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Ammend Taxes

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Ammend Taxes

Ammend taxes 3. Ammend taxes   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. Ammend taxes 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. Ammend taxes Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Ammend taxes 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. Ammend taxes Any remaining gain is a section 1231 gain. Ammend taxes 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. Ammend taxes Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Ammend taxes Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Ammend taxes 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). Ammend taxes Do not take that gain into account as section 1231 gain. Ammend taxes Section 1231 transactions. Ammend taxes   The following transactions result in gain or loss subject to section 1231 treatment. Ammend taxes Sales or exchanges of real property or depreciable personal property. Ammend taxes This property must be used in a trade or business and held longer than 1 year. Ammend taxes Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Ammend taxes Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Ammend taxes Sales or exchanges of leaseholds. Ammend taxes The leasehold must be used in a trade or business and held longer than 1 year. Ammend taxes Sales or exchanges of cattle and horses. Ammend taxes The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Ammend taxes Sales or exchanges of other livestock. Ammend taxes This livestock does not include poultry. Ammend taxes It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Ammend taxes Sales or exchanges of unharvested crops. Ammend taxes 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. Ammend taxes 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). Ammend taxes Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Ammend taxes Cutting of timber or disposal of timber, coal, or iron ore. Ammend taxes The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Ammend taxes Condemnations. Ammend taxes The condemned property must have been held longer than 1 year. Ammend taxes 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. Ammend taxes It cannot be property held for personal use. Ammend taxes Casualties and thefts. Ammend taxes 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). Ammend taxes You must have held the property longer than 1 year. Ammend taxes 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. Ammend taxes For more information on casualties and thefts, see Publication 547. Ammend taxes Property for sale to customers. Ammend taxes   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Ammend taxes 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. Ammend taxes Example. Ammend taxes You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Ammend taxes Customers make deposits on the reels, which you refund if the reels are returned within a year. Ammend taxes If they are not returned, you keep each deposit as the agreed-upon sales price. Ammend taxes Most reels are returned within the 1-year period. Ammend taxes You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Ammend taxes Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Ammend taxes Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Ammend taxes Copyrights. Ammend taxes    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). Ammend taxes The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Ammend taxes Treatment as ordinary or capital. Ammend taxes   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Ammend taxes If you have a net section 1231 loss, it is ordinary loss. Ammend taxes 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. Ammend taxes The rest, if any, is long-term capital gain. Ammend taxes Nonrecaptured section 1231 losses. Ammend taxes   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. Ammend taxes 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. Ammend taxes These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Ammend taxes Example. Ammend taxes In 2013, Ben has a $2,000 net section 1231 gain. Ammend taxes 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. Ammend taxes From 2008 through 2012 he had the following section 1231 gains and losses. Ammend taxes 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. Ammend taxes 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. Ammend taxes 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. Ammend taxes This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Ammend taxes On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Ammend taxes Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Ammend taxes Whether the adjusted basis was figured using depreciation or amortization another person claimed. Ammend taxes Corporate distributions. Ammend taxes   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Ammend taxes General asset accounts. Ammend taxes   Different rules apply to dispositions of property you depreciated using a general asset account. Ammend taxes For information on these rules, see Publication 946. Ammend taxes 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. Ammend taxes See Gain Treated as Ordinary Income, later. Ammend taxes Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Ammend taxes See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Ammend taxes Section 1245 property defined. Ammend taxes   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. Ammend taxes Personal property (either tangible or intangible). Ammend taxes Other tangible property (except buildings and their structural components) used as any of the following. Ammend taxes See Buildings and structural components below. Ammend taxes An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Ammend taxes A research facility in any of the activities in (a). Ammend taxes A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Ammend taxes That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Ammend taxes Amortization of certified pollution control facilities. Ammend taxes The section 179 expense deduction. Ammend taxes Deduction for clean-fuel vehicles and certain refueling property. Ammend taxes Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Ammend taxes Deduction for certain qualified refinery property. Ammend taxes Deduction for qualified energy efficient commercial building property. Ammend taxes Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Ammend taxes (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Ammend taxes ) 