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Efile tax return 23. Efile tax return   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Efile tax return Mortgage proceeds used for business or investment. Efile tax return Introduction This chapter discusses what interest expenses you can deduct. Efile tax return Interest is the amount you pay for the use of borrowed money. Efile tax return The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Efile tax return Home mortgage interest, including certain points and mortgage insurance premiums. Efile tax return Investment interest. Efile tax return This chapter explains these deductions. Efile tax return It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Efile tax return Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Efile tax return Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Efile tax return The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Efile tax return You can deduct home mortgage interest if all the following conditions are met. Efile tax return You file Form 1040 and itemize deductions on Schedule A (Form 1040). Efile tax return The mortgage is a secured debt on a qualified home in which you have an ownership interest. Efile tax return (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Efile tax return The term “qualified home” means your main home or second home. Efile tax return For details, see Publication 936. Efile tax return )  Both you and the lender must intend that the loan be repaid. Efile tax return Amount Deductible In most cases, you can deduct all of your home mortgage interest. Efile tax return How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Efile tax return Fully deductible interest. Efile tax return   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. Efile tax return (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. Efile tax return )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Efile tax return Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). Efile tax return Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). Efile tax return The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Efile tax return   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Efile tax return    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Efile tax return Figure 23-A. Efile tax return Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Efile tax return Figure 23-A. Efile tax return Is My Interest Fully Deductible? Limits on deduction. Efile tax return   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Efile tax return If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Efile tax return Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Efile tax return It also describes certain special situations that may affect your deduction. Efile tax return Late payment charge on mortgage payment. Efile tax return   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. Efile tax return Mortgage prepayment penalty. Efile tax return   If you pay off your home mortgage early, you may have to pay a penalty. Efile tax return You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Efile tax return Sale of home. Efile tax return   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. Efile tax return Example. Efile tax return John and Peggy Harris sold their home on May 7. Efile tax return Through April 30, they made home mortgage interest payments of $1,220. Efile tax return The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Efile tax return Their mortgage interest deduction is $1,270 ($1,220 + $50). Efile tax return Prepaid interest. Efile tax return   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Efile tax return You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Efile tax return However, there is an exception that applies to points, discussed later. Efile tax return Mortgage interest credit. Efile tax return   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. Efile tax return Figure the credit on Form 8396, Mortgage Interest Credit. Efile tax return If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Efile tax return   For more information on the credit, see chapter 37. Efile tax return Ministers' and military housing allowance. Efile tax return   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. Efile tax return Hardest Hit Fund and Emergency Homeowners' Loan Programs. Efile tax return   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Efile tax return You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Efile tax return You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Efile tax return If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Efile tax return However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Efile tax return Mortgage assistance payments under section 235 of the National Housing Act. Efile tax return   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. Efile tax return You cannot deduct the interest that is paid for you. Efile tax return No other effect on taxes. Efile tax return   Do not include these mortgage assistance payments in your income. Efile tax return Also, do not use these payments to reduce other deductions, such as real estate taxes. Efile tax return Divorced or separated individuals. Efile tax return   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. Efile tax return See the discussion of Payments for jointly-owned home in chapter 18. Efile tax return Redeemable ground rents. Efile tax return   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Efile tax return   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Efile tax return For more information, see Publication 936. Efile tax return Nonredeemable ground rents. Efile tax return   Payments on a nonredeemable ground rent are not mortgage interest. Efile tax return You can deduct them as rent if they are a business expense or if they are for rental property. Efile tax return Reverse mortgages. Efile tax return   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. Efile tax return With a reverse mortgage, you retain title to your home. Efile tax return Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Efile tax return Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Efile tax return Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Efile tax return Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Efile tax return Rental payments. Efile tax return   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Efile tax return This is true even if the settlement papers call them interest. Efile tax return You cannot deduct these payments as home mortgage interest. Efile tax return Mortgage proceeds invested in tax-exempt securities. Efile tax return   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. Efile tax return “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Efile tax return Refunds of interest. Efile tax return   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. Efile tax return If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. Efile tax return However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Efile tax return This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Efile tax return    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. Efile tax return For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Efile tax return   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Efile tax return Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Efile