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File 2008 Taxes

File 2008 taxes 1. File 2008 taxes   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. File 2008 taxes It is an allowance for the wear and tear, deterioration, or obsolescence of the property. File 2008 taxes This chapter discusses the general rules for depreciating property and answers the following questions. File 2008 taxes What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use to depreciate your property? What is the basis of your depreciable property? How do you treat repairs and improvements? Do you have to file Form 4562? How do you correct depreciation deductions? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. File 2008 taxes What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. File 2008 taxes You also can depreciate certain intangible property, such as patents, copyrights, and computer software. File 2008 taxes To be depreciable, the property must meet all the following requirements. File 2008 taxes It must be property you own. File 2008 taxes It must be used in your business or income-producing activity. File 2008 taxes It must have a determinable useful life. File 2008 taxes It must be expected to last more than one year. File 2008 taxes The following discussions provide information about these requirements. File 2008 taxes Property You Own To claim depreciation, you usually must be the owner of the property. File 2008 taxes You are considered as owning property even if it is subject to a debt. File 2008 taxes Example 1. File 2008 taxes You made a down payment to purchase rental property and assumed the previous owner's mortgage. File 2008 taxes You own the property and you can depreciate it. File 2008 taxes Example 2. File 2008 taxes You bought a new van that you will use only for your courier business. File 2008 taxes You will be making payments on the van over the next 5 years. File 2008 taxes You own the van and you can depreciate it. File 2008 taxes Leased property. File 2008 taxes   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). File 2008 taxes This means you bear the burden of exhaustion of the capital investment in the property. File 2008 taxes Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. File 2008 taxes You can, however, depreciate any capital improvements you make to the property. File 2008 taxes See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. File 2008 taxes   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. File 2008 taxes However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property. File 2008 taxes Incidents of ownership. File 2008 taxes   Incidents of ownership in property include the following. File 2008 taxes The legal title to the property. File 2008 taxes The legal obligation to pay for the property. File 2008 taxes The responsibility to pay maintenance and operating expenses. File 2008 taxes The duty to pay any taxes on the property. File 2008 taxes The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. File 2008 taxes Life tenant. File 2008 taxes   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. File 2008 taxes However, see Certain term interests in property under Excepted Property, later. File 2008 taxes Cooperative apartments. File 2008 taxes   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. File 2008 taxes   Figure your depreciation deduction as follows. File 2008 taxes Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. File 2008 taxes If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. File 2008 taxes Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. File 2008 taxes Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. File 2008 taxes Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. File 2008 taxes Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. File 2008 taxes Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. File 2008 taxes Multiply the result of (2) by the percentage you figured in (3). File 2008 taxes This is your depreciation on the stock. File 2008 taxes   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. File 2008 taxes You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. File 2008 taxes Example. File 2008 taxes You figure your share of the cooperative housing corporation's depreciation to be $30,000. File 2008 taxes Your adjusted basis in the stock of the corporation is $50,000. File 2008 taxes You use one half of your apartment solely for business purposes. File 2008 taxes Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). File 2008 taxes Change to business use. File 2008 taxes   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. File 2008 taxes The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. File 2008 taxes The fair market value of the property on the date you change your apartment to business use. File 2008 taxes This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. File 2008 taxes The corporation's adjusted basis in the property on that date. File 2008 taxes Do not subtract depreciation when figuring the corporation's adjusted basis. File 2008 taxes   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. File 2008 taxes The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. File 2008 taxes   For a discussion of fair market value and adjusted basis, see Publication 551. File 2008 taxes Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. File 2008 taxes If you use property to produce income (investment use), the income must be taxable. File 2008 taxes You cannot depreciate property that you use solely for personal activities. File 2008 taxes Partial business or investment use. File 2008 taxes   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. File 2008 taxes For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. File 2008 taxes    You must keep records showing the business, investment, and personal use of your property. File 2008 taxes For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. File 2008 taxes    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. File 2008 taxes For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. File 2008 taxes Office in the home. File 2008 taxes   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. File 2008 taxes For information about depreciating your home office, see Publication 587. File 2008 taxes Inventory. File 2008 taxes   You cannot depreciate inventory because it is not held for use in your business. File 2008 taxes Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. File 2008 taxes   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. File 2008 taxes See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. File 2008 taxes   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. File 2008 taxes If it is unclear, examine carefully all the facts in the operation of the particular business. File 2008 taxes The following example shows how a careful examination of the facts in two similar situations results in different conclusions. File 2008 taxes Example. File 2008 taxes Maple Corporation is in the business of leasing cars. File 2008 taxes At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. File 2008 taxes Maple does not have a showroom, used car lot, or individuals to sell the cars. File 2008 taxes Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. File 2008 taxes Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. File 2008 taxes If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. File 2008 taxes In this situation, the cars are held primarily for sale to customers in the ordinary course of business. File 2008 taxes Containers. File 2008 taxes   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. File 2008 taxes However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. File 2008 taxes They qualify as property used in your business. File 2008 taxes Title to the containers does not pass to the buyer. File 2008 taxes   To