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Federal And State Income Tax Forms

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Federal And State Income Tax Forms

Federal and state income tax forms 5. Federal and state income tax forms   Taxes Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: When To Deduct Taxes Real Estate TaxesSeparate elections. Federal and state income tax forms Making the election. Federal and state income tax forms Form 3115. Federal and state income tax forms Income TaxesAccrual of contested income taxes. Federal and state income tax forms Employment Taxes Other TaxesAdditional Medicare Tax. Federal and state income tax forms What's New Additional Medicare Tax. Federal and state income tax forms  Beginning in 2013, you must withhold a 0. Federal and state income tax forms 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Federal and state income tax forms Also, self-employed individuals may be required to pay Additional Medicare Tax on self-employment income. Federal and state income tax forms See Employment Taxes , and Self-employment tax , later. Federal and state income tax forms Introduction You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. Federal and state income tax forms You cannot deduct federal income taxes, estate and gift taxes, or state inheritance, legacy, and succession taxes. Federal and state income tax forms Topics - This chapter discusses: When to deduct taxes Real estate taxes Income taxes Employment taxes Other taxes Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 510 Excise Taxes 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch SE (Form 1040) Self-Employment Tax 3115 Application for Change in Accounting Method 8959 Additional Medicare Tax See chapter 12 for information about getting publications and forms. Federal and state income tax forms When To Deduct Taxes Generally, you can only deduct taxes in the year you pay them. Federal and state income tax forms This applies whether you use the cash method or an accrual method of accounting. Federal and state income tax forms Under an accrual method, you can deduct a tax before you pay it if you meet the exception for recurring items discussed under Economic Performance in Publication 538. Federal and state income tax forms You can also elect to ratably accrue real estate taxes as discussed later under Real Estate Taxes . Federal and state income tax forms Limit on accrual of taxes. Federal and state income tax forms   A taxing jurisdiction can require the use of a date for accruing taxes that is earlier than the date it originally required. Federal and state income tax forms However, if you use an accrual method, and can deduct the tax before you pay it, use the original accrual date for the year of change and all future years to determine when you can deduct the tax. Federal and state income tax forms Example. Federal and state income tax forms Your state imposes a tax on personal property used in a trade or business conducted in the state. Federal and state income tax forms This tax is assessed and becomes a lien as of July 1 (accrual date). Federal and state income tax forms In 2013, the state changed the assessment and lien dates from July 1, 2014, to December 31, 2013, for property tax year 2014. Federal and state income tax forms Use the original accrual date (July 1, 2014) to determine when you can deduct the tax. Federal and state income tax forms You must also use the July 1 accrual date for all future years to determine when you can deduct the tax. Federal and state income tax forms Uniform capitalization rules. Federal and state income tax forms   Uniform capitalization rules apply to certain taxpayers who produce real property or tangible personal property for use in a trade or business or for sale to customers. Federal and state income tax forms They also apply to certain taxpayers who acquire property for resale. Federal and state income tax forms Under these rules, you either include certain costs in inventory or capitalize certain expenses related to the property, such as taxes. Federal and state income tax forms For more information, see chapter 1. Federal and state income tax forms Carrying charges. Federal and state income tax forms   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Federal and state income tax forms You can elect to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Federal and state income tax forms For more information, see chapter 7. Federal and state income tax forms Refunds of taxes. Federal and state income tax forms   If you receive a refund for any taxes you deducted in an earlier year, include the refund in income to the extent the deduction reduced your federal income tax in the earlier year. Federal and state income tax forms For more information, see Recovery of amount deducted (tax benefit rule) in chapter 1. Federal and state income tax forms    You must include in income any interest you receive on tax refunds. Federal and state income tax forms Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Federal and state income tax forms The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Federal and state income tax forms Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. Federal and state income tax forms See Taxes for local benefits , later. Federal and state income tax forms If you use an accrual method, you generally cannot accrue real estate taxes until you pay them to the government authority. Federal and state income tax forms However, you can elect to ratably accrue the taxes during the year. Federal and state income tax forms See Electing to ratably accrue , later. Federal and state income tax forms Taxes for local benefits. Federal and state income tax forms   Generally, you cannot deduct taxes charged for local benefits and improvements that tend to increase the value of your property. Federal and state income tax forms These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. Federal and state income tax forms You should increase the basis of your property by the amount of the assessment. Federal and state income tax forms   You can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. Federal and state income tax forms If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a deduction for that part of the tax. Federal and state income tax forms Example. Federal and state income tax forms To improve downtown commercial business, Waterfront City converted a downtown business area street into an enclosed pedestrian mall. Federal and state income tax forms The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. Federal and state income tax forms The city is paying the principal and interest with the annual payments made by the property owners. Federal and state income tax forms The assessments for construction costs are not deductible as taxes or as business expenses, but are depreciable capital expenses. Federal and state income tax forms The part of the payments used to pay the interest charges on the bonds is deductible as taxes. Federal and state income tax forms Charges for services. Federal and state income tax forms   Water bills, sewerage, and other service charges assessed against your business property are not real estate taxes, but are deductible as business expenses. Federal and state income tax forms Purchase or sale of real estate. Federal and state income tax forms   If real estate is sold, the real estate taxes must be allocated between the buyer and the seller. Federal and state income tax forms   The buyer and seller must allocate the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. Federal and state income tax forms Treat the seller as paying the taxes up to but not including the date of sale. Federal and state income tax forms Treat the buyer as paying the taxes beginning with the date of sale. Federal and state income tax forms You can usually find this information on the settlement statement you received at closing. Federal and state income tax forms   If you (the seller) use an accrual method and have not elected to ratably accrue real estate taxes, you are considered to have accrued your part of the tax on the date you sell the property. Federal and state income tax forms Example. Federal and state income tax forms Alberto Verde, a calendar year accrual method taxpayer, owns real estate in Olmo County. Federal and state income tax forms He has not elected to ratably accrue property taxes. Federal and state income tax forms November 30 of each year is the assessment and lien date for the current real property tax year, which is the calendar year. Federal and state income tax forms He sold the property on June 30, 2013. Federal and state income tax forms Under his accounting method he would not be able to claim a deduction for the taxes because the sale occurred before November 30. Federal and state income tax forms He is treated as having accrued his part of the tax, 181/366  (January 1–June 29), on June 30, and he can deduct it for 2013. Federal and state income tax forms Electing to ratably accrue. Federal and state income tax forms   If you use an accrual method, you can elect to accrue real estate tax related to a definite period ratably over that period. Federal and state income tax forms Example. Federal and state income tax forms Juan Sanchez is a calendar year taxpayer who uses an accrual method. Federal and state income tax forms His real estate taxes for the real property tax year, July 1, 2013, to June 30, 2014, are $1,200. Federal and state income tax forms July 1 is the assessment and lien date. Federal and state income tax forms If Juan elects to ratably accrue the taxes, $600 will accrue in 2013 ($1,200 × 6/12, July 1–December 31) and the balance will accrue in 2014. Federal and state income tax forms Separate elections. Federal and state income tax forms   You can elect to ratably accrue the taxes for each separate trade or business and for nonbusiness activities if you account for them separately. Federal and state income tax forms Once you elect to ratably accrue real estate taxes, you must use that method unless you get permission from the IRS to change. Federal and state income tax forms See Form 3115 , later. Federal and state income tax forms Making the election. Federal and state income tax forms   If you elect to ratably accrue the taxes for the first year in which you incur real estate taxes, attach a statement to your income tax return for that year. Federal and state income tax forms The statement should show all the following items. Federal and state income tax forms The trades or businesses to which the election applies and the accounting method or methods used. Federal and state income tax forms The period to which the taxes relate. Federal