tax return Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Efile tax return A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Efile tax return See Points paid by the seller , later. Efile tax return General Rule You generally cannot deduct the full amount of points in the year paid. Efile tax return Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Efile tax return See Deduction Allowed Ratably , next. Efile tax return For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Efile tax return Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. Efile tax return You use the cash method of accounting. Efile tax return This means you report income in the year you receive it and deduct expenses in the year you pay them. Efile tax return Most individuals use this method. Efile tax return Your loan is secured by a home. Efile tax return (The home does not need to be your main home. Efile tax return ) Your loan period is not more than 30 years. Efile tax return If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. Efile tax return Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. Efile tax return Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Efile tax return (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Efile tax return ) Your loan is secured by your main home. Efile tax return (Your main home is the one you ordinarily live in most of the time. Efile tax return ) Paying points is an established business practice in the area where the loan was made. Efile tax return The points paid were not more than the points generally charged in that area. Efile tax return You use the cash method of accounting. Efile tax return This means you report income in the year you receive it and deduct expenses in the year you pay them. Efile tax return (If you want more information about this method, see Accounting Methods in chapter 1. Efile tax return ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Efile tax return The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Efile tax return The funds you provided are not required to have been applied to the points. Efile tax return They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Efile tax return You cannot have borrowed these funds from your lender or mortgage broker. Efile tax return You use your loan to buy or build your main home. Efile tax return The points were computed as a percentage of the principal amount of the mortgage. Efile tax return The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Efile tax return The points may be shown as paid from either your funds or the seller's. Efile tax return Figure 23-B. Efile tax return Are My Points Fully Deductible This Year? Please click here for the text description of the image. Efile tax return Figure 23-B. Efile tax return Are My Points Fully Deductible This Year? Note. Efile tax return If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. Efile tax return Home improvement loan. Efile tax return   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. Efile tax return Second home. Efile tax return You cannot fully deduct in the year paid points you pay on loans secured by your second home. Efile tax return You can deduct these points only over the life of the loan. Efile tax return Refinancing. Efile tax return   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Efile tax return This is true even if the new mortgage is secured by your main home. Efile tax return   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Efile tax return You can deduct the rest of the points over the life of the loan. Efile tax return Example 1. Efile tax return In 1998, Bill Fields got a mortgage to buy a home. Efile tax return In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Efile tax return The mortgage is secured by his home. Efile tax return To get the new loan, he had to pay three points ($3,000). Efile tax return Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Efile tax return Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Efile tax return The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Efile tax return Bill's first payment on the new loan was due July 1. Efile tax return He made six payments on the loan in 2013 and is a cash basis taxpayer. Efile tax return Bill used the funds from the new mortgage to repay his existing mortgage. Efile tax return Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. Efile tax return He cannot deduct all of the points in 2013. Efile tax return He can deduct two points ($2,000) ratably over the life of the loan. Efile tax return He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Efile tax return The other point ($1,000) was a fee for services and is not deductible. Efile tax return Example 2. Efile tax return The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Efile tax return Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Efile tax return His deduction is $500 ($2,000 × 25%). Efile tax return Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Efile tax return This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Efile tax return The total amount Bill deducts in 2013 is $550 ($500 + $50). Efile tax return Special Situations This section describes certain special situations that may affect your deduction of points. Efile tax return Original issue discount. Efile tax return   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. Efile tax return This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Efile tax return Amounts charged for services. Efile tax return   Amounts charged by the lender for specific services connected to the loan are not interest. Efile tax return Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Efile tax return You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Efile tax return Points paid by the seller. Efile tax return   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Efile tax return Treatment by seller. Efile tax return   The seller cannot deduct these fees as interest. Efile tax return But they are a selling expense that reduces the amount realized by the seller. Efile tax return See chapter 15 for information on selling your home. Efile tax return Treatment by buyer. Efile tax return    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. Efile tax return If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Efile tax return If any of those tests are not met, the buyer deducts the points over the life of the loan. Efile tax return   For information about basis, see chapter 13. Efile tax return Funds provided are less than points. Efile tax return   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. Efile tax return In addition, you can deduct any points paid by the seller. Efile tax return Example 1. Efile tax return When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Efile tax return You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Efile tax return Of the $1,000 charged for points, you can deduct $750 in the year paid. Efile tax return You spread the remaining $250 over the life of the mortgage. Efile tax return Example 2. Efile tax return The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Efile tax return In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Efile tax return You spread the remaining $250 over the life of the mortgage. Efile tax return You must reduce the basis of your home by the $1,000 paid by the seller. Efile tax return Excess