determine if these requirements are met, consider the following questions. File 2008 taxes Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. File 2008 taxes This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. File 2008 taxes Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. File 2008 taxes Example. File 2008 taxes You maintain a library for use in your profession. File 2008 taxes You can depreciate it. File 2008 taxes However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. File 2008 taxes Instead, you deduct their cost as a business expense. File 2008 taxes What Property Cannot Be Depreciated? Certain property cannot be depreciated. File 2008 taxes This includes land and certain excepted property. File 2008 taxes Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. File 2008 taxes The cost of land generally includes the cost of clearing, grading, planting, and landscaping. File 2008 taxes Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. File 2008 taxes These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. File 2008 taxes Example. File 2008 taxes You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. File 2008 taxes Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. File 2008 taxes If you replace the building, you would have to destroy the bushes and trees right next to it. File 2008 taxes These bushes and trees are closely associated with the building, so they have a determinable useful life. File 2008 taxes Therefore, you can depreciate them. File 2008 taxes Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. File 2008 taxes Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. File 2008 taxes Property placed in service and disposed of in the same year. File 2008 taxes Determining when property is placed in service is explained later. File 2008 taxes Equipment used to build capital improvements. File 2008 taxes You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. File 2008 taxes See Uniform Capitalization Rules in Publication 551. File 2008 taxes Section 197 intangibles. File 2008 taxes You must amortize these costs. File 2008 taxes Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. File 2008 taxes Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. File 2008 taxes See Intangible Property , later. File 2008 taxes Certain term interests. File 2008 taxes Certain term interests in property. File 2008 taxes   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. File 2008 taxes A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. File 2008 taxes Related persons. File 2008 taxes   For a description of related persons, see Related Persons, later. File 2008 taxes For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. File 2008 taxes Basis adjustments. File 2008 taxes   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. File 2008 taxes   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. File 2008 taxes However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. File 2008 taxes The term interest is held by an organization exempt from tax. File 2008 taxes The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. File 2008 taxes Exceptions. File 2008 taxes   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. File 2008 taxes They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. File 2008 taxes When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. File 2008 taxes You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. File 2008 taxes Placed in Service You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. File 2008 taxes Even if you are not using the property, it is in service when it is ready and available for its specific use. File 2008 taxes Example 1. File 2008 taxes Donald Steep bought a machine for his business. File 2008 taxes The machine was delivered last year. File 2008 taxes However, it was not installed and operational until this year. File 2008 taxes It is considered placed in service this year. File 2008 taxes If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. File 2008 taxes Example 2. File 2008 taxes On April 6, Sue Thorn bought a house to use as residential rental property. File 2008 taxes She made several repairs and had it ready for rent on July 5. File 2008 taxes At that time, she began to advertise it for rent in the local newspaper. File 2008 taxes The house is considered placed in service in July when it was ready and available for rent. File 2008 taxes She can begin to depreciate it in July. File 2008 taxes Example 3. File 2008 taxes James Elm is a building contractor who specializes in constructing office buildings. File 2008 taxes He bought a truck last year that had to be modified to lift materials to second-story levels. File 2008 taxes The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. File 2008 taxes The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. File 2008 taxes Conversion to business use. File 2008 taxes   If you place property in service in a personal activity, you cannot claim depreciation. File 2008 taxes However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. File 2008 taxes You place the property in service in the business or income-producing activity on the date of the change. File 2008 taxes Example. File 2008 taxes You bought a home and used it as your personal home several years before you converted it to rental property. File 2008 taxes Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. File 2008 taxes You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. File 2008 taxes Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). File 2008 taxes For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. File 2008 taxes Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. File 2008 taxes You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. File 2008 taxes See What Is the Basis of Your Depreciable Property , later. File 2008 taxes Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. File 2008 taxes You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. File 2008 taxes You sell or exchange the property. File 2008 taxes You convert the property to personal use. File 2008 taxes You abandon the property. File 2008 taxes You transfer the property to a supplies or scrap account. File 2008 taxes The property is destroyed. File 2008 taxes If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. File 2008 taxes What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. File 2008 taxes MACRS is discussed in chapter 4. File 2008 taxes You cannot use MACRS to depreciate the following property. File 2008 taxes Property you placed in service before 1987. File 2008 taxes Certain property owned or used in 1986. File 2008 taxes Intangible property. File 2008 taxes Films, video tapes, and recordings. File 2008 taxes Certain corporate or partnership property acquired in a nontaxable transfer. File 2008 taxes Property you elected to exclude from MACRS. File 2008 taxes The following discussions describe the property listed above and explain what depreciation method should be used. File 2008 taxes Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). File 2008 taxes Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. File 2008 taxes For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. File 2008 taxes Use of real property changed. File 2008 taxes   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. File 2008 taxes Improvements made after 1986. File 2008 taxes   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. File 2008 taxes Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. File 2008 taxes For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. File 2008 taxes Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. File 2008 taxes If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. File 2008 taxes For the following discussions, do not treat property as owned before you placed it in service. File 2008 taxes