Bargain sale to charity, later. Amend taxes online Example. Amend taxes online You transferred depreciable personal property to your son for $20,000. Amend taxes online When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Amend taxes online You took depreciation of $30,000. Amend taxes online You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Amend taxes online You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Amend taxes online You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Amend taxes online Gift to charitable organization. Amend taxes online   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Amend taxes online Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Amend taxes online   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Amend taxes online For more information, see Giving Property That Has Increased in Value in Publication 526. Amend taxes online Bargain sale to charity. Amend taxes online   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Amend taxes online First, figure the ordinary income as if you had sold the property at its fair market value. Amend taxes online Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Amend taxes online See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Amend taxes online Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Amend taxes online Example. Amend taxes online You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Amend taxes online Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Amend taxes online If you had sold the property at its fair market value, your ordinary income would have been $5,000. Amend taxes online Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Amend taxes online Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Amend taxes online For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Amend taxes online However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Amend taxes online Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Amend taxes online Example 1. Amend taxes online Janet Smith owned depreciable property that, upon her death, was inherited by her son. Amend taxes online No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Amend taxes online However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Amend taxes online Example 2. Amend taxes online The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Amend taxes online If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Amend taxes online Ordinary income from depreciation must be reported by the trust on the transfer. Amend taxes online Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Amend taxes online For information on like-kind exchanges and involuntary conversions, see chapter 1. Amend taxes online Depreciable personal property. Amend taxes online   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Amend taxes online The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Amend taxes online The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Amend taxes online Example 1. Amend taxes online You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Amend taxes online The old machine cost you $5,000 two years ago. Amend taxes online You took depreciation deductions of $3,950. Amend taxes online Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Amend taxes online Example 2. Amend taxes online You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Amend taxes online This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Amend taxes online You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Amend taxes online Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Amend taxes online All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Amend taxes online Example 3. Amend taxes online A fire destroyed office machinery you bought for $116,000. Amend taxes online The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Amend taxes online You received a $117,000 insurance payment, realizing a gain of $92,640. Amend taxes online You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Amend taxes online $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Amend taxes online The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Amend taxes online The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Amend taxes online 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Amend taxes online Depreciable real property. Amend taxes online   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Amend taxes online The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Amend taxes online The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Amend taxes online   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Amend taxes online Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Amend taxes online Example. Amend taxes online The state paid you $116,000 when it condemned your depreciable real property for public use. Amend taxes online You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Amend taxes online You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Amend taxes online You choose to postpone reporting the gain. Amend taxes online If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Amend taxes online The ordinary income to be reported is $6,000, which is the greater of the following amounts. Amend taxes online The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Amend taxes online The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Amend taxes online   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Amend taxes online Basis of property acquired. Amend taxes online   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Amend taxes online   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Amend taxes online However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Amend taxes online Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Amend taxes online Add the fair market value (or cost) of the other property acquired to the result in (1). Amend taxes online Divide the result in (1) by the result in (2). Amend taxes online Multiply the total basis by the result in (3). Amend taxes online This is the basis of the depreciable real property acquired. Amend taxes online If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Amend taxes online Subtract the result in (4) from the total basis. Amend taxes online This is the basis of the other property acquired. Amend taxes online If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Amend taxes online Example 1. Amend taxes online In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Amend taxes online The property's adjusted basis was $38,400, with additional depreciation of $14,932. Amend taxes online On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Amend taxes online Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Amend taxes online You chose to postpone reporting the gain under the involuntary conversion rules. Amend taxes online Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Amend taxes online The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Amend taxes online The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Amend taxes online If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Amend taxes online Example 2. Amend taxes online John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Amend taxes online He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Amend taxes online He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Amend taxes online Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Amend taxes online The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Amend taxes online The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Amend taxes online The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Amend taxes online The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Amend taxes online 4. Amend taxes online The basis of the depreciable real property is $12,000. Amend taxes online This is the $30,000 total basis multiplied by the 0. Amend taxes online 4 figured in (3). Amend taxes online The basis of the other property (land) is $18,000. Amend taxes online This is the $30,000 total basis minus the $12,000 figured in (4). Amend taxes online The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Amend taxes online Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Amend taxes online Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Amend taxes online See chapter 2. Amend taxes online In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Amend taxes online In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Amend taxes online These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Amend taxes online The comparison should take into account all the following facts and circumstances. Amend taxes online The original cost and reproduction cost of construction, erection, or production. Amend taxes online The remaining economic useful life. Amend taxes online The state of obsolescence. Amend taxes online The anticipated expenditures required to maintain, renovate, or modernize the properties. Amend taxes online Like-kind exchanges and involuntary conversions. Amend taxes online   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Amend taxes online The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Amend taxes online The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Amend taxes online   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Amend taxes online The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Amend taxes online If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Amend taxes online Example. Amend taxes online A fire destroyed your property with a total fair market value of $50,000. Amend taxes online It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Amend taxes online You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Amend taxes online The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Amend taxes online You choose to postpone reporting your gain from the involuntary conversion. Amend taxes online You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Amend taxes online The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Amend taxes online The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Amend taxes online The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Amend taxes online Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Amend taxes online The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Amend taxes online All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Amend taxes online Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Amend taxes online However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 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