points. Efile tax return   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. Efile tax return You must spread any additional points over the life of the mortgage. Efile tax return Mortgage ending early. Efile tax return   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Efile tax return However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Efile tax return Instead, deduct the remaining balance over the term of the new loan. Efile tax return    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Efile tax return Example. Efile tax return Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Efile tax return He deducts $200 points per year. Efile tax return Through 2012, Dan has deducted $2,200 of the points. Efile tax return Dan prepaid his mortgage in full in 2013. Efile tax return He can deduct the remaining $800 of points in 2013. Efile tax return Limits on deduction. Efile tax return   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Efile tax return See Publication 936 for details. Efile tax return Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Efile tax return The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Efile tax return Qualified mortgage insurance. Efile tax return   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Efile tax return   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Efile tax return If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Efile tax return These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Efile tax return Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Efile tax return Special rules for prepaid mortgage insurance. Efile tax return   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Efile tax return You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. Efile tax return No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Efile tax return This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Efile tax return See the Example below. Efile tax return Example. Efile tax return Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Efile tax return Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Efile tax return Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Efile tax return Ryan's adjusted gross income (AGI) for 2012 is $76,000. Efile tax return Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Efile tax return For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Efile tax return In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). Efile tax return Limit on deduction. Efile tax return   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. Efile tax return See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Efile tax return If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Efile tax return Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. Efile tax return You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Efile tax return A governmental unit is a person for purposes of furnishing the statement. Efile tax return The statement for each year should be sent to you by January 31 of the following year. Efile tax return A copy of this form will also be sent to the IRS. Efile tax return The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. Efile tax return However, it should not show any interest that was paid for you by a government agency. Efile tax return As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Efile tax return However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Efile tax return See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Efile tax return Prepaid interest on Form 1098. Efile tax return   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. Efile tax return However, you cannot deduct the prepaid amount for January 2014 in 2013. Efile tax return (See Prepaid interest , earlier. Efile tax return ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Efile tax return You will include the interest for January 2014 with the other interest you pay for 2014. Efile tax return See How To Report , later. Efile tax return Refunded interest. Efile tax return   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. Efile tax return See Refunds of interest , earlier. Efile tax return Mortgage insurance premiums. Efile tax return   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Efile tax return See Mortgage Insurance Premiums, earlier. Efile tax return Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Efile tax return If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Efile tax return You can deduct investment interest subject to the limit discussed later. Efile tax return However, you cannot deduct interest you incurred to produce tax-exempt income. Efile tax return Nor can you deduct interest expenses on straddles. Efile tax return Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Efile tax return Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Efile tax return It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Efile tax return Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Efile tax return Partners, shareholders, and beneficiaries. Efile tax return   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Efile tax return Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Efile tax return Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Efile tax return The allocation is not affected by the use of property that secures the debt. Efile tax return Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Efile tax return You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Efile tax return The interest carried over is treated as investment interest paid or accrued in that next year. Efile tax return You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Efile tax return Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Efile tax return Investment income. Efile tax return    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Efile tax return Investment income does not include Alaska Permanent Fund dividends. Efile tax return It also does not include qualified dividends or net capital gain unless you choose to include them. Efile tax return Choosing to include qualified dividends. Efile tax return   Investment income generally does not include qualified dividends, discussed in chapter 8. Efile tax return However, you can choose to include all or part of your qualified dividends in investment income. Efile tax return   You make this choice by completing Form 4952, line 4g, according to its instructions. Efile tax return   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Efile tax return Choosing to include net capital gain. Efile tax return   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Efile tax return However, you can choose to include all or part of your net capital gain in investment income. Efile tax return    You make this choice by completing Form 4952, line 4g, according to its instructions. Efile tax return   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Efile tax return    Before making either choice, consider the overall effect on your tax liability. Efile tax return Compare your tax if you make one or both of these choices with your tax if you do not. Efile tax return Investment income of child reported on parent's return. Efile tax return    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Efile tax return If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. Efile tax return Child's qualified dividends. Efile tax return   