If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. File 2008 taxes Personal property. File 2008 taxes   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. File 2008 taxes You or someone related to you owned or used the property in 1986. File 2008 taxes You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. File 2008 taxes You lease the property to a person (or someone related to this person) who owned or used the property in 1986. File 2008 taxes You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. File 2008 taxes Real property. File 2008 taxes   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. File 2008 taxes You or someone related to you owned the property in 1986. File 2008 taxes You lease the property to a person who owned the property in 1986 (or someone related to that person). File 2008 taxes You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. File 2008 taxes MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. File 2008 taxes It does not apply to the carried-over part of the basis. File 2008 taxes Exceptions. File 2008 taxes   The rules above do not apply to the following. File 2008 taxes Residential rental property or nonresidential real property. File 2008 taxes Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. File 2008 taxes For information on how to figure depreciation under ACRS, see Publication 534. File 2008 taxes Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. File 2008 taxes Related persons. File 2008 taxes   For this purpose, the following are related persons. File 2008 taxes An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. File 2008 taxes A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. File 2008 taxes Two corporations that are members of the same controlled group. File 2008 taxes A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. File 2008 taxes The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. File 2008 taxes The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. File 2008 taxes A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. File 2008 taxes Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. File 2008 taxes A corporation and a partnership if the same persons own both of the following. File 2008 taxes More than 10% of the value of the outstanding stock of the corporation. File 2008 taxes More than 10% of the capital or profits interest in the partnership. File 2008 taxes The executor and beneficiary of any estate. File 2008 taxes A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. File 2008 taxes Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. File 2008 taxes The related person and a person who is engaged in trades or businesses under common control. File 2008 taxes See section 52(a) and 52(b) of the Internal Revenue Code. File 2008 taxes When to determine relationship. File 2008 taxes   You must determine whether you are related to another person at the time you acquire the property. File 2008 taxes   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. File 2008 taxes For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. File 2008 taxes Constructive ownership of stock or partnership interest. File 2008 taxes   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. File 2008 taxes Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. File 2008 taxes However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. File 2008 taxes An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. File 2008 taxes An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. File 2008 taxes For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. File 2008 taxes However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. File 2008 taxes Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. File 2008 taxes However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). File 2008 taxes You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. File 2008 taxes Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. File 2008 taxes To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. File 2008 taxes Subtract the salvage value, if any, from the adjusted basis. File 2008 taxes The balance is the total depreciation you can take over the useful life of the property. File 2008 taxes Divide the balance by the number of years in the useful life. File 2008 taxes This gives you your yearly depreciation deduction. File 2008 taxes Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. File 2008 taxes If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. File 2008 taxes Example. File 2008 taxes In April, Frank bought a patent for $5,100 that is not a section 197 intangible. File 2008 taxes He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. File 2008 taxes He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. File 2008 taxes He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. File 2008 taxes Next year, Frank can deduct $300 for the full year. File 2008 taxes Patents and copyrights. File 2008 taxes   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. File 2008 taxes The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. File 2008 taxes However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. File 2008 taxes Computer software. File 2008 taxes   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. File 2008 taxes   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. File 2008 taxes It is readily available for purchase by the general public. File 2008 taxes It is subject to a nonexclusive license. File 2008 taxes It has not been substantially modified. File 2008 taxes   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. File 2008 taxes If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. File 2008 taxes    Tax-exempt use property subject to a lease. File 2008 taxes   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term. File 2008 taxes Certain created intangibles. File 2008 taxes   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. File 2008 taxes For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. File 2008 taxes   The following are not eligible. File 2008 taxes Any intangible asset acquired from another person. File 2008 taxes Created financial interests. File 2008 taxes Any intangible asset that has a useful life that can be estimated with reasonable accuracy. File 2008 taxes Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. File 2008 taxes Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. File 2008 taxes   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. File 2008 taxes For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. File 2008 taxes Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. File 2008 taxes Motion picture films or video tapes. File 2008 taxes Sound recordings. File 2008 taxes Copyrights. File 2008 taxes Books. File 2008 taxes Patents. File 2008 taxes Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. File 2008 taxes The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. File 2008 taxes For more information, see section 167(g) of the Internal Revenue Code. File 2008 taxes Films, video tapes, and recordings. File 2008 taxes   You cannot use MACRS for motion picture films, video tapes, and sound recordings. File 2008 taxes For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. File 2008 taxes You can depreciate this property using either the straight line method or the income forecast method. File 2008 taxes Participations and residuals. File 2008 taxes   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. File 2008 taxes The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. File 2008 taxes For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. File 2008 taxes   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. File 2008 taxes Videocassettes. File 2008 taxes   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. File 2008 taxes If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. File 