and state income tax forms The computation of the real estate tax deduction for that first year. Federal and state income tax forms   Generally, you must file your return by the due date (including extensions). Federal and state income tax forms However, if you timely filed your return for the year without electing to ratably accrue, you can still make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Federal and state income tax forms Attach the statement to the amended return and write “Filed pursuant to section 301. Federal and state income tax forms 9100-2” on the statement. Federal and state income tax forms File the amended return at the same address where you filed the original return. Federal and state income tax forms Form 3115. Federal and state income tax forms    If you elect to ratably accrue real estate taxes for a year after the first year in which you incur real estate taxes, or if you want to revoke your election to ratably accrue real estate taxes, file Form 3115. Federal and state income tax forms For more information, including applicable time frames for filing, see the Instructions for Form 3115. Federal and state income tax forms Note. Federal and state income tax forms If you are filing an application for a change in accounting method filed after January 9, 2011, for a year of change ending after April 29, 2010, see Revenue Procedure 2011-14, 2011-4 I. Federal and state income tax forms R. Federal and state income tax forms B. Federal and state income tax forms 330, as modified and clarified by Revenue Procedure 2012-19, 2012-14 I. Federal and state income tax forms R. Federal and state income tax forms B. Federal and state income tax forms 689, and Revenue Procedure 2012-20, 2012-14 I. Federal and state income tax forms R. Federal and state income tax forms B. Federal and state income tax forms 700, or any successor. Federal and state income tax forms Revenue Procedure 2011-14 is available at  www. Federal and state income tax forms irs. Federal and state income tax forms gov/irb/2011-04IRB/ar08. Federal and state income tax forms html. Federal and state income tax forms Income Taxes This section discusses federal, state, local, and foreign income taxes. Federal and state income tax forms Federal income taxes. Federal and state income tax forms   You cannot deduct federal income taxes. Federal and state income tax forms State and local income taxes. Federal and state income tax forms   A corporation or partnership can deduct state and local income taxes imposed on the corporation or partnership as business expenses. Federal and state income tax forms An individual can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Federal and state income tax forms   However, an individual can deduct a state tax on gross income (as distinguished from net income) directly attributable to a trade or business as a business expense. Federal and state income tax forms Accrual of contested income taxes. Federal and state income tax forms   If you use an accrual method, and you contest a state or local income tax liability, you must accrue and deduct any contested amount in the tax year in which the liability is finally determined. Federal and state income tax forms   If additional state or local income taxes for a prior year are assessed in a later year, you can deduct the taxes in the year in which they were originally imposed (the prior year) if the tax liability is not contested. Federal and state income tax forms You cannot deduct them in the year in which the liability is finally determined. Federal and state income tax forms    The filing of an income tax return is not considered a contest and, in the absence of an overt act of protest, you can deduct the tax in the prior year. Federal and state income tax forms Also, you can deduct any additional taxes in the prior year if you do not show some affirmative evidence of denial of the liability. Federal and state income tax forms   However, if you consistently deduct additional assessments in the year they are paid or finally determined (including those for which there was no contest), you must continue to do so. Federal and state income tax forms You cannot take a deduction in the earlier year unless you receive permission to change your method of accounting. Federal and state income tax forms For more information on accounting methods, see When Can I Deduct an Expense in chapter 1. Federal and state income tax forms Foreign income taxes. Federal and state income tax forms   Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. Federal and state income tax forms S. Federal and state income tax forms possession. Federal and state income tax forms However, an individual cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. Federal and state income tax forms S. Federal and state income tax forms tax under the foreign earned income exclusion or the foreign housing exclusion. Federal and state income tax forms For information on these exclusions, see Publication 54, Tax Guide for U. Federal and state income tax forms S. Federal and state income tax forms Citizens and Resident Aliens Abroad. Federal and state income tax forms For information on the foreign tax credit, see Publication 514, Foreign Tax Credit for Individuals. Federal and state income tax forms Employment Taxes If you have employees, you must withhold various taxes from your employees' pay. Federal and state income tax forms Most employers must withhold their employees' share of social security, Medicare taxes, and Additional Medicare Tax (if applicable) along with state and federal income taxes. Federal and state income tax forms You may also need to pay certain employment taxes from your own funds. Federal and state income tax forms These include your share of social security and Medicare taxes as an employer, along with unemployment taxes. Federal and state income tax forms Note. Federal and state income tax forms Additional Medicare Tax is only imposed on the employee. Federal and state income tax forms There is no employer share of Additional Medicare Tax. Federal and state income tax forms Your deduction for wages paid is not reduced by the social security and Medicare taxes, Additional Medicare Tax, and income taxes you withhold from your employees. Federal and state income tax forms You can deduct the employment taxes you must pay from your own funds as taxes. Federal and state income tax forms Example. Federal and state income tax forms You pay your employee $18,000 a year. Federal and state income tax forms However, after you withhold various taxes, your employee receives $14,500. Federal and state income tax forms You also pay an additional $1,500 in employment taxes. Federal and state income tax forms You should deduct the full $18,000 as wages. Federal and state income tax forms You can deduct the $1,500 you pay from your own funds as taxes. Federal and state income tax forms For more information on employment taxes, see Publication 15 (Circular E). Federal and state income tax forms Unemployment fund taxes. Federal and state income tax forms   As an employer, you may have to make payments to a state unemployment compensation fund or to a state disability benefit fund. Federal and state income tax forms Deduct these payments as taxes. Federal and state income tax forms Other Taxes The following are other taxes you can deduct if you incur them in the ordinary course of your trade or business. Federal and state income tax forms Excise taxes. Federal and state income tax forms   Generally, you can deduct as a business expense all excise taxes that are ordinary and necessary expenses of carrying on your trade or business. Federal and state income tax forms However, see Fuel taxes , later. Federal and state income tax forms   For more information on excise taxes, see Publication 510. Federal and state income tax forms Franchise taxes. Federal and state income tax forms   You can deduct corporate franchise taxes as a business expense. Federal and state income tax forms Fuel taxes. Federal and state income tax forms   Generally, taxes on gasoline, diesel fuel, and other motor fuels that you use in your business are included as part of the cost of the fuel. Federal and state income tax forms Do not deduct these taxes as a separate item. Federal and state income tax forms   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Federal and state income tax forms For more information, see Publication 510. Federal and state income tax forms Occupational taxes. Federal and state income tax forms   You can deduct as a business expense an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. Federal and state income tax forms Personal property tax. Federal and state income tax forms   You can deduct any tax imposed by a state or local government on personal property used in your trade or business. Federal and state income tax forms Sales tax. Federal and state income tax forms   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Federal and state income tax forms If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Federal and state income tax forms If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Federal and state income tax forms If the property is depreciable, add the sales tax to the basis for depreciation. Federal and state income tax forms For more information on basis, see Publication 551. Federal and state income tax forms    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Federal and state income tax forms Also, do not include these taxes in gross receipts or sales. Federal and state income tax forms Self-employment tax. Federal and state income tax forms   You can deduct part of your self-employment tax as a business expense in figuring your adjusted gross income. Federal and state income tax forms This deduction only affects your income tax. Federal and state income tax forms It does not affect your net earnings from self-employment or your self-employment tax. Federal and state income tax forms   To deduct the tax, enter on Form 1040, line 27, the amount shown on the Deduction for one-half of self-employment tax line of Schedule SE (Form 1040). Federal and state income tax forms   For more information on self-employment tax, see Publication 334. Federal and state income tax forms Additional Medicare Tax. Federal and state income tax forms   Beginning in 2013, you may be required to pay Additional Medicare Tax on self-employment income. Federal and state income tax forms See Form 8959 and the Instructions for Form 8959 for more information on the Additional Medicare Tax. Federal and state income tax forms Prev  Up  Next   Home   More Online Publications
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Help for Victims of Hurricane Sandy