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Efile tax return However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Efile tax return   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Efile tax return Child's Alaska Permanent Fund dividends. Efile tax return   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Efile tax return To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Efile tax return Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Efile tax return Subtract the result from the amount on Form 8814, line 12. Efile tax return Child's capital gain distributions. Efile tax return    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Efile tax return However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Efile tax return   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Efile tax return Investment expenses. Efile tax return   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Efile tax return Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Efile tax return Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Efile tax return Losses from passive activities. Efile tax return   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Efile tax return See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Efile tax return Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Efile tax return Exception to use of Form 4952. Efile tax return   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Efile tax return Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Efile tax return You do not have any other deductible investment expenses. Efile tax return You have no carryover of investment interest expense from 2012. Efile tax return If you meet all of these tests, you can deduct all of your investment interest. Efile tax return More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Efile tax return Items You Cannot Deduct Some interest payments are not deductible. Efile tax return Certain expenses similar to interest also are not deductible. Efile tax return Nondeductible expenses include the following items. Efile tax return Personal interest (discussed later). Efile tax return Service charges (however, see Other Expenses (Line 23) in chapter 28). Efile tax return Annual fees for credit cards. Efile tax return Loan fees. Efile tax return Credit investigation fees. Efile tax return Interest to purchase or carry tax-exempt securities. Efile tax return Penalties. Efile tax return   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Efile tax return Personal Interest Personal interest is not deductible. Efile tax return Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Efile tax return It includes the following items. Efile tax return Interest on car loans (unless you use the car for business). Efile tax return Interest on federal, state, or local income tax. Efile tax return Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Efile tax return Late payment charges by a public utility. Efile tax return You may be able to deduct interest you pay on a qualified student loan. Efile tax return For details, see Publication 970, Tax Benefits for Education. Efile tax return Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Efile tax return However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Efile tax return You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Efile tax return You do this by tracing disbursements of the debt proceeds to specific uses. Efile tax return For details on how to do this, see chapter 4 of Publication 535. Efile tax return How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Efile tax return Where you deduct your interest expense generally depends on how you use the loan proceeds. Efile tax return See Table 23-1 for a summary of where to deduct your interest expense. Efile tax return Home mortgage interest and points. Efile tax return   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Efile tax return If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Efile tax return Attach a statement explaining the difference and print “See attached” next to line 10. Efile tax return    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Efile tax return If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. Efile tax return The seller must give you this number and you must give the seller your TIN. Efile tax return A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Efile tax return Failure to meet any of these requirements may result in a $50 penalty for each failure. Efile tax return The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. Efile tax return See Social Security Number (SSN) in chapter 1 for more information about TINs. Efile tax return    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. Efile tax return   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Efile tax return More than one borrower. Efile tax return   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Efile tax return Show how much of the interest each of you paid, and give the name and address of the person who received the form. Efile tax return Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Efile tax return Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Efile tax return   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. Efile tax return You should let each of the other borrowers know what his or her share is. Efile tax return Mortgage proceeds used for business or investment. Efile tax return    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Efile tax return It shows where to deduct the part of your excess interest that is for those activities. Efile tax return Investment interest. Efile tax return    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Efile tax return Amortization of bond premium. Efile tax return   There are various ways to treat the premium you pay to buy taxable bonds. Efile tax return See Bond Premium Amortization in Publication 550. Efile tax return Income-producing rental or royalty interest. Efile tax return   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Efile tax return Example. Efile tax return You rent out part of your home and borrow money to make repairs. Efile tax return You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Efile tax return Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Efile tax return Table 23-1. Efile tax return Where To Deduct Your Interest Expense IF you have . Efile tax return . Efile tax return . Efile tax return THEN deduct it on . Efile tax return . Efile tax return . Efile tax return AND for more information go to . Efile tax return . Efile tax return . Efile tax return deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Efile tax return deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Efile tax return deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Efile tax return deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Efile tax return deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Efile tax return deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Efile tax return deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Efile tax return deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Efile tax return deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Efile tax return personal interest not deductible. Efile tax return Prev  Up  Next   Home   More Online Publications
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Employer ID Numbers (EINs)