2008 taxes Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. File 2008 taxes You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. File 2008 taxes However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. File 2008 taxes The nontaxable transfers covered by this rule include the following. File 2008 taxes A distribution in complete liquidation of a subsidiary. File 2008 taxes A transfer to a corporation controlled by the transferor. File 2008 taxes An exchange of property solely for corporate stock or securities in a reorganization. File 2008 taxes A contribution of property to a partnership in exchange for a partnership interest. File 2008 taxes A partnership distribution of property to a partner. File 2008 taxes Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. File 2008 taxes You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. File 2008 taxes You must make this election by the return due date (including extensions) for the tax year you place your property in service. File 2008 taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). File 2008 taxes Attach the election to the amended return and write “Filed pursuant to section 301. File 2008 taxes 9100-2” on the election statement. File 2008 taxes File the amended return at the same address you filed the original return. File 2008 taxes Use of standard mileage rate. File 2008 taxes   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. File 2008 taxes See Publication 463 for a discussion of the standard mileage rate. File 2008 taxes What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. File 2008 taxes To determine basis, you need to know the cost or other basis of your property. File 2008 taxes Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. File 2008 taxes The cost includes the amount you pay in cash, debt obligations, other property, or services. File 2008 taxes Exception. File 2008 taxes   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). File 2008 taxes If you make that choice, you cannot include those sales taxes as part of your cost basis. File 2008 taxes Assumed debt. File 2008 taxes   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. File 2008 taxes Example. File 2008 taxes You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. File 2008 taxes Your total cost is $140,000, the cash you paid plus the mortgage you assumed. File 2008 taxes Settlement costs. File 2008 taxes   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. File 2008 taxes These generally are shown on your settlement statement and include the following. File 2008 taxes Legal and recording fees. File 2008 taxes Abstract fees. File 2008 taxes Survey charges. File 2008 taxes Owner's title insurance. File 2008 taxes Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. File 2008 taxes   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. File 2008 taxes Property you construct or build. File 2008 taxes   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. File 2008 taxes For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. File 2008 taxes Other Basis Other basis usually refers to basis that is determined by the way you received the property. File 2008 taxes For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. File 2008 taxes If you acquired property in this or some other way, see Publication 551 to determine your basis. File 2008 taxes Property changed from personal use. File 2008 taxes   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. File 2008 taxes The fair market value (FMV) of the property on the date of the change in use. File 2008 taxes Your original cost or other basis adjusted as follows. File 2008 taxes Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. File 2008 taxes Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. File 2008 taxes Example. File 2008 taxes Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. File 2008 taxes Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. File 2008 taxes Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. File 2008 taxes Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). File 2008 taxes On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. File 2008 taxes The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). File 2008 taxes Property acquired in a nontaxable transaction. File 2008 taxes   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. File 2008 taxes Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. File 2008 taxes See Like-kind exchanges and involuntary conversions. File 2008 taxes under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. File 2008 taxes   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. File 2008 taxes See How Do You Use General Asset Accounts in chapter 4. File 2008 taxes Adjusted Basis To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. File 2008 taxes These events could include the following. File 2008 taxes Installing utility lines. File 2008 taxes Paying legal fees for perfecting the title. File 2008 taxes Settling zoning issues. File 2008 taxes Receiving rebates. File 2008 taxes Incurring a casualty or theft loss. File 2008 taxes For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. File 2008 taxes If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. File 2008 taxes For more information, see What Is the Basis for Depreciation in chapter 4. File 2008 taxes . File 2008 taxes Basis adjustment for depreciation allowed or allowable. File 2008 taxes   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. File 2008 taxes Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). File 2008 taxes Depreciation allowable is depreciation you are entitled to deduct. File 2008 taxes   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. File 2008 taxes   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). File 2008 taxes How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. File 2008 taxes Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. File 2008 taxes You generally deduct the cost of repairing business property in the same way as any other business expense. File 2008 taxes However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. File 2008 taxes Example. File 2008 taxes You repair a small section on one corner of the roof of a rental house. File 2008 taxes You deduct the cost of the repair as a rental expense. File 2008 taxes However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. File 2008 taxes You depreciate the cost of the new roof. File 2008 taxes Improvements to rented property. File 2008 taxes   You can depreciate permanent improvements you make to business property you rent from someone else. File 2008 taxes Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. File 2008 taxes Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. File 2008 taxes A section 179 deduction for the current year or a section 179 carryover from a prior year. File 2008 taxes See chapter 2 for information on the section 179 deduction. File 2008 taxes Depreciation for property placed in service during the current year. File 2008 taxes Depreciation on any vehicle or other listed property, regardless of when it was placed in service. File 2008 taxes See chapter 5 for information on listed property. File 2008 taxes A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). File 2008 taxes Amortization of costs if the current year is the first year of the amortization period. File 2008 taxes Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. File 2008 taxes S. File 2008 taxes Income Tax Return for an S Corporation) regardless of when it was placed in service. File 2008 taxes You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. File 2008 taxes Table 1-1 presents an overview of the purpose of the various parts of Form 4562. File 2008 taxes Employee. File 2008 taxes   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. File 2008 taxes Instead, use