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The IRS is providing help to the victims of Hurricane Sandy. Special tax relief and assistance is available to taxpayers in the Presidential Disaster Areas. 

So far, the IRS filing and payment relief applies to the following localities identified by FEMA for Individual Assistance due to Hurricane Sandy:

  • In Connecticut: Fairfield, Middlesex, New Haven, and New London Counties and the Mashantucket Pequot Tribal Nation and Mohegan Tribal Nation located within New London County;

  • In Maryland: Somerset County
  • In New Jersey: Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren;
  • In New York: Bronx, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Sullivan, Suffolk, Ulster and Westchester;
  • In Rhode Island: Newport and Washington counties.

The IRS also announced additional tax relief to certain affected individuals and businesses, further extending tax deadlines of that relief until April 1 for the following localities:

  • In New Jersey: Monmouth and Ocean counties.
  • In New York: Nassau, Queens, Richmond and Suffolk counties.

We are monitoring the situation closely to resolve potential tax administration issues as they are identified. The IRS often updates its information on disaster relief efforts related to Hurricane Sandy. For the latest news, check this page frequently.

News Releases

  • IR-2013-16, IRS Extends Tax Relief to Some New Jersey and New York Victims of Hurricane Sandy; Return Filing and Tax Payment Deadline Extended to April 1, 2013
  • IR-2012-96, IRS Gives Additional Time to Small, Automatically Revoked Tax-Exempt Organizations Affected by Hurricane Sandy
  • IR-2012-94, IRS Extends Hurricane Sandy Diesel Fuel Penalty Waiver to Dec. 7 for New Jersey and Parts of New York
  • IR-2012-93, Retirement Plans Can Make Loans, Hardship Distributions to Sandy Victims
  • IR-2012-91, IRS Warns Consumers of Possible Scams Relating to Hurricane Sandy Relief
  • IR-2012-91SP, IRS Advierte a Consumidores de Posibles Estafas Relacionadas a las Ayudas por el Huracán Sandy
  • IR-2012-88, Treasury, IRS Announce Special Relief to Encourage Leave-Donation Programs for Victims of Hurricane Sandy
  • IR-2012-88SP, Tesoro y IRS Anuncian Alivio Especial para Estimular Programas Que Permitan la Donación de Días de Paga a Víctimas del Huracán Sandy
  • IR-2012-87, IRS Expedites Charity Applications, Urges Use of Existing Charities
  • IR-2012-87SP, El IRS Acelera Las Solicitudes de Organizaciones Benéficas, Recomienda el Uso de Caridades Existentes
  • IR-2012-86, Treasury and IRS Expand Availability of Housing for Hurricane Sandy Victims
  • IR-2012-85, IRS Waives Diesel Fuel Penalty Due to Hurricane Sandy
  • IR-2012-84, IRS Announces Qualified Disaster Treatment of Payments to Victims of Hurricane Sandy
  • IR-2012-84SP, El IRS Anuncia el Trato de Pagos Por un Desastre Calificado para las Víctimas del Huracán Sandy
  • IR-2012-83, IRS Provides Tax Relief to Victims of Hurricane Sandy; Return Filing and Tax Payment Deadline Extended to Feb. 1, 2013
  • IR-2012-83SP, IRS Ofrece Alivio a Víctimas del Huracán Sandy; Extiende Plazo de Presentación de Declaraciones de Impuestos y Pagos al 1 de Febrero de 2013
  • IR-2012-82, IRS Gives Additional Time to Taxpayers and Preparers Affected by Hurricane Sandy; File and Pay by Nov. 7

Legal Guidance

  • Notice 2013-21, Postponement of Deadline for Making an Election to Deduct for the Preceding Taxable Year Losses Attributable to Hurricane Sandy
  • Notice 2012-71, Postponement of Deadline for Transitional Relief under Notice 2011-43 for Certain Small Organizations Affected by Hurricane Sandy
  • Notice 2012-69, Treatment of Certain Amounts Paid to Section 170(c) Organizations under Certain Employer Leave-Based Donation Programs to Aid Victims of Hurricane Sandy
  • Notice 2012-68, Low-Income Housing Credit Disaster Relief for Hurricane Sandy

Other Resources

For additional information provided by the federal government on disaster recovery, visit DisasterAssistance.gov and the Hurricane Sandy Recovery page on USA.gov. The latest Federal Emergency Management Agency disaster declarations are also available.