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An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN. You may apply for an EIN in various ways, and now you may apply online. This is a free service offered by the Internal Revenue Service. You must check with your state to make sure you need a state number or charter.

Apply for an EIN Online

Check out our Interview-style online EIN application. No need to file a Form SS-4! We ask you the questions and you give us the answers. The application includes embedded help topics and hyperlinked keywords and definitions so separate instructions aren’t needed. After all validations are done you will get your EIN immediately upon completion. You can then download, save, and print your confirmation notice. It’s fast, free, and user-friendly!

Change of Ownership or Structure

Generally, businesses need a new EIN when their ownership or structure has changed. Refer to "Do You Need a New EIN?" to determine if this applies to your business.

Verify Your EIN

If you want to verify your EIN, see the Lost or Misplaced Your EIN page for instructions.

Daily Limitation of an Employer Identification Number

Effective May 21, 2012, to ensure fair and equitable treatment for all taxpayers, the Internal Revenue Service will limit Employer Identification Number (EIN) issuance to one per responsible party per day. This limitation is applicable to all requests for EINs whether online or by fax or mail. We apologize for any inconvenience this may cause.

Page Last Reviewed or Updated: 03-Jan-2014

The Efile Tax Return

Efile tax return 2. Efile tax return   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Efile tax return Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Efile tax return S. Efile tax return or foreign source income. Efile tax return This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Efile tax return S. Efile tax return Virgin Islands (USVI). Efile tax return Generally, the same rules that apply for determining U. Efile tax return S. Efile tax return source income also apply for determining possession source income. Efile tax return However, there are some important exceptions to these rules. Efile tax return Both the general rules and the exceptions are discussed in this chapter. Efile tax return U. Efile tax return S. Efile tax return income rule. Efile tax return   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Efile tax return Table 2-1 shows the general rules for determining whether income is from sources within the United States. Efile tax return Table 2-1. Efile tax return General Rules for Determining U. Efile tax return S. Efile tax return Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Efile tax return Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Efile tax return For more information, see Regulations section 1. Efile tax return 863-1(b). Efile tax return Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Efile tax return Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Efile tax return Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Efile tax return It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Efile tax return Services performed wholly within a relevant possession. Efile tax return   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Efile tax return However, there is an exception for income earned as a member of the U. Efile tax return S. Efile tax return Armed Forces or a civilian spouse. Efile tax return U. Efile tax return S. Efile tax return Armed Forces. Efile tax return   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Efile tax return However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Efile tax return Civilian spouse of active duty member of the U. Efile tax return S. Efile tax return Armed Forces. Efile tax return   If you are a bona fide resident of a U. Efile tax return S. Efile tax return possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Efile tax return Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Efile tax return S. Efile tax return possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Efile tax return Services performed partly inside and partly outside a relevant possession. Efile tax return   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Efile tax return Compensation (other than certain fringe benefits) is sourced on a time basis. Efile tax return Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Efile tax return   Or, you may be permitted to use an alternative basis to determine the source of compensation. Efile tax return See Alternative basis , later. Efile tax return   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Efile tax return In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Efile tax return Time basis. Efile tax return   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Efile tax return Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Efile tax return The time period for which the income is made does not have to be a year. Efile tax return Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Efile tax return Example. Efile tax return In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Efile tax return Your Puerto Rico source income is $60,000, figured as follows. Efile tax return       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Efile tax return   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Efile tax return Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Efile tax return You determine the period to which the income is attributable based on the facts and circumstances of your case. Efile tax return For more information on multi-year compensation, see Treasury Decision (T. Efile tax return D. Efile tax return ) 9212 and Regulations section 1. Efile tax return 861-4, 2005-35 I. Efile tax return R. Efile tax return B. Efile tax return 429, available at www. Efile tax return irs. Efile tax return gov/irb/2005-35_IRB/ar14. Efile tax return html. Efile tax return Certain fringe benefits sourced on a geographical basis. Efile tax return   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Efile tax return Housing. Efile tax return Education. Efile tax return Local transportation. Efile tax return Tax reimbursement. Efile tax return Hazardous or hardship duty pay. Efile tax return Moving expense reimbursement. Efile tax return For information on determining the source of the fringe benefits listed above, see Regulations section 1. Efile tax return 861-4. Efile tax return Alternative basis. Efile tax return   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Efile tax return If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Efile tax return De minimis exception. Efile tax return   There is an exception to the rule for determining the source of income earned in a possession. Efile tax return Generally, you will not have income from a possession if during a tax year you: Are a U. Efile tax return S. Efile tax return citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Efile tax return This exception began with income earned during your 2008 tax year. Efile tax return Pensions. Efile tax return   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Efile tax return The contribution portion is sourced according to where services were performed that earned the pension. Efile tax return The investment earnings portion is sourced according to the location of the pension trust. Efile tax return Example. Efile tax return You are a U. Efile tax return S. Efile tax return citizen who worked in Puerto Rico for a U. Efile tax return S. Efile tax return company. Efile tax return All services were performed in Puerto Rico. Efile tax return Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Efile tax return S. Efile tax return pension trust of your employer. Efile tax return Distributions from the U. Efile tax return S. Efile tax return pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Efile tax return S. Efile tax return source income. Efile tax return Investment Income This category includes such income as interest, dividends, rents, and royalties. Efile tax return Interest income. Efile tax return   The source of interest income is generally determined by the residence of the payer. Efile tax return Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Efile tax return   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Efile tax return See Regulations section 1. Efile tax return 937-2(i) for more