either Form 2106 or Form 2106-EZ. File 2008 taxes Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. File 2008 taxes How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. File 2008 taxes See Filing an Amended Return , next. File 2008 taxes If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. File 2008 taxes See Changing Your Accounting Method , later. File 2008 taxes Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. File 2008 taxes You claimed the incorrect amount because of a mathematical error made in any year. File 2008 taxes You claimed the incorrect amount because of a posting error made in any year. File 2008 taxes You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. File 2008 taxes You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. File 2008 taxes Adoption of accounting method defined. File 2008 taxes   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. File 2008 taxes   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. File 2008 taxes irs. File 2008 taxes gov/pub/irs-irbs/irb11-04. File 2008 taxes pdf. File 2008 taxes (Note. File 2008 taxes Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. File 2008 taxes For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. File 2008 taxes irs. File 2008 taxes gov/pub/irs-irbs/irb12-14. File 2008 taxes pdf. File 2008 taxes )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. File 2008 taxes irs. File 2008 taxes gov/pub/irs-irbs/irb07-29. File 2008 taxes pdf. File 2008 taxes When to file. File 2008 taxes   If an amended return is allowed, you must file it by the later of the following. File 2008 taxes 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. File 2008 taxes A return filed before an unextended due date is considered filed on that due date. File 2008 taxes 2 years from the time you paid your tax for that year. File 2008 taxes Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. File 2008 taxes You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. File 2008 taxes The following are examples of a change in method of accounting for depreciation. File 2008 taxes A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. File 2008 taxes A change in the treatment of an asset from nondepreciable to depreciable or vice versa. File 2008 taxes A change in the depreciation method, period of recovery, or convention of a depreciable asset. File 2008 taxes A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. File 2008 taxes A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). File 2008 taxes Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. File 2008 taxes An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. File 2008 taxes A change in use of an asset in the hands of the same taxpayer. File 2008 taxes Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). File 2008 taxes If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. File 2008 taxes Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. File 2008 taxes You must submit a request for a letter ruling to make a late election or revoke an election. File 2008 taxes Any change in the placed in service date of a depreciable asset. File 2008 taxes See section 1. File 2008 taxes 446-1(e)(2)(ii)(d) of the regulations for more information and examples. File 2008 taxes IRS approval. File 2008 taxes   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. File 2008 taxes If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. File 2008 taxes B. File 2008 taxes 680. File 2008 taxes Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. File 2008 taxes Additional guidance. File 2008 taxes    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. File 2008 taxes irs. File 2008 taxes gov/pub/irs-irbs/irb11-04. File 2008 taxes pdf. File 2008 taxes (Note. File 2008 taxes Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. File 2008 taxes For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. File 2008 taxes irs. File 2008 taxes gov/pub/irs-irbs/irb12-14. File 2008 taxes pdf. File 2008 taxes )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. File 2008 taxes irs. File 2008 taxes gov/pub/irs-irbs/irb07-29. File 2008 taxes pdf. File 2008 taxes Table 1-1. File 2008 taxes Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. File 2008 taxes For more information, see Form 4562 and its instructions. File 2008 taxes Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. File 2008 taxes   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. File 2008 taxes The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. File 2008 taxes If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. File 2008 taxes A negative section 481(a) adjustment results in a decrease in taxable income. File 2008 taxes It is taken into account in the year of change and is reported on your business tax returns as “other expenses. File 2008 taxes ” A positive section 481(a) adjustment results in an increase in taxable income. File 2008 taxes It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. File 2008 taxes ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. File 2008 taxes Make the election by completing the appropriate line on Form 3115. File 2008 taxes   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. File 2008 taxes Prev  Up  Next   Home   More Online Publications
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File 2008 taxes 4. File 2008 taxes   Sales and Trades of Investment Property Table of Contents IntroductionNominees. File 2008 taxes Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. File 2008 taxes Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. File 2008 taxes Debt paid off. File 2008 taxes Payment of cash. File 2008 taxes Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. File 2008 taxes S. File 2008 taxes Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. File 2008 taxes Exception 2. File 2008 taxes Section 1256 contracts and straddles. File 2008 taxes Market discount bonds. File 2008 taxes File Form 1099-B or Form 1099-S with the IRS. File 2008 taxes Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. File 2008 taxes Investment property. File 2008 taxes   This is property that produces investment income. File 2008 taxes Examples include stocks, bonds, and Treasury bills and notes. File 2008 taxes Property used in a trade or business is not investment property. File 2008 taxes Form 1099-B. File 2008 taxes   If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. File 2008 taxes You should receive the statement by February 15 of the next year. File 2008 taxes It will show the gross proceeds from the sale. File 2008 taxes The IRS will also get a copy of Form 1099-B from the broker. File 2008 taxes   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. File 2008 taxes If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. File 2008 taxes This will help you complete Form 8949. File 2008 taxes Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. File 2008 taxes    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. File 2008 taxes Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). File 2008 taxes Nominees. File 2008 taxes   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. File 2008 taxes   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. File 2008 taxes Other property transactions. File 2008 taxes   Certain transfers of property are discussed in other IRS publications. File 2008 taxes These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. File 2008 taxes Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . File 2008 taxes Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. File 2008 taxes What Is a Sale or Trade? This section explains what is a sale or trade. File 2008 taxes It also explains certain transactions and events that are treated as sales or trades. File 2008 taxes A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. File 2008 taxes