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). Ammend taxes Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Ammend taxes Deduction for qualified tertiary injectant expenses. Ammend taxes Certain reforestation expenditures. Ammend taxes Deduction for election to expense qualified advanced mine safety equipment property. Ammend taxes Single purpose agricultural (livestock) or horticultural structures. Ammend taxes Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Ammend taxes Any railroad grading or tunnel bore. Ammend taxes Buildings and structural components. Ammend taxes   Section 1245 property does not include buildings and structural components. Ammend taxes The term building includes a house, barn, warehouse, or garage. Ammend taxes The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Ammend taxes   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Ammend taxes 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. Ammend taxes   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. Ammend taxes 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. Ammend taxes Facility for bulk storage of fungible commodities. Ammend taxes   This term includes oil or gas storage tanks and grain storage bins. Ammend taxes Bulk storage means the storage of a commodity in a large mass before it is used. Ammend taxes For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Ammend taxes To be fungible, a commodity must be such that one part may be used in place of another. Ammend taxes   Stored materials that vary in composition, size, and weight are not fungible. Ammend taxes 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. Ammend taxes For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Ammend taxes 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. Ammend taxes The depreciation and amortization allowed or allowable on the property. Ammend taxes The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Ammend taxes A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Ammend taxes 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. Ammend taxes See Gifts and Transfers at Death, later. Ammend taxes Use Part III of Form 4797 to figure the ordinary income part of the gain. Ammend taxes Depreciation taken on other property or taken by other taxpayers. Ammend taxes   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Ammend taxes Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Ammend taxes 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). Ammend taxes Depreciation and amortization. Ammend taxes   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Ammend taxes Ordinary depreciation deductions. Ammend taxes Any special depreciation allowance you claimed. Ammend taxes Amortization deductions for all the following costs. Ammend taxes Acquiring a lease. Ammend taxes Lessee improvements. Ammend taxes Certified pollution control facilities. Ammend taxes Certain reforestation expenses. Ammend taxes Section 197 intangibles. Ammend taxes Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Ammend taxes Franchises, trademarks, and trade names acquired before August 11, 1993. Ammend taxes The section 179 deduction. Ammend taxes Deductions for all the following costs. Ammend taxes Removing barriers to the disabled and the elderly. Ammend taxes Tertiary injectant expenses. Ammend taxes Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Ammend taxes Environmental cleanup costs. Ammend taxes Certain reforestation expenses. Ammend taxes Qualified disaster expenses. Ammend taxes Any basis reduction for the investment credit (minus any basis increase for credit recapture). Ammend taxes Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Ammend taxes Example. Ammend taxes You file your returns on a calendar year basis. Ammend taxes 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. Ammend taxes You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Ammend taxes You did not take the section 179 deduction. Ammend taxes You sold the truck in May 2013 for $7,000. Ammend taxes The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Ammend taxes Figure the gain treated as ordinary income as follows. Ammend taxes 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. Ammend taxes   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. Ammend taxes   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. Ammend taxes Depreciation allowed or allowable. Ammend taxes   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. Ammend taxes 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. Ammend taxes 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. Ammend taxes   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Ammend taxes Multiple asset accounts. Ammend taxes   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. Ammend taxes Example. Ammend taxes In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Ammend taxes All of the depreciation was recorded in a single depreciation account. Ammend taxes After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Ammend taxes You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Ammend taxes 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. Ammend taxes Normal retirement. Ammend taxes   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. Ammend taxes 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. Ammend taxes To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Ammend taxes Section 1250 property defined. Ammend taxes   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Ammend taxes It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Ammend taxes A fee simple interest in land is not included because it is not depreciable. Ammend taxes   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Ammend taxes 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. Ammend taxes For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Ammend taxes For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Ammend taxes If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Ammend taxes You will not have additional depreciation if any of the following conditions apply to the property disposed of. Ammend taxes 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. Ammend taxes 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. Ammend taxes The property was residential low-income rental property you held for 162/3 years or longer. Ammend taxes 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. Ammend taxes 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. Ammend taxes 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. Ammend taxes These properties are