Related Item: Hurricane Sandy News Releases and Legal Guidance

 

Page Last Reviewed or Updated: 05-Nov-2013

The Federal And State Income Tax Forms

Federal and state income tax forms 8. Federal and state income tax forms   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Federal and state income tax forms Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Federal and state income tax forms Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Federal and state income tax forms Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Federal and state income tax forms Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Federal and state income tax forms This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Federal and state income tax forms A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Federal and state income tax forms An exchange is a transfer of property for other property or services. Federal and state income tax forms Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Federal and state income tax forms If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Federal and state income tax forms If the adjusted basis of the property is more than the amount you realize, you will have a loss. Federal and state income tax forms Basis and adjusted basis. Federal and state income tax forms   The basis of property you buy is usually its cost. Federal and state income tax forms The adjusted basis of property is basis plus certain additions and minus certain deductions. Federal and state income tax forms See chapter 6 for more information about basis and adjusted basis. Federal and state income tax forms Amount realized. Federal and state income tax forms   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Federal and state income tax forms The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Federal and state income tax forms   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Federal and state income tax forms Amount recognized. Federal and state income tax forms   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Federal and state income tax forms A recognized gain is a gain you must include in gross income and report on your income tax return. Federal and state income tax forms A recognized loss is a loss you deduct from gross income. Federal and state income tax forms However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Federal and state income tax forms See Like-Kind Exchanges next. Federal and state income tax forms Also, a loss from the disposition of property held for personal use is not deductible. Federal and state income tax forms Like-Kind Exchanges Certain exchanges of property are not taxable. Federal and state income tax forms This means any gain from the exchange is not recognized, and any loss cannot be deducted. Federal and state income tax forms Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Federal and state income tax forms The exchange of property for the same kind of property is the most common type of nontaxable exchange. Federal and state income tax forms To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Federal and state income tax forms Qualifying property. Federal and state income tax forms Like-kind property. Federal and state income tax forms These two requirements are discussed later. Federal and state income tax forms Multiple-party transactions. Federal and state income tax forms   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Federal and state income tax forms Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Federal and state income tax forms Receipt of title from third party. Federal and state income tax forms   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Federal and state income tax forms Basis of property received. Federal and state income tax forms   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Federal and state income tax forms See chapter 6 for more information. Federal and state income tax forms Money paid. Federal and state income tax forms   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Federal and state income tax forms The basis of the property received is the basis of the property given up, increased by the money paid. Federal and state income tax forms Example. Federal and state income tax forms You traded an old tractor with an adjusted basis of $15,000 for a new one. Federal and state income tax forms The new tractor costs $300,000. Federal and state income tax forms You were allowed $80,000 for the old tractor and paid $220,000 cash. Federal and state income tax forms You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Federal and state income tax forms If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Federal and state income tax forms In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Federal and state income tax forms Reporting the exchange. Federal and state income tax forms   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Federal and state income tax forms The Instructions for Form 8824 explain how to report the details of the exchange. Federal and state income tax forms   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Federal and state income tax forms You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Federal and state income tax forms See chapter 9 for more information. Federal and state income tax forms Qualifying property. Federal and state income tax forms   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Federal and state income tax forms Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Federal and state income tax forms Nonqualifying property. Federal and state income tax forms   The rules for like-kind exchanges do not apply to exchanges of the following property. Federal and state income tax forms Property you use for personal purposes, such as your home and family car. Federal and state income tax forms Stock in trade or other property held primarily for sale, such as crops and produce. Federal and state income tax forms Stocks, bonds, or notes. Federal and state income tax forms However, see Qualifying property above. Federal and state income tax forms Other securities or evidences of indebtedness, such as accounts receivable. Federal and state income tax forms Partnership interests. Federal and state income tax forms However, you may have a nontaxable exchange under other rules. Federal and state income tax forms See Other Nontaxable Exchanges in chapter 1 of Publication 544. Federal and state income tax forms Like-kind property. Federal and state income tax forms   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Federal and state income tax forms Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Federal and state income tax forms Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Federal and state income tax forms For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Federal and state income tax forms   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Federal and state income tax forms An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Federal and state income tax forms The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Federal and state income tax forms For example, the exchange of a bull for a cow is not a like-kind exchange. Federal and state income tax forms An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Federal and state income tax forms    Note. Federal and state income tax forms Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Federal and state income tax forms Personal property. Federal and state income tax forms   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Federal and state income tax forms Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Federal and state income tax forms Property classified in any General Asset Class may not be classified within a Product Class. Federal and state income tax forms Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Federal and state income tax forms General Asset Classes. Federal and state income tax forms   General Asset Classes describe the types of property frequently used in many businesses. Federal and state income tax forms They include, but are not limited to, the following property. Federal and state income tax forms Office furniture, fixtures, and equipment (asset class 00. Federal and state income tax forms 11). Federal and state income tax forms Information systems, such as computers and peripheral equipment (asset class 00. Federal and state income tax forms 12). Federal and state income tax forms Data handling equipment except computers (asset class 00. Federal and state income tax forms 13). Federal and state income tax forms Automobiles and taxis (asset class 00. Federal and state income tax forms 22). Federal and state income tax forms Light general purpose trucks (asset class 00. Federal and state income tax forms 241). Federal and state income tax forms Heavy general purpose trucks (asset class 00. Federal and state income tax forms 242). Federal and state income tax forms Tractor units for use over-the-road (asset class 00. Federal and state income tax forms 26). Federal and state income tax forms Trailers and trailer-mounted containers (asset class 00. Federal and state income tax forms 27). Federal and state income tax forms Industrial steam and electric generation and/or distribution systems (asset class 00. Federal and state income tax forms 4). Federal and state income tax forms Product Classes. Federal and state income tax forms   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Federal and state income tax forms The latest version of the manual can be accessed at www. Federal and state income tax forms census. Federal and state income tax forms gov/eos/www/naics/. Federal and state income tax forms Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Federal and state income tax forms ntis. Federal and state income tax forms gov/products/naics. Federal and state income tax forms aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Federal and state income tax forms A CD-ROM version with search and retrieval software is also available from NTIS. Federal and state income tax forms    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Federal and state income tax forms Partially nontaxable exchange. Federal and state income tax forms   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Federal and state income tax forms You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Federal and state income tax forms A loss is not deductible. Federal and state income tax forms Example 1. Federal and state income tax forms You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Federal and state income tax forms You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Federal and state income tax forms However, only $10,000, the cash received, is recognized (included in income). Federal and state income tax forms Example 2. Federal and state income tax forms Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Federal and state income tax forms Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Federal and state income tax forms Example 3. Federal and state income tax forms Assume in Example 1 that the FMV of the land you received was only $15,000. Federal and state income tax forms Your $5,000 loss is not recognized. Federal and state income tax forms Unlike property given up. Federal and state income tax forms   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Federal and state income tax forms The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Federal and state income tax forms Like-kind exchanges between related persons. Federal and state income tax forms   Special rules apply to like-kind exchanges between related persons. Federal and state income tax forms These rules affect both direct and indirect exchanges. Federal and state income tax forms Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Federal and state income tax forms The gain or loss on the original exchange must be recognized as of the date of the later disposition. Federal and state income tax forms The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Federal and state income tax forms Related