A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. File 2008 taxes Sale and purchase. File 2008 taxes   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. File 2008 taxes The sale and purchase are two separate transactions. File 2008 taxes But see Like-Kind Exchanges under Nontaxable Trades, later. File 2008 taxes Redemption of stock. File 2008 taxes   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. File 2008 taxes Dividend versus sale or trade. File 2008 taxes   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. File 2008 taxes Both direct and indirect ownership of stock will be considered. File 2008 taxes The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. File 2008 taxes Redemption or retirement of bonds. File 2008 taxes   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. File 2008 taxes See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. File 2008 taxes   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. File 2008 taxes For details, see Regulations section 1. File 2008 taxes 1001-3. File 2008 taxes Surrender of stock. File 2008 taxes   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. File 2008 taxes The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. File 2008 taxes Trade of investment property for an annuity. File 2008 taxes   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. File 2008 taxes If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. File 2008 taxes Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. File 2008 taxes Transfer by inheritance. File 2008 taxes   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. File 2008 taxes No taxable gain or deductible loss results from the transfer. File 2008 taxes Termination of certain rights and obligations. File 2008 taxes   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. File 2008 taxes Any gain or loss is treated as a capital gain or loss. File 2008 taxes   This rule does not apply to the retirement of a debt instrument. File 2008 taxes See Redemption or retirement of bonds , earlier. File 2008 taxes Worthless Securities Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. File 2008 taxes This affects whether your capital loss is long term or short term. File 2008 taxes See Holding Period , later. File 2008 taxes Worthless securities also include securities that you abandon after March 12, 2008. File 2008 taxes To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. File 2008 taxes All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. File 2008 taxes If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. File 2008 taxes Do not deduct them in the year the stock became worthless. File 2008 taxes How to report loss. File 2008 taxes   Report worthless securities in Form 8949, Part I or Part II, whichever applies. File 2008 taxes    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. File 2008 taxes See Form 8949 and the Instructions for Form 8949. File 2008 taxes Filing a claim for refund. File 2008 taxes   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. File 2008 taxes You must use Form 1040X, Amended U. File 2008 taxes S. File 2008 taxes Individual Income Tax Return, to amend your return for the year the security became worthless. File 2008 taxes You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. File 2008 taxes (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. File 2008 taxes ) For more information about filing a claim, see Publication 556. File 2008 taxes Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. File 2008 taxes You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. File 2008 taxes This gives you a new holding period for the position that begins on the date of the constructive sale. File 2008 taxes Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. File 2008 taxes Constructive sale. File 2008 taxes   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). File 2008 taxes   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. File 2008 taxes For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. File 2008 taxes Exception for nonmarketable securities. File 2008 taxes   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. File 2008 taxes Exception for certain closed transactions. File 2008 taxes   Do not treat a transaction as a constructive sale if all of the following are true. File 2008 taxes You closed the transaction on or before the 30th day after the end of your tax year. File 2008 taxes You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. File 2008 taxes Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. File 2008 taxes   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. File 2008 taxes   This exception also applies to successive short sales of an entire appreciated financial position. File 2008 taxes For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. File 2008 taxes This bulletin is available at www. File 2008 taxes irs. File 2008 taxes gov/pub/irs-irbs/irb03-03. File 2008 taxes pdf. File 2008 taxes Appreciated financial position. File 2008 taxes   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. File 2008 taxes Exceptions. File 2008 taxes   An appreciated financial position does not include the following. File 2008 taxes Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). File 2008 taxes Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. File 2008 taxes 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). File 2008 taxes Any hedge with respect to a position described in (2). File 2008 taxes Certain trust instruments treated as stock. File 2008 taxes   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). File 2008 taxes Sale of appreciated financial position. File 2008 taxes   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. File 2008 taxes However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. File 2008 taxes Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. File 2008 taxes Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. File 2008 taxes Exceptions. File 2008 taxes   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. File 2008 taxes For more details, including definitions of these terms, see section 1256. File 2008 taxes Regulated futures contract. File 2008 taxes   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. File 2008 taxes A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. File 2008 taxes Foreign currency contract. File 2008 taxes   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. File 2008 taxes   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. File 2008 taxes   Special rules apply to certain foreign currency transactions. File 2008 taxes These transactions may result in ordinary gain or loss treatment. File 2008 taxes For details, see Internal Revenue Code section 988 and Regulations sections 1. File 2008 taxes 988-1(a)(7) and 1. File 2008 taxes 988-3. File 2008 taxes Nonequity option. File 2008 taxes   This is any listed option (defined later) that is not an equity option. File 2008 taxes Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. File 2008 taxes A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). File 2008 taxes Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. File 2008 taxes Cash-settled options. File 2008 taxes   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. File 2008 taxes   This rule does not apply to options established before the SEC determines that the stock index is broad based. File 2008 taxes Listed option. File 2008 taxes   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). File 2008 taxes A listed option, however, does not include an option that is a right to acquire stock from the issuer. File 2008 taxes Dealer equity option. File 2008 taxes   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. File 2008 taxes   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. File 2008 taxes Equity option. File 2008 taxes   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. File 