depreciated using the straight line method. Ammend taxes In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Ammend taxes Depreciation taken by other taxpayers or on other property. Ammend taxes   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Ammend taxes Example. Ammend taxes Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Ammend taxes 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. Ammend taxes 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. Ammend taxes At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Ammend taxes Depreciation allowed or allowable. Ammend taxes   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. Ammend taxes 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. Ammend taxes Retired or demolished property. Ammend taxes   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. Ammend taxes Example. Ammend taxes A wing of your building is totally destroyed by fire. Ammend taxes 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. Ammend taxes Figuring straight line depreciation. Ammend taxes   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. Ammend taxes 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. Ammend taxes   Salvage value and useful life are not used for the ACRS method of depreciation. Ammend taxes Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Ammend taxes   The straight line method is applied without any basis reduction for the investment credit. Ammend taxes Property held by lessee. Ammend taxes   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. Ammend taxes 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. Ammend taxes The same rule applies to the cost of acquiring a lease. Ammend taxes   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Ammend taxes 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. Ammend taxes 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. Ammend taxes The percentages for these types of real property are as follows. Ammend taxes Nonresidential real property. Ammend taxes   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Ammend taxes For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Ammend taxes Residential rental property. Ammend taxes   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%. Ammend taxes The percentage for periods before 1976 is zero. Ammend taxes Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Ammend taxes Low-income housing. Ammend taxes    Low-income housing includes all the following types of residential rental property. Ammend taxes 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. Ammend taxes Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Ammend taxes 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. Ammend taxes Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Ammend taxes   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Ammend taxes 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. Ammend taxes Foreclosure. Ammend taxes   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. Ammend taxes Example. Ammend taxes On June 1, 2001, you acquired low-income housing property. Ammend taxes 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. Ammend taxes The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Ammend taxes 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. Ammend taxes Therefore, 70% of the additional depreciation is treated as ordinary income. Ammend taxes Holding period. Ammend taxes   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Ammend taxes For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Ammend taxes If you sold it on January 2, 2013, the holding period is exactly 192 full months. Ammend taxes The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Ammend taxes Holding period for constructed, reconstructed, or erected property. Ammend taxes   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. Ammend taxes Property acquired by gift or received in a tax-free transfer. Ammend taxes   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. Ammend taxes   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. Ammend taxes See Low-Income Housing With Two or More Elements, next. Ammend taxes 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. Ammend taxes The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Ammend taxes The following are the types of separate elements. Ammend taxes A separate improvement (defined below). Ammend taxes The basic section 1250 property plus improvements not qualifying as separate improvements. Ammend taxes The units placed in service at different times before all the section 1250 property is finished. Ammend taxes 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. Ammend taxes As a result, the apartment house consists of three separate elements. Ammend taxes The 36-month test for separate improvements. Ammend taxes   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. Ammend taxes 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. Ammend taxes 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). Ammend taxes $5,000. Ammend taxes The 1-year test. Ammend taxes   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. Ammend taxes The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Ammend taxes 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. Ammend taxes Example. Ammend taxes The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Ammend taxes During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Ammend taxes 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. Ammend taxes However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Ammend taxes Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Ammend taxes Addition to the capital account. Ammend taxes   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. Ammend taxes   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Ammend taxes 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. Ammend taxes The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Ammend taxes 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. Ammend taxes   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Ammend taxes 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. Ammend taxes Unadjusted basis. Ammend taxes   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. Ammend taxes However, the cost of components retired before that date is not included in the unadjusted basis. Ammend taxes Holding period. Ammend taxes   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Ammend taxes 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. Ammend taxes 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. Ammend