persons. Federal and state income tax forms   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Federal and state income tax forms ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Federal and state income tax forms   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Federal and state income tax forms Example. Federal and state income tax forms You used a grey pickup truck in your farming business. Federal and state income tax forms Your sister used a red pickup truck in her landscaping business. Federal and state income tax forms In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Federal and state income tax forms At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Federal and state income tax forms The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Federal and state income tax forms You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Federal and state income tax forms Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Federal and state income tax forms However, because this was a like-kind exchange, you recognized no gain. Federal and state income tax forms Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Federal and state income tax forms She recognized gain only to the extent of the money she received, $200. Federal and state income tax forms Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Federal and state income tax forms In 2013, you sold the red pickup truck to a third party for $7,000. Federal and state income tax forms Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Federal and state income tax forms On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Federal and state income tax forms You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Federal and state income tax forms In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Federal and state income tax forms Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Federal and state income tax forms Exceptions to the rules for related persons. Federal and state income tax forms   The following property dispositions are excluded from these rules. Federal and state income tax forms Dispositions due to the death of either related person. Federal and state income tax forms Involuntary conversions. Federal and state income tax forms Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Federal and state income tax forms Multiple property exchanges. Federal and state income tax forms   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Federal and state income tax forms However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Federal and state income tax forms Transfer and receive properties in two or more exchange groups. Federal and state income tax forms Transfer or receive more than one property within a single exchange group. Federal and state income tax forms   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Federal and state income tax forms Deferred exchange. Federal and state income tax forms   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Federal and state income tax forms A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Federal and state income tax forms The property you receive is replacement property. Federal and state income tax forms The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Federal and state income tax forms In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Federal and state income tax forms   For more information see Deferred Exchanges in chapter 1 of Publication 544. Federal and state income tax forms Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Federal and state income tax forms This rule does not apply if the recipient is a nonresident alien. Federal and state income tax forms Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Federal and state income tax forms Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Federal and state income tax forms The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Federal and state income tax forms This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Federal and state income tax forms This rule applies for determining loss as well as gain. Federal and state income tax forms Any gain recognized on a transfer in trust increases the basis. Federal and state income tax forms For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Federal and state income tax forms Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Federal and state income tax forms You may also have a capital gain if your section 1231 transactions result in a net gain. Federal and state income tax forms See Section 1231 Gains and Losses in  chapter 9. Federal and state income tax forms To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Federal and state income tax forms Your net capital gains may be taxed at a lower tax rate than ordinary income. Federal and state income tax forms See Capital Gains Tax Rates , later. Federal and state income tax forms Your deduction for a net capital loss may be limited. Federal and state income tax forms See Treatment of Capital Losses , later. Federal and state income tax forms Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Federal and state income tax forms The following items are examples of capital assets. Federal and state income tax forms A home owned and occupied by you and your family. Federal and state income tax forms Household furnishings. Federal and state income tax forms A car used for pleasure. Federal and state income tax forms If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Federal and state income tax forms Stocks and bonds. Federal and state income tax forms However, there are special rules for gains on qualified small business stock. Federal and state income tax forms For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Federal and state income tax forms Personal-use property. Federal and state income tax forms   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Federal and state income tax forms Loss from the sale or exchange of personal-use property is not deductible. Federal and state income tax forms You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Federal and state income tax forms For information on casualties and thefts, see chapter 11. Federal and state income tax forms Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Federal and state income tax forms The time you own an asset before disposing of it is the holding period. Federal and state income tax forms If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Federal and state income tax forms Report it in Part I of Schedule D (Form 1040). Federal and state income tax forms If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Federal and state income tax forms Report it in Part II of Schedule D (Form 1040). Federal and state income tax forms Holding period. Federal and state income tax forms   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Federal and state income tax forms The day you disposed of the property is part of your holding period. Federal and state income tax forms Example. Federal and state income tax forms If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Federal and state income tax forms If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Federal and state income tax forms Inherited property. Federal and state income tax forms   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Federal and state income tax forms This rule does not apply to livestock used in a farm business. Federal and state income tax forms See Holding period under Livestock , later. Federal and state income tax forms Nonbusiness bad debt. Federal and state income tax forms   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Federal and state income tax forms See chapter 4 of Publication 550. Federal and state income tax forms Nontaxable exchange. Federal and state income tax forms   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Federal and state income tax forms That is, it begins on the same day as your holding period for the old property. Federal and state income tax forms Gift. Federal and state income tax forms   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Federal and state income tax forms Real property. Federal and state income tax forms   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Federal and state income tax forms   However, taking possession of real property under an option agreement is not enough to start the holding period. Federal and state income tax forms The holding period cannot start until there is an actual contract of sale. Federal and state income tax forms The holding period of the seller cannot end before that time. Federal and state income tax forms Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Federal and state income tax forms Net short-term capital gain or loss. Federal and state income tax forms   Combine your short-term capital gains and losses. Federal and state income tax forms Do this by adding all of your short-term capital gains. Federal and state income tax forms Then add all of your short-term capital losses. Federal and state income tax forms Subtract the lesser total from the greater. Federal and state income tax forms The difference is your net short-term capital gain or loss. Federal and state income tax forms Net long-term capital gain or loss. Federal and state income tax forms   Follow the same steps to combine your long-term capital gains and losses. Federal and state income tax forms The result is your net long-term capital gain or loss. Federal and state income tax forms Net gain. Federal and state income tax forms   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Federal and state income tax forms However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Federal and state income tax forms See Capital Gains Tax Rates , later. Federal and state income tax forms Net loss. Federal and state income tax forms   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Federal and state income tax forms But there are limits on how much loss you can deduct and when you can deduct it. Federal and state income tax forms See Treatment of Capital Losses next. Federal and state income tax forms Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Federal and state income tax forms For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Federal and state income tax forms If your other income is low, you may not be able to use the full $3,000. Federal and state income tax forms The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Federal and state income tax forms Capital loss carryover. Federal and state income tax forms   Generally, you have a capital loss carryover if either of the following situations applies to you. Federal and state income tax forms Your net loss on Schedule D (Form 1040), is more than the yearly limit. Federal and state income tax forms Your taxable income without your deduction for exemptions is less than zero. Federal and state income tax forms If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Federal and state income tax forms    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Federal and state income tax forms Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Federal and state income tax forms These lower rates are called the maximum capital gains rates. Federal and state income tax forms The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Federal and state income tax forms See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Federal and state income tax forms Also see Publication 550. Federal and state income tax forms Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Federal and state income tax forms A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Federal and state income tax forms Property held for sale in the ordinary course of your farm business. Federal and state income tax forms   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Federal and state income tax forms Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Federal and state income tax forms The treatment of this property is discussed in chapter 3. Federal and state income tax forms Land and depreciable properties. Federal and state income tax forms   