2008 taxes  Equity options include options on a group of stocks only if the group is a narrow-based stock index. File 2008 taxes Dealer securities futures contract. File 2008 taxes   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). File 2008 taxes A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . File 2008 taxes Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. File 2008 taxes That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. File 2008 taxes Hedging exception. File 2008 taxes   The marked-to-market rules do not apply to hedging transactions. File 2008 taxes See Hedging Transactions , later. File 2008 taxes 60/40 rule. File 2008 taxes   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. File 2008 taxes This is true regardless of how long you actually held the property. File 2008 taxes Example. File 2008 taxes On June 22, 2012, you bought a regulated futures contract for $50,000. File 2008 taxes On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. File 2008 taxes You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. File 2008 taxes On February 1, 2013, you sold the contract for $56,000. File 2008 taxes Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. File 2008 taxes Limited partners or entrepreneurs. File 2008 taxes   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). File 2008 taxes Instead, these gains or losses are treated as short term. File 2008 taxes Terminations and transfers. File 2008 taxes   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. File 2008 taxes In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. File 2008 taxes Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. File 2008 taxes Loss carryback election. File 2008 taxes   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. File 2008 taxes See How To Report , later, for information about reporting this election on your return. File 2008 taxes   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. File 2008 taxes In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. File 2008 taxes   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. File 2008 taxes In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. File 2008 taxes   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. File 2008 taxes (See Capital Losses under Reporting Capital Gains and Losses, later. File 2008 taxes ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. File 2008 taxes In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. File 2008 taxes Net section 1256 contracts loss. File 2008 taxes   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. File 2008 taxes Net section 1256 contracts gain. File 2008 taxes   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. File 2008 taxes  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. File 2008 taxes Traders in section 1256 contracts. File 2008 taxes   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. File 2008 taxes However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. File 2008 taxes Treatment of underlying property. File 2008 taxes   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. File 2008 taxes How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. File 2008 taxes Form 6781. File 2008 taxes   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. File 2008 taxes This includes the amount shown in box 10 of Form 1099-B. File 2008 taxes Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. File 2008 taxes Include a copy of Form 6781 with your income tax return. File 2008 taxes   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. File 2008 taxes Follow the Form 6781 instructions for completing Part I. File 2008 taxes Loss carryback election. File 2008 taxes   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. File 2008 taxes Follow the instructions for completing Form 6781 for the loss year to make this election. File 2008 taxes Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. File 2008 taxes A transaction is a hedging transaction if both of the following conditions are met. File 2008 taxes You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. File 2008 taxes You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. File 2008 taxes This hedging transaction exception does not apply to transactions entered into by or for any syndicate. File 2008 taxes A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. File 2008 taxes A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. File 2008 taxes However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. File 2008 taxes Hedging loss limit. File 2008 taxes   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. File 2008 taxes A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. File 2008 taxes   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. File 2008 taxes Ignore any hedging transaction items in determining this taxable income. File 2008 taxes If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. File 2008 taxes   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. File 2008 taxes   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. File 2008 taxes The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. File 2008 taxes Sale of property used in a hedge. File 2008 taxes   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. File 2008 taxes Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. File 2008 taxes See the Instructions for Schedule SE (Form 1040). File 2008 taxes In addition, the rules relating to contributions to self-employment retirement plans apply. File 2008 taxes For information on retirement plan contributions, see Publication 560 and Publication 590. File 2008 taxes Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. File 2008 taxes You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. File 2008 taxes Investment property you buy normally has an original basis equal to its cost. File 2008 taxes If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. File 2008 taxes Cost Basis The basis of property you buy is usually its cost. File 2008 taxes The cost is the amount you pay in cash, debt obligations, or other property or services. File 2008 taxes Unstated interest. File 2008 taxes   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. File 2008 taxes You generally have unstated interest if your interest rate is less than the applicable federal rate. File 2008 taxes For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. File 2008 taxes Basis Other Than Cost There are times when you must use a basis other than cost. File 2008 taxes In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. File 2008 taxes Fair market value. File 2008 taxes   This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. File 2008 taxes Sales of similar property, around the same date, may be helpful in figuring fair market value. File 2008 taxes Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. File 2008 taxes The amount you include in income then becomes your basis in the property. File 2008 taxes If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. File 2008 taxes Restricted property. File 2008 taxes   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. File 2008 taxes Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. File 2008 taxes See Restricted Property in Publication 525 for more information. File 2008 taxes Bargain purchases. File 2008 taxes   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. File 2008 taxes Your basis in the property is the price you pay plus the amount you include in income. File 2008 taxes Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. File 2008 taxes Example. File 2008 taxes You trade A Company stock for B Company stock having a fair market value of $1,200. File 2008 taxes If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. File 2008 taxes If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. File 2008 taxes The