taxes The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Ammend taxes   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. Ammend taxes Use the first day of a calendar month that is closest to the middle of the tax year. Ammend taxes If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Ammend taxes Figuring ordinary income attributable to each separate element. Ammend taxes   Figure ordinary income attributable to each separate element as follows. Ammend taxes   Step 1. Ammend taxes 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. Ammend taxes   Step 2. Ammend taxes 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). Ammend taxes   Step 3. Ammend taxes Multiply the result in Step 2 by the applicable percentage for the element. Ammend taxes Example. Ammend taxes You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Ammend taxes The property consisted of four elements (W, X, Y, and Z). Ammend taxes Step 1. Ammend taxes The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Ammend taxes The sum of the additional depreciation for all the elements is $24,000. Ammend taxes Step 2. Ammend taxes The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Ammend taxes Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Ammend taxes $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Ammend taxes Step 3. Ammend taxes The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Ammend taxes From these facts, the sum of the ordinary income for each element is figured as follows. Ammend taxes   Step 1 Step 2 Step 3 Ordinary Income W . Ammend taxes 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Ammend taxes 25 5,000 92% 4,600 Z . Ammend taxes 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. Ammend taxes In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Ammend taxes In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Ammend taxes Figure the additional depreciation for the periods after 1975. Ammend taxes Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Ammend taxes Stop here if this is residential rental property or if (2) is equal to or more than (1). Ammend taxes This is the gain treated as ordinary income because of additional depreciation. Ammend taxes Subtract (2) from (1). Ammend taxes Figure the additional depreciation for periods after 1969 but before 1976. Ammend taxes Add the lesser of (4) or (5) to the result in (3). Ammend taxes This is the gain treated as ordinary income because of additional depreciation. Ammend taxes A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Ammend taxes Use Form 4797, Part III, to figure the ordinary income part of the gain. Ammend taxes Corporations. Ammend taxes   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Ammend taxes 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. Ammend taxes Report this additional ordinary income on Form 4797, Part III, line 26 (f). Ammend taxes 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. Ammend taxes This applies even if no payments are received in that year. Ammend taxes If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Ammend taxes For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Ammend taxes 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. Ammend taxes To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Ammend taxes Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Ammend taxes For a detailed discussion of installment sales, see Publication 537. Ammend taxes Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Ammend taxes 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. Ammend taxes For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Ammend taxes See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Ammend taxes Part gift and part sale or exchange. Ammend taxes   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. Ammend taxes 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. Ammend taxes However, see Bargain sale to charity, later. Ammend taxes Example. Ammend taxes You transferred depreciable personal property to your son for $20,000. Ammend taxes When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Ammend taxes You took depreciation of $30,000. Ammend taxes 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. Ammend taxes 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. Ammend taxes 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. Ammend taxes Gift to charitable organization. Ammend taxes   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. Ammend taxes Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Ammend taxes   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. Ammend taxes For more information, see Giving Property That Has Increased in Value in Publication 526. Ammend taxes Bargain sale to charity. Ammend taxes   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. Ammend taxes First, figure the ordinary income as if you had sold the property at its fair market value. Ammend taxes 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. Ammend taxes See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Ammend taxes Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Ammend taxes Example. Ammend taxes You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Ammend taxes Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Ammend taxes If you had sold the property at its fair market value, your ordinary income would have been $5,000. Ammend taxes Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Ammend taxes 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. Ammend taxes For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Ammend taxes 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. Ammend taxes 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. Ammend taxes Example 1. Ammend taxes Janet Smith owned depreciable property that, upon her death, was inherited by her son. Ammend taxes 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. Ammend taxes 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. Ammend taxes Example 2. Ammend taxes The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Ammend taxes 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. Ammend taxes Ordinary income from depreciation must be reported by the trust on the transfer. Ammend taxes 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. Ammend taxes For information on like-kind exchanges and involuntary conversions, see chapter 1. Ammend taxes Depreciable personal property. Ammend taxes   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. Ammend taxes The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Ammend