Land and depreciable property you use in farming are not capital assets. Federal and state income tax forms Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Federal and state income tax forms However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Federal and state income tax forms The sales of these business assets are reported on Form 4797. Federal and state income tax forms See chapter 9 for more information. Federal and state income tax forms Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Federal and state income tax forms Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Federal and state income tax forms A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Federal and state income tax forms The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Federal and state income tax forms A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Federal and state income tax forms Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Federal and state income tax forms Hedging transactions. Federal and state income tax forms Transactions that are not hedging transactions. Federal and state income tax forms Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Federal and state income tax forms There is a limit on the amount of capital losses you can deduct each year. Federal and state income tax forms Hedging transactions are not subject to the mark-to-market rules. Federal and state income tax forms If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Federal and state income tax forms They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Federal and state income tax forms The gain or loss on the termination of these hedges is generally ordinary gain or loss. Federal and state income tax forms Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Federal and state income tax forms Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Federal and state income tax forms Examples include fuel and feed. Federal and state income tax forms If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Federal and state income tax forms Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Federal and state income tax forms It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Federal and state income tax forms Retain the identification of each hedging transaction with your books and records. Federal and state income tax forms Also, identify the item(s) or aggregate risk that is being hedged in your records. Federal and state income tax forms Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Federal and state income tax forms For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Federal and state income tax forms Accounting methods for hedging transactions. Federal and state income tax forms   The accounting method you use for a hedging transaction must clearly reflect income. Federal and state income tax forms This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Federal and state income tax forms There are requirements and limits on the method you can use for certain hedging transactions. Federal and state income tax forms See Regulations section 1. Federal and state income tax forms 446-4(e) for those requirements and limits. Federal and state income tax forms   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Federal and state income tax forms Cash method. Federal and state income tax forms Farm-price method. Federal and state income tax forms Unit-livestock-price method. Federal and state income tax forms   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Federal and state income tax forms   Your books and records must describe the accounting method used for each type of hedging transaction. Federal and state income tax forms They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Federal and state income tax forms You must make the additional identification no more than 35 days after entering into the hedging transaction. Federal and state income tax forms Example of a hedging transaction. Federal and state income tax forms   You file your income tax returns on the cash method. Federal and state income tax forms On July 2 you anticipate a yield of 50,000 bushels of corn this year. Federal and state income tax forms The December futures price is $5. Federal and state income tax forms 75 a bushel, but there are indications that by harvest time the price will drop. Federal and state income tax forms To protect yourself against a drop in the price, you enter into the following hedging transaction. Federal and state income tax forms You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Federal and state income tax forms 75 a bushel. Federal and state income tax forms   The price did not drop as anticipated but rose to $6 a bushel. Federal and state income tax forms In November, you sell your crop at a local elevator for $6 a bushel. Federal and state income tax forms You also close out your futures position by buying ten December contracts for $6 a bushel. Federal and state income tax forms You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Federal and state income tax forms   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Federal and state income tax forms Your loss on the hedge is 25 cents a bushel. Federal and state income tax forms In effect, the net selling price of your corn is $5. Federal and state income tax forms 75 a bushel. Federal and state income tax forms   Report the results of your futures transactions and your sale of corn separately on Schedule F. Federal and state income tax forms See the instructions for the 2013 Schedule F (Form 1040). Federal and state income tax forms   The loss on your futures transactions is $13,900, figured as follows. Federal and state income tax forms July 2 - Sold December corn futures (50,000 bu. Federal and state income tax forms @$5. Federal and state income tax forms 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Federal and state income tax forms @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Federal and state income tax forms   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Federal and state income tax forms × $6). Federal and state income tax forms Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Federal and state income tax forms   Assume you were right and the price went down 25 cents a bushel. Federal and state income tax forms In effect, you would still net $5. Federal and state income tax forms 75 a bushel, figured as follows. Federal and state income tax forms Sold cash corn, per bushel $5. Federal and state income tax forms 50 Gain on hedge, per bushel . Federal and state income tax forms 25 Net price, per bushel $5. Federal and state income tax forms 75       The gain on your futures transactions would have been $11,100, figured as follows. Federal and state income tax forms July 2 - Sold December corn futures (50,000 bu. Federal and state income tax forms @$5. Federal and state income tax forms 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Federal and state income tax forms @$5. Federal and state income tax forms 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Federal and state income tax forms   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Federal and state income tax forms Livestock This part discusses the sale or exchange of livestock used in your farm business. Federal and state income tax forms Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Federal and state income tax forms However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Federal and state income tax forms See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Federal and state income tax forms The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Federal and state income tax forms The sale of this livestock is reported on Schedule F. Federal and state income tax forms See chapter 3. Federal and state income tax forms Also, special rules apply to sales or exchanges caused by weather-related conditions. Federal and state income tax forms See chapter 3. Federal and state income tax forms Holding period. Federal and state income tax forms   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Federal and state income tax forms Livestock. Federal and state income tax forms   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Federal and state income tax forms Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Federal and state income tax forms Livestock used in farm business. Federal and state income tax forms   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Federal and state income tax forms The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Federal and state income tax forms An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Federal and state income tax forms However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Federal and state income tax forms Example 1. Federal and state income tax forms You discover an animal that you intend to use for breeding purposes is sterile. Federal and state income tax forms You dispose of it within a reasonable time. Federal and state income tax forms This animal was held for breeding purposes. Federal and state income tax forms Example 2. Federal and state income tax forms You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Federal and state income tax forms These young animals were held for breeding or dairy purposes. Federal and state income tax forms Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Federal and state income tax forms See Sales Caused by Weather-Related Conditions in chapter 3. Federal and state income tax forms Example 3. Federal and state income tax forms You are in the business of raising hogs for slaughter. Federal and state income tax forms Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Federal and state income tax forms You sell the brood sows after obtaining the litter. Federal and state income tax forms Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Federal and state income tax forms Example 4. Federal and state income tax forms You are in the business of raising registered cattle for sale to others for use as breeding cattle. Federal and state income tax forms The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Federal and state income tax forms Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Federal and state income tax forms Such use does not demonstrate that you are holding the cattle for breeding purposes. Federal and state income tax forms However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Federal and state income tax forms The same applies to hog and sheep breeders. Federal and state income tax forms Example 5. Federal and state income tax forms You breed, raise, and train horses for racing purposes. Federal and state income tax forms Every year you cull horses from your racing stable. Federal and state income tax forms In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Federal and state income tax forms These horses are all considered held for sporting purposes. Federal and state income tax forms Figuring gain or loss on the cash method. Federal and state income tax forms   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Federal and state income tax forms Raised livestock. Federal and state income tax forms   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Federal and state income tax forms Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Federal and state income tax forms The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Federal and state income tax forms However, see Uniform Capitalization Rules in chapter 6. Federal and state income tax forms Purchased livestock. Federal and state income tax forms   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Federal and state income tax forms Example. Federal and state income tax forms A farmer sold a breeding cow on January 8, 2013, for $1,250. Federal and state income tax forms Expenses of the sale were $125. Federal and state income tax forms The cow was bought July 2, 2009, for $1,300. Federal and state income tax forms Depreciation (not less than the amount allowable) was $867. Federal and state income tax forms Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Federal