information. Efile tax return Dividends. Efile tax return   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Efile tax return There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Efile tax return For more information, see Regulations section 1. Efile tax return 937-2(g). Efile tax return Rental income. Efile tax return   Rents from property located in a relevant possession are treated as income from sources within that possession. Efile tax return Royalties. Efile tax return   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Efile tax return   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Efile tax return Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Efile tax return The most common situations are discussed below. Efile tax return Real property. Efile tax return   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Efile tax return The location of the property generally determines the source of income from the sale. Efile tax return For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Efile tax return If, however, the home you sold was located in the United States, the gain is U. Efile tax return S. Efile tax return source income. Efile tax return Personal property. Efile tax return   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Efile tax return Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Efile tax return If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Efile tax return   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Efile tax return The rules applying to sales of inventory are discussed below. Efile tax return For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Efile tax return Inventory. Efile tax return   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Efile tax return The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Efile tax return Purchased. Efile tax return   Income from the sale of inventory that you purchased is sourced where you sell the property. Efile tax return Generally, this is where title to the property passes to the buyer. Efile tax return Produced. Efile tax return   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Efile tax return For information on making the allocation, see Regulations section 1. Efile tax return 863-3(f). Efile tax return Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Efile tax return S. Efile tax return citizen or resident alien prior to becoming a bona fide resident of a possession. Efile tax return You are subject to these special rules if you meet both of the following conditions. Efile tax return For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Efile tax return For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Efile tax return If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Efile tax return Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Efile tax return S. Efile tax return tax return. Efile tax return (See chapter 3 for additional filing information. Efile tax return ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Efile tax return These rules apply to dispositions after April 11, 2005. Efile tax return For details, see Regulations section 1. Efile tax return 937-2(f)(1) and Examples 1 and 2 of section 1. Efile tax return 937-2(k). Efile tax return Example 1. Efile tax return In 2007, Cheryl Jones, a U. Efile tax return S. Efile tax return citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Efile tax return S. Efile tax return corporation listed on the New York Stock Exchange. Efile tax return On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Efile tax return Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Efile tax return On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Efile tax return On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Efile tax return Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Efile tax return The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Efile tax return This existing special rule applies if you are a U. Efile tax return S. Efile tax return citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Efile tax return S. Efile tax return assets during the 10-year period beginning when you became a bona fide resident. Efile tax return The gain is U. Efile tax return S. Efile tax return source income that generally is subject to U. Efile tax return S. Efile tax return tax if the property is either (1) located in the United States; (2) stock issued by a U. Efile tax return S. Efile tax return corporation or a debt obligation of a U. Efile tax return S. Efile tax return person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Efile tax return See chapter 3 for filing information. Efile tax return Special election. Efile tax return   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Efile tax return Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Efile tax return This election overrides both of the special rules discussed earlier. Efile tax return   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Efile tax return Marketable securities. Efile tax return   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Efile tax return Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Efile tax return S. Efile tax return holding periods. Efile tax return   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Efile tax return The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Efile tax return This is your gain (or loss) that is treated as being from sources within the relevant possession. Efile tax return If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Efile tax return Example 2. Efile tax return Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Efile tax return S. Efile tax return and possession holding periods. Efile tax return Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Efile tax return Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Efile tax return By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Efile tax return Other personal property. Efile tax return   For personal property other than marketable securities, use a time-based allocation. Efile tax return Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Efile tax return      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Efile tax return Example 3. Efile tax return In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Efile tax return On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Efile tax return On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Efile tax return She had owned the interest for a total of 1,720 days. Efile tax return Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Efile tax return The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Efile tax return By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Efile tax return Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Efile tax return Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Efile tax return These rules do not apply to amounts paid as salary or other compensation for services. Efile tax return See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Efile tax return Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Efile tax return These circumstances are listed below. Efile tax return You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Efile tax return That office or place of business is a material factor in producing the income. Efile tax return The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Efile tax return An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Efile tax return The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Efile tax return Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Efile tax return Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Efile tax return Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Efile tax return Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Efile tax return Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Efile tax return Example. Efile tax return Marcy Jackson is a bona fide resident of American Samoa. Efile tax return Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Efile tax return A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Efile tax return Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Efile tax return The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Efile tax return However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Efile tax return Prev  Up  Next   Home   More Online Publications