taxes The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Ammend taxes Example 1. Ammend taxes You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Ammend taxes The old machine cost you $5,000 two years ago. Ammend taxes You took depreciation deductions of $3,950. Ammend taxes 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. Ammend taxes Example 2. Ammend taxes You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Ammend taxes 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). Ammend taxes You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Ammend taxes Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Ammend taxes All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Ammend taxes Example 3. Ammend taxes A fire destroyed office machinery you bought for $116,000. Ammend taxes The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Ammend taxes You received a $117,000 insurance payment, realizing a gain of $92,640. Ammend taxes 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. Ammend taxes $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. Ammend taxes 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. Ammend taxes The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Ammend taxes 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. Ammend taxes Depreciable real property. Ammend taxes   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. Ammend taxes 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. Ammend taxes 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. Ammend taxes   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. Ammend taxes Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Ammend taxes Example. Ammend taxes The state paid you $116,000 when it condemned your depreciable real property for public use. Ammend taxes 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). Ammend taxes You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Ammend taxes You choose to postpone reporting the gain. Ammend taxes 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. Ammend taxes The ordinary income to be reported is $6,000, which is the greater of the following amounts. Ammend taxes 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. Ammend taxes 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. Ammend taxes   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Ammend taxes Basis of property acquired. Ammend taxes   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. Ammend taxes   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). Ammend taxes However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Ammend taxes 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. Ammend taxes Add the fair market value (or cost) of the other property acquired to the result in (1). Ammend taxes Divide the result in (1) by the result in (2). Ammend taxes Multiply the total basis by the result in (3). Ammend taxes This is the basis of the depreciable real property acquired. Ammend taxes 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). Ammend taxes Subtract the result in (4) from the total basis. Ammend taxes This is the basis of the other property acquired. Ammend taxes 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). Ammend taxes Example 1. Ammend taxes 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. Ammend taxes The property's adjusted basis was $38,400, with additional depreciation of $14,932. Ammend taxes On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Ammend taxes Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Ammend taxes You chose to postpone reporting the gain under the involuntary conversion rules. Ammend taxes 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. Ammend taxes The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Ammend taxes The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Ammend taxes 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. Ammend taxes Example 2. Ammend taxes John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Ammend taxes He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Ammend taxes He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Ammend taxes 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. Ammend taxes The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Ammend taxes The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Ammend taxes The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Ammend taxes The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Ammend taxes 4. Ammend taxes The basis of the depreciable real property is $12,000. Ammend taxes This is the $30,000 total basis multiplied by the 0. Ammend taxes 4 figured in (3). Ammend taxes The basis of the other property (land) is $18,000. Ammend taxes This is the $30,000 total basis minus the $12,000 figured in (4). Ammend taxes 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. Ammend taxes 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. Ammend taxes Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Ammend taxes See chapter 2. Ammend taxes 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. Ammend taxes In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Ammend taxes These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Ammend taxes The comparison should take into account all the following facts and circumstances. Ammend taxes The original cost and reproduction cost of construction, erection, or production. Ammend taxes The remaining economic useful life. Ammend taxes The state of obsolescence. Ammend taxes The anticipated expenditures required to maintain, renovate, or modernize the properties. Ammend taxes Like-kind exchanges and involuntary conversions. Ammend taxes   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. Ammend taxes 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. Ammend taxes 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. Ammend taxes   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. Ammend taxes 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. Ammend taxes 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. Ammend taxes Example. Ammend taxes A fire destroyed your property with a total fair market value of $50,000. Ammend taxes It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Ammend taxes 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. Ammend taxes The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Ammend taxes You choose to postpone reporting your gain from the involuntary conversion. Ammend taxes You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Ammend taxes 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. Ammend taxes The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Ammend taxes The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Ammend taxes Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Ammend taxes 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. Ammend taxes 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. Ammend taxes Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Ammend taxes 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. Ammend taxes Prev  Up  Next   Home   More Online Publications