and state income tax forms Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Federal and state income tax forms Any loss on the disposition of such property is treated as a long-term capital loss. Federal and state income tax forms Converted wetland. Federal and state income tax forms   This is generally land that was drained or filled to make the production of agricultural commodities possible. Federal and state income tax forms It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Federal and state income tax forms   A wetland (before conversion) is land that meets all the following conditions. Federal and state income tax forms It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Federal and state income tax forms It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Federal and state income tax forms It supports, under normal circumstances, mostly plants that grow in saturated soil. Federal and state income tax forms Highly erodible cropland. Federal and state income tax forms   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Federal and state income tax forms Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Federal and state income tax forms Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Federal and state income tax forms Successor. Federal and state income tax forms   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Federal and state income tax forms Timber Standing timber you held as investment property is a capital asset. Federal and state income tax forms Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Federal and state income tax forms If you held the timber primarily for sale to customers, it is not a capital asset. Federal and state income tax forms Gain or loss on its sale is ordinary business income or loss. Federal and state income tax forms It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Federal and state income tax forms See the Instructions for Schedule F (Form 1040). Federal and state income tax forms Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Federal and state income tax forms Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Federal and state income tax forms , are ordinary farm income and expenses reported on Schedule F. Federal and state income tax forms Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Federal and state income tax forms Timber considered cut. Federal and state income tax forms   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Federal and state income tax forms This is true whether the timber is cut under contract or whether you cut it yourself. Federal and state income tax forms Christmas trees. Federal and state income tax forms   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Federal and state income tax forms They qualify for both rules discussed below. Federal and state income tax forms Election to treat cutting as a sale or exchange. Federal and state income tax forms   Under the general rule, the cutting of timber results in no gain or loss. Federal and state income tax forms It is not until a sale or exchange occurs that gain or loss is realized. Federal and state income tax forms But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Federal and state income tax forms Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Federal and state income tax forms Any later sale results in ordinary business income or loss. Federal and state income tax forms See the example below. Federal and state income tax forms   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Federal and state income tax forms Making the election. Federal and state income tax forms   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Federal and state income tax forms You do not have to make the election in the first year you cut the timber. Federal and state income tax forms You can make it in any year to which the election would apply. Federal and state income tax forms If the timber is partnership property, the election is made on the partnership return. Federal and state income tax forms This election cannot be made on an amended return. Federal and state income tax forms   Once you have made the election, it remains in effect for all later years unless you revoke it. Federal and state income tax forms Election under section 631(a) may be revoked. Federal and state income tax forms   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Federal and state income tax forms The prior election (and revocation) is disregarded for purposes of making a subsequent election. Federal and state income tax forms See Form T (Timber), Forest Activities Schedule, for more information. Federal and state income tax forms Gain or loss. Federal and state income tax forms   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Federal and state income tax forms   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Federal and state income tax forms Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Federal and state income tax forms 611-3. Federal and state income tax forms   Depletion of timber is discussed in chapter 7. Federal and state income tax forms Example. Federal and state income tax forms   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Federal and state income tax forms It had an adjusted basis for depletion of $40 per MBF. Federal and state income tax forms You are a calendar year taxpayer. Federal and state income tax forms On January 1, 2013, the timber had a FMV of $350 per MBF. Federal and state income tax forms It was cut in April for sale. Federal and state income tax forms On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Federal and state income tax forms You report the difference between the FMV and your adjusted basis for depletion as a gain. Federal and state income tax forms This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Federal and state income tax forms You figure your gain as follows. Federal and state income tax forms FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Federal and state income tax forms Outright sales of timber. Federal and state income tax forms   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Federal and state income tax forms However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Federal and state income tax forms Cutting contract. Federal and state income tax forms   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Federal and state income tax forms You are the owner of the timber. Federal and state income tax forms You held the timber longer than 1 year before its disposal. Federal and state income tax forms You kept an economic interest in the timber. Federal and state income tax forms   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Federal and state income tax forms   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Federal and state income tax forms Include this amount on Form 4797 along with your other section 1231 gains or losses. Federal and state income tax forms Date of disposal. Federal and state income tax forms   The date of disposal is the date the timber is cut. Federal and state income tax forms However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Federal and state income tax forms   This election applies only to figure the holding period of the timber. Federal and state income tax forms It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Federal and state income tax forms   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Federal and state income tax forms The statement must identify the advance payments subject to the election and the contract under which they were made. Federal and state income tax forms   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Federal and state income tax forms Attach the statement to the amended return and write “Filed pursuant to section 301. Federal and state income tax forms 9100-2” at the top of the statement. Federal and state income tax forms File the amended return at the same address the original return was filed. Federal and state income tax forms Owner. Federal and state income tax forms   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Federal and state income tax forms You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Federal and state income tax forms Tree stumps. Federal and state income tax forms   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Federal and state income tax forms Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Federal and state income tax forms However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Federal and state income tax forms Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Federal and state income tax forms   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Federal and state income tax forms Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Federal and state income tax forms If you have a gain from the sale, you may be allowed to exclude the gain on your home. Federal and state income tax forms For more information, see Publication 523, Selling Your Home. Federal and state income tax forms The gain on the sale of your business property is taxable. Federal and state income tax forms A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Federal and state income tax forms Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Federal and state income tax forms See chapter 9. Federal and state income tax forms Losses from personal-use property, other than casualty or theft losses, are not deductible. Federal and state income tax forms If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Federal and state income tax forms See chapter 10 for information about installment sales. Federal and state income tax forms When you sell your farm, the gain or loss on each asset is figured separately. Federal and state income tax forms The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Federal and state income tax forms Each of the assets sold must be classified as one of the following. Federal and state income tax forms Capital asset held 1 year or less. Federal and state income tax forms Capital asset held longer than 1 year. Federal and state income tax forms Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Federal and state income tax forms Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Federal and state income tax forms Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Federal and state income tax forms Allocation of consideration paid for a farm. Federal and state income tax forms   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Federal and state income tax forms The residual method is required only if the group of assets sold constitutes a trade or business. Federal and state income tax forms This method determines gain or loss from the transfer of each asset. Federal and state income tax forms It also determines the buyer's basis in the business assets. Federal and state income tax forms For more information, see Sale of a Business in chapter 2 of Publication 544. Federal and state income tax forms Property used in farm operation. Federal and state income tax forms   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Federal and state income tax forms Recognized gains and losses on business property must be reported on your return for the year of the sale. Federal and state income tax forms If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Federal and state income tax forms Example. Federal and state income tax forms You sell your farm, including your main home, which you have owned since December 2001. Federal and state income tax forms You realize gain on the sale as follows. Federal and state income tax forms   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Federal and state income tax forms All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Federal and state income tax forms Treat the balance as section 1231 gain. Federal and state income tax forms The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Federal and state income tax forms Partial sale. Federal and state income tax forms   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Federal and state income tax forms You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Federal