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    The U.S. Food and Drug Administration is warning the public about criminals posing as FDA special agents and other law enforcement personnel as part of a continued international extortion scam. The criminals call the victims who in most cases previously purchased drugs over the Internet or via "telepharmacies" and identify themselves as FDA special agents or other law enforcement officials. The criminals inform the victims that purchasing drugs over the Internet or the telephone is illegal, and that law enforcement action will be pursued unless a fine or fee ranging from $100 to $250,000 is paid. Victims often also have fraudulent transactions placed against their credit cards.
  • FTC Warns Consumers About Scam Artists' Pitch for Potassium Iodide Treatment
    Recent reports of events in Japan are causing scam artists to try to convince consumers that they need potassium iodide pills and drops to protect themselves. Potassium iodide, or KI, can help prevent thyroid cancer, which is one of the biggest risks from contamination with radioactive iodine. However, public health experts agree that U.S. residents should not buy or take potassium iodide unless specifically notified or instructed by public health officials.
  • Medicare Beneficiaries Urged to Be on the Look-out for Phone Scams
    Seniors and people with disabilities should be aware of a scheme that asks Medicare beneficiaries for money and checking account information to help them enroll in a Medicare Prescription Drug Plan. NO Medicare drug plan can ask a person with Medicare for bank account or other personal information over the telephone.
  • VA Warns Veterans of Telephone Prescription Scam
    The Department of Veterans Affairs (VA) is warning Veterans not to give credit card numbers over the phone to callers claiming to update VA prescription information. Veteran Service Organizations have brought to VA's attention that callers are misrepresenting the VA to gain personal information over the phone. They say VA recently changed procedures for dispensing prescriptions and ask for the Veteran's credit card number.

The Ammend Taxes

Ammend taxes Publication 600 - Main Contents Table of Contents Actual Expenses Optional Sales Tax Tables Instructions for the State and Local General Sales Tax Deduction WorksheetWhat if you lived in more than one state? What if you lived in more than one locality? What if your local general sales tax rate changed during 2006? What if you lived in more than one locality in the same state during 2006? Actual Expenses Generally, you can deduct the actual state and local general sales taxes (including compensating use taxes) you paid in 2006 if the tax rate was the same as the general sales tax rate. Ammend taxes However, sales taxes on food, clothing, medical supplies, and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. Ammend taxes If you paid sales tax on a motor vehicle at a rate higher than the general sales tax rate, you can deduct only the amount of tax that you would have paid at the general sales tax rate on that vehicle. Ammend taxes Motor vehicles include cars, motorcycles, motor homes, recreational vehicles, sport utility vehicles, trucks, vans, and off-road vehicles. Ammend taxes Also include any state and local general sales taxes paid for a leased motor vehicle. Ammend taxes Do not include sales taxes paid on items used in your trade or business. Ammend taxes To deduct your actual expenses, enter the amount on Schedule A, line 5, and enter “ST” on the dotted line to the left of the line 5 entry space. Ammend taxes You must keep your actual receipts showing general sales taxes paid to use this method. Ammend taxes Refund of general sales taxes. Ammend taxes   If you received a refund of state or local general sales taxes in 2006 for amounts paid in 2006, reduce your actual 2006 state and local general sales taxes by this amount. Ammend taxes If you received a refund of state or local general sales taxes in 2006 for prior year purchases, do not reduce your 2006 state and local general sales taxes by this amount. Ammend taxes But if you deducted your actual state and local general sales taxes in the earlier year and the deduction reduced your tax, you may have to include the refund in income on Form 1040, line 21. Ammend taxes See Recoveries in Pub. Ammend taxes 525 for details. Ammend taxes Optional Sales Tax Tables Instead of using your actual expenses, you can use the tables on pages 5 through 7 to figure your state and local general sales tax deduction. Ammend taxes You may also be able to add the state and local general sales taxes paid on certain specified items. Ammend taxes To figure your state and local general sales tax deduction using the tables, complete the worksheet below. Ammend taxes If your filing status is married filing separately, both you and your spouse elect to deduct sales taxes, and your spouse elects to use the optional sales tax tables, you also must use the tables to figure your state and local general sales tax deduction. Ammend taxes State and Local General Sales Tax Deduction Worksheet (See the instructions that begin on page 3. Ammend taxes ) Before you begin: See the instructions for line 1 on page 3 if: You lived in more than one state during 2006, or You had any nontaxable income in 2006. Ammend taxes   1. Ammend taxes Enter your state general sales taxes from the applicable table on page 5 or 6 (see page 3 of the instructions) 1. Ammend taxes $     Next. Ammend taxes If, for all of 2006, you lived only in Connecticut, the District of Columbia, Hawaii, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Rhode Island, Virginia, or West Virginia, skip lines 2 through 5, enter -0- on line 6, and go to line 7. Ammend taxes Otherwise, go to line 2       2. Ammend taxes Did you live in Alaska, Arizona, Arkansas (Texarkana only), California (Los Angeles County only), Colorado, Georgia, Illinois, Louisiana, New York State, or North Carolina in 2006?         No. Ammend taxes Enter -0-                   Yes. Ammend taxes Enter your local general sales taxes from the applicable table on page 7 (see page 3 of the instructions)     2. Ammend taxes $       3. Ammend taxes Did your locality impose a local general sales tax in 2006? Residents of California, Nevada, and Texarkana, Arkansas, see page 3 of the instructions             No. Ammend taxes Skip lines 3 through 5, enter -0- on line 6, and go to line 7             Yes. Ammend taxes Enter your local general sales tax rate, but omit the percentage sign. Ammend taxes For example, if your local general sales tax rate was 2. Ammend taxes 5%, enter 2. Ammend taxes 5. Ammend taxes If your local general sales tax rate changed or you lived in more than one locality in the same state during 2006, see page 3 of the instructions. Ammend taxes (If you do not know your local general sales tax rate, contact your local government. Ammend taxes ) 3. Ammend taxes . Ammend taxes       4. Ammend taxes Did you enter -0- on line 2 above?             No. Ammend taxes Skip lines 4 and 5 and go to line 6             Yes. Ammend taxes Enter your state general sales tax rate (shown in the table heading for your state), but omit the percentage sign. Ammend taxes For example, if your state general sales tax rate is 6%, enter 6. Ammend taxes 0 4. Ammend taxes . Ammend taxes       5. Ammend taxes Divide line 3 by line 4. Ammend taxes Enter the result as a decimal (rounded to at least three places) 5. Ammend taxes . Ammend taxes       6. Ammend taxes Did you enter -0- on line 2 above?             No. Ammend taxes Multiply line 2 by line 3   6. Ammend taxes $     Yes. Ammend taxes Multiply line 1 by line 5. Ammend taxes If you lived in more than one locality in the same state during 2006, see page 4 of the instructions           7. Ammend taxes Enter your state and local general sales taxes paid on specified items, if any (see page 4 of the instructions) 7. Ammend taxes $   8. Ammend taxes Deduction for general sales taxes. Ammend taxes Add lines 1, 6, and 7. Ammend taxes Enter the result here and the total from all your state and local general sales tax deduction worksheets, if you completed more than one, on Schedule A, line 5. Ammend taxes Be sure to enter “ST” on the dotted line to the left of the entry space 8. Ammend taxes $     Instructions for the State and Local General Sales Tax Deduction Worksheet Line 1. Ammend taxes    If you lived in the same state for all of 2006, enter the applicable amount, based on your 2006 income and exemptions, from the optional state sales tax table for your state on page 5 or 6. Ammend taxes Read down the “At least-But less than” columns for your state and find the line that includes your 2006 income. Ammend taxes If married filing separately, do not include your spouse's income. Ammend taxes Your 2006 income is the amount shown on your Form 1040, line 38, plus any nontaxable items, such as the following. Ammend taxes Tax-exempt interest. Ammend taxes Veterans' benefits. Ammend taxes Nontaxable combat pay. Ammend taxes Workers' compensation. Ammend taxes Nontaxable part of social security and railroad retirement benefits. Ammend taxes Nontaxable part of IRA, pension, or annuity distributions. Ammend taxes Do not include rollovers. Ammend taxes Public assistance payments. Ammend taxes The exemptions column refers to the number of exemptions claimed on Form 1040, line 6d. Ammend taxes Do not include any additional exemptions you listed on Form 8914 for individuals displaced by Hurricane Katrina. Ammend taxes What if you lived in more than one state?    If you lived in more than one state during 2006, look up the table amount for each state using the above rules. Ammend taxes If there is no table for your state, the table amount is considered to be zero. Ammend taxes Multiply the table amount for each state you lived in by a fraction. Ammend taxes The numerator of the fraction is the number of days you lived in the state during 2006 and the denominator is the total number of days in the year (365). Ammend taxes Enter the total of the prorated table amounts for each state on line 1. Ammend taxes However, if you also lived in a locality during 2006 that imposed a local general sales tax, do not enter the total on line 1. Ammend taxes Instead, complete a separate worksheet for each state you lived in and enter the prorated amount for that state on line 1. Ammend taxes Example. Ammend taxes You lived in State A from January 1 through August 31, 2006 (243 days), and in State B from September 1 through December 31, 2006 (122 days). Ammend taxes The table amount for State A is $500. Ammend taxes The table amount for State B is $400. Ammend taxes You would figure your state general sales tax as follows. Ammend taxes State A: $500 x 243/365 = $333   State B: $400 x 122/365 = 134   Total = $467   If none of the localities in which you lived during 2006 imposed a local general sales tax, enter $467 on line 1 of your worksheet. Ammend taxes Otherwise, complete a separate worksheet for State A and State B. Ammend taxes Enter $333 on line 1 of the State A worksheet and $134 on line 1 of the State B worksheet. Ammend taxes Line 2. Ammend taxes   If you checked the “No” box, enter -0- on line 2, and go to line 3. Ammend taxes If you checked the “Yes” box and lived in the same locality for all of 2006, enter the applicable amount, based on your 2006 income and exemptions, from the optional local sales tax table for your locality on page 7. Ammend taxes Read down the “At least-But less than” columns for your locality and find the line that includes your 2006 income. Ammend taxes See the line 1 instructions on this page to figure your 2006 income. Ammend taxes The exemptions column refers to the number of exemptions claimed on Form 1040, line 6d. Ammend taxes Do not include any additional exemptions you listed on Form 8914 for individuals displaced by Hurricane Katrina. Ammend taxes What if you lived in more than one locality?   