and state income tax forms For a detailed discussion on installment sales, see Publication 544. Federal and state income tax forms Adjusted basis of the part sold. Federal and state income tax forms   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Federal and state income tax forms , on the part sold. Federal and state income tax forms If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Federal and state income tax forms Example. Federal and state income tax forms You bought a 600-acre farm for $700,000. Federal and state income tax forms The farm included land and buildings. Federal and state income tax forms The purchase contract designated $600,000 of the purchase price to the land. Federal and state income tax forms You later sold 60 acres of land on which you had installed a fence. Federal and state income tax forms Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Federal and state income tax forms Use this amount to determine your gain or loss on the sale of the 60 acres. Federal and state income tax forms Assessed values for local property taxes. Federal and state income tax forms   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Federal and state income tax forms Example. Federal and state income tax forms Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Federal and state income tax forms However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Federal and state income tax forms The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Federal and state income tax forms Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Federal and state income tax forms The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Federal and state income tax forms Sale of your home. Federal and state income tax forms   Your home is a capital asset and not property used in the trade or business of farming. Federal and state income tax forms If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Federal and state income tax forms Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Federal and state income tax forms   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Federal and state income tax forms For more information on basis, see chapter 6. Federal and state income tax forms More information. Federal and state income tax forms   For more information on selling your home, see Publication 523. Federal and state income tax forms Gain from condemnation. Federal and state income tax forms   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Federal and state income tax forms However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Federal and state income tax forms Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Federal and state income tax forms The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Federal and state income tax forms This is true even if you voluntarily return the property to the lender. Federal and state income tax forms You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Federal and state income tax forms Buyer's (borrower's) gain or loss. Federal and state income tax forms   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Federal and state income tax forms The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Federal and state income tax forms See Determining Gain or Loss , earlier. Federal and state income tax forms Worksheet 8-1. Federal and state income tax forms Worksheet for Foreclosures andRepossessions Part 1. Federal and state income tax forms Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Federal and state income tax forms Complete this part only if you were personally liable for the debt. Federal and state income tax forms Otherwise, go to Part 2. Federal and state income tax forms   1. Federal and state income tax forms Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Federal and state income tax forms Enter the Fair Market Value of the transferred property   3. Federal and state income tax forms Ordinary income from cancellation of debt upon foreclosure or repossession. Federal and state income tax forms * Subtract line 2 from line 1. Federal and state income tax forms If zero or less, enter -0-   Part 2. Federal and state income tax forms Figure your gain or loss from foreclosure or repossession. Federal and state income tax forms   4. Federal and state income tax forms If you completed Part 1, enter the smaller of line 1 or line 2. Federal and state income tax forms If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Federal and state income tax forms Enter any proceeds you received from the foreclosure sale   6. Federal and state income tax forms Add lines 4 and 5   7. Federal and state income tax forms Enter the adjusted basis of the transferred property   8. Federal and state income tax forms Gain or loss from foreclosure or repossession. Federal and state income tax forms Subtract line 7  from line 6   * The income may not be taxable. Federal and state income tax forms See Cancellation of debt . Federal and state income tax forms    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Federal and state income tax forms Amount realized on a nonrecourse debt. Federal and state income tax forms   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Federal and state income tax forms The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Federal and state income tax forms Example 1. Federal and state income tax forms Ann paid $200,000 for land used in her farming business. Federal and state income tax forms She paid $15,000 down and borrowed the remaining $185,000 from a bank. Federal and state income tax forms Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Federal and state income tax forms The bank foreclosed on the loan 2 years after Ann stopped making payments. Federal and state income tax forms When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Federal and state income tax forms The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Federal and state income tax forms She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Federal and state income tax forms She has a $20,000 deductible loss. Federal and state income tax forms Example 2. Federal and state income tax forms Assume the same facts as in Example 1 except the FMV of the land was $210,000. Federal and state income tax forms The result is the same. Federal and state income tax forms The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Federal and state income tax forms Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Federal and state income tax forms Amount realized on a recourse debt. Federal and state income tax forms   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Federal and state income tax forms   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Federal and state income tax forms The amount realized does not include the canceled debt that is your income from cancellation of debt. Federal and state income tax forms See Cancellation of debt , later. Federal and state income tax forms Example 3. Federal and state income tax forms Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Federal and state income tax forms In this case, the amount she realizes is $170,000. Federal and state income tax forms This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Federal and state income tax forms Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Federal and state income tax forms She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Federal and state income tax forms She is also treated as receiving ordinary income from cancellation of debt. Federal and state income tax forms That income is $10,000 ($180,000 − $170,000). Federal and state income tax forms This is the part of the canceled debt not included in the amount realized. Federal and state income tax forms She reports this as other income on Schedule F, line 8. Federal and state income tax forms Seller's (lender's) gain or loss on repossession. Federal and state income tax forms   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Federal and state income tax forms For more information, see Repossession in Publication 537, Installment Sales. Federal and state income tax forms Cancellation of debt. Federal and state income tax forms   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Federal and state income tax forms This income is separate from any gain or loss realized from the foreclosure or repossession. Federal and state income tax forms Report the income from cancellation of a business debt on Schedule F, line 8. Federal and state income tax forms Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Federal and state income tax forms    You can use Worksheet 8-1 to figure your income from cancellation of debt. Federal and state income tax forms   However, income from cancellation of debt is not taxed if any of the following apply. Federal and state income tax forms The cancellation is intended as a gift. Federal and state income tax forms The debt is qualified farm debt (see chapter 3). Federal and state income tax forms The debt is qualified real property business debt (see chapter 5 of Publication 334). Federal and state income tax forms You are insolvent or bankrupt (see  chapter 3). Federal and state income tax forms The debt is qualified principal residence indebtedness (see chapter 3). Federal and state income tax forms   Use Form 982 to report the income exclusion. Federal and state income tax forms Abandonment The abandonment of property is a disposition of property. Federal and state income tax forms You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Federal and state income tax forms Business or investment property. Federal and state income tax forms   Loss from abandonment of business or investment property is deductible as a loss. Federal and state income tax forms Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Federal and state income tax forms If your adjusted basis is more than the amount you realize (if any), then you have a loss. Federal and state income tax forms If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Federal and state income tax forms This rule also applies to leasehold improvements the lessor made for the lessee. Federal and state income tax forms However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Federal and state income tax forms   If the abandoned property is secured by debt, special rules apply. Federal and state income tax forms The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Federal and state income tax forms For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Federal and state income tax forms The abandonment loss is deducted in the tax year in which the loss is sustained. Federal and state income tax forms Report the loss on Form 4797, Part II, line 10. Federal and state income tax forms Personal-use property. Federal and state income tax forms   You cannot deduct any loss from abandonment of your home or other property held for personal use. Federal and state income tax forms Canceled debt. Federal and state income tax forms   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Federal and state income tax forms This income is separate from any loss realized from abandonment of the property. Federal and state income tax forms Report income from cancellation of a debt related to a business or rental activity as business or rental income. Federal and state income tax forms Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Federal and state income tax forms   However, income from cancellation of debt is not taxed in certain circumstances. Federal and state income tax forms See Cancellation of debt earlier under Foreclosure or Repossession . Federal and state income tax forms Forms 1099-A and 1099-C. Federal and state income tax forms   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Federal and state income tax forms However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Federal and state income tax forms The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Federal and state income tax forms For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Federal and state income tax forms Prev  Up  Next   Home   More Online Publications