If you lived in more than one locality during 2006, look up the table amount for each locality using the above rules. Ammend taxes If there is no table for your locality, the table amount is considered to be zero. Ammend taxes Multiply the table amount for each locality you lived in by a fraction. Ammend taxes The numerator of the fraction is the number of days you lived in the locality during 2006 and the denominator is the total number of days in the year (365). Ammend taxes If you lived in more than one locality in the same state and the local general sales tax rate was the same for each locality, enter the total of the prorated table amounts for each locality in that state on line 2. Ammend taxes Otherwise, complete a separate worksheet for lines 2 through 6 for each locality and enter each prorated table amount on line 2 of the applicable worksheet. Ammend taxes Example. Ammend taxes You lived in Locality 1 from January 1 through August 31, 2006 (243 days), and in Locality 2 from September 1 through December 31, 2006 (122 days). Ammend taxes The table amount for Locality 1 is $100. Ammend taxes The table amount for Locality 2 is $150. Ammend taxes You would figure the amount to enter on line 2 as follows. Ammend taxes Note that this amount may not equal your local sales tax deduction, which is figured on line 6 of the worksheet. Ammend taxes Locality 1: $100 x 243/365 = $67   Locality 2: $150 x 122/365 = 50   Total = $117   Line 3. Ammend taxes   If you lived in California, check the “No” box if your combined state and local general sales tax rate is 7. Ammend taxes 25%. Ammend taxes Otherwise, check the “Yes” box and include on line 3 only the part of the combined rate that is more than 7. Ammend taxes 25%. Ammend taxes   If you lived in Nevada, check the “No” box if your combined state and local general sales tax rate is 6. Ammend taxes 5%. Ammend taxes Otherwise, check the “Yes” box and include on line 3 only the part of the combined rate that is more than 6. Ammend taxes 5%. Ammend taxes   If you lived in Texarkana, Arkansas, check the “Yes” box and enter “4. Ammend taxes 0” on line 3. Ammend taxes Your local general sales tax rate of 4. Ammend taxes 0% includes the additional 1. Ammend taxes 0% Arkansas state sales tax rate for Texarkana and the 1. Ammend taxes 5% sales tax rate for Miller County. Ammend taxes What if your local general sales tax rate changed during 2006?    If you checked the “Yes” box and your local general sales tax rate changed during 2006, figure the rate to enter on line 3 as follows. Ammend taxes Multiply each tax rate for the period it was in effect by a fraction. Ammend taxes The numerator of the fraction is the number of days the rate was in effect during 2006 and the denominator is the total number of days in the year (365). Ammend taxes Enter the total of the prorated tax rates on line 3. Ammend taxes Example. Ammend taxes Locality 1 imposed a 1% local general sales tax from January 1 through September 30, 2006 (273 days). Ammend taxes The rate increased to 1. Ammend taxes 75% for the period from October 1 through December 31, 2006 (92 days). Ammend taxes You would enter “1. Ammend taxes 189” on line 3, figured as follows. Ammend taxes January 1 - September 30: 1. Ammend taxes 00 x 273/365 = 0. Ammend taxes 748   October 1 - December 31: 1. Ammend taxes 75 x 92/365 = 0. Ammend taxes 441   Total = 1. Ammend taxes 189   What if you lived in more than one locality in the same state during 2006?    Complete a separate worksheet for lines 2 through 6 for each locality in your state if you lived in more than one locality in the same state during 2006 and either of the following applies. Ammend taxes Each locality did not have the same local general sales tax rate. Ammend taxes You lived in Texarkana, AR, or Los Angeles County, CA. Ammend taxes   To figure the amount to enter on line 3 of the worksheet for each locality in which you lived (except a locality for which you used the table on page 7 to figure your local general sales tax deduction), multiply the local general sales tax rate by a fraction. Ammend taxes The numerator of the fraction is the number of days you lived in the locality during 2006 and the denominator is the total number of days in the year (365). Ammend taxes Example. Ammend taxes You lived in Locality 1 from January 1 through August 31, 2006 (243 days), and in Locality 2 from September 1 through December 31, 2006 (122 days). Ammend taxes The local general sales tax rate for Locality 1 is 1%. Ammend taxes The rate for Locality 2 is 1. Ammend taxes 75%. Ammend taxes You would enter “0. Ammend taxes 666” on line 3 for the Locality 1 worksheet and “0. Ammend taxes 585” for the Locality 2 worksheet, figured as follows. Ammend taxes Locality 1: 1. Ammend taxes 00 x 243/365 = 0. Ammend taxes 666   Locality 2: 1. Ammend taxes 75 x 122/365 = 0. Ammend taxes 585   Line 6. Ammend taxes   If you lived in more than one locality in the same state during 2006, you should have completed line 1 only on the first worksheet for that state and separate worksheets for lines 2 through 6 for any other locality within that state in which you lived during 2006. Ammend taxes If you checked the “Yes” box on line 6 of any of those worksheets, multiply line 5 of that worksheet by the amount that you entered on line 1 for that state on the first worksheet. Ammend taxes Line 7. Ammend taxes    Enter on line 7 any state and local general sales taxes paid on the following specified items. Ammend taxes If you are completing more than one worksheet, include the total for line 7 on only one of the worksheets. Ammend taxes A motor vehicle (including a car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van, and off-road vehicle). Ammend taxes Also include any state and local general sales taxes paid for a leased motor vehicle. Ammend taxes If the state sales tax rate on these items is higher than the general sales tax rate, only include the amount of tax you would have paid at the general sales tax rate. Ammend taxes An aircraft or boat, if the tax rate was the same as the general sales tax rate. Ammend taxes A home (including a mobile home or prefabricated home) or substantial addition to or major renovation of a home, but only if the tax rate was the same as the general sales tax rate and any of the following applies. Ammend taxes Your state or locality imposes a general sales tax directly on the sale of a home or on the cost of a substantial addition or major renovation. Ammend taxes You purchased the materials to build a home or substantial addition or to perform a major renovation and paid the sales tax directly. Ammend taxes Under your state law, your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation. Ammend taxes The contract must state that the contractor is authorized to act in your name and must follow your directions on construction decisions. Ammend taxes In this case, you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly. Ammend taxes   Do not include sales taxes paid on items used in your trade or business. Ammend taxes If you received a refund of state or local general sales taxes in 2006, see Refund of general sales taxes on page 1. Ammend taxes Prev  Up  Next   Home   More Online Publications