basis of your B Company stock is $1,200. File 2008 taxes If you later sell the B Company stock for $1,300, you will have a gain of $100. File 2008 taxes Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. File 2008 taxes See Nontaxable Trades , later. File 2008 taxes The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. File 2008 taxes Increase this amount by any cash you paid, additional costs you had, and any gain recognized. File 2008 taxes Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. File 2008 taxes Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. File 2008 taxes See Transfers Between Spouses , later. File 2008 taxes Recordkeeping. File 2008 taxes The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. File 2008 taxes Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. File 2008 taxes Fair market value less than donor's adjusted basis. File 2008 taxes   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. File 2008 taxes Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. File 2008 taxes No gain or loss. File 2008 taxes   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. File 2008 taxes Example. File 2008 taxes You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. File 2008 taxes The fair market value at the time of the gift is $9,000. File 2008 taxes You later sell the property for $9,500. File 2008 taxes You have neither gain nor loss. File 2008 taxes Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. File 2008 taxes Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. File 2008 taxes Fair market value equal to or more than donor's adjusted basis. File 2008 taxes   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. File 2008 taxes Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. File 2008 taxes Gift received before 1977. File 2008 taxes   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. File 2008 taxes However, your basis cannot be more than the fair market value of the gift at the time it was given to you. File 2008 taxes Example 1. File 2008 taxes You were given XYZ Company stock in 1976. File 2008 taxes At the time of the gift, the stock had a fair market value of $21,000. File 2008 taxes The donor's adjusted basis was $20,000. File 2008 taxes The donor paid a gift tax of $500 on the gift. File 2008 taxes Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. File 2008 taxes Example 2. File 2008 taxes The facts are the same as in Example 1 except that the gift tax paid was $1,500. File 2008 taxes Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. File 2008 taxes Gift received after 1976. File 2008 taxes   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. File 2008 taxes You figure this part by multiplying the gift tax paid on the gift by a fraction. File 2008 taxes The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. File 2008 taxes   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. File 2008 taxes The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. File 2008 taxes Example. File 2008 taxes In 2013, you received a gift of property from your mother. File 2008 taxes At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. File 2008 taxes The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. File 2008 taxes You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . File 2008 taxes 701 ($61,000 ÷ $87,000) . File 2008 taxes 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. File 2008 taxes   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. File 2008 taxes Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. File 2008 taxes For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. File 2008 taxes Gift tax information. File 2008 taxes   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. File 2008 taxes For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. File 2008 taxes Property Received as Inheritance Before or after 2010. File 2008 taxes   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. File 2008 taxes If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. File 2008 taxes For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. File 2008 taxes Appreciated property you gave the decedent. File 2008 taxes   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. File 2008 taxes This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. File 2008 taxes Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. File 2008 taxes More information. File 2008 taxes   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. File 2008 taxes Inherited in 2010 and executor elected to file Form 8939. File 2008 taxes   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. File 2008 taxes Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. File 2008 taxes The result of these adjustments to the basis is the adjusted basis. File 2008 taxes Adjustments to the basis of stocks and bonds are explained in the following discussion. File 2008 taxes For information about other adjustments to basis, see Publication 551. File 2008 taxes Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. File 2008 taxes If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . File 2008 taxes The basis of stock must be adjusted for certain events that occur after purchase. File 2008 taxes For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. File 2008 taxes You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). File 2008 taxes These distributions, up to the amount of your basis, are a nontaxable return of capital. File 2008 taxes The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. File 2008 taxes To find out more, go to www. File 2008 taxes irs. File 2008 taxes gov/Filing/Filing-Options. File 2008 taxes Identifying stock or bonds sold. File 2008 taxes   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. File 2008 taxes Adequate identification. File 2008 taxes   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. File 2008 taxes Broker holds stock. File 2008 taxes   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. File 2008 taxes  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. File 2008 taxes Single stock certificate. File 2008 taxes   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. File 2008 taxes   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. File 2008 taxes Bonds. File 2008 taxes   These methods of identification also apply to bonds sold or transferred. File 2008 taxes Identification not possible. File 2008 taxes   If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. File 2008 taxes Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. File 2008 taxes Example. File 2008 taxes You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. File 2008 taxes In January 1999 you bought another 200 shares for $11 a share. File 2008 taxes In July 1999 you gave your son 50 shares. File 2008 taxes In December 2001 you bought 100 shares for $9 a share. File 2008 taxes In April 2013 you sold 130 shares. File 2008 taxes You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. File 2008 taxes The shares of stock you gave your son had a basis of $500 (50 × $10). File 2008 taxes You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. File 2008 taxes    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. File 2008 taxes Example. File 2008 taxes You bought 100 shares of Fund A for $10 a share. File 2008 taxes You paid a $50 commission to the broker for the purchase. File 2008 taxes Your cost basis for each share is $10. File 2008 taxes 50 ($1,050 ÷ 100). File 2008 taxes Commissions and load charges. File 2008 taxes   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. File 2008 taxes You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. File 2008 taxes A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). File 2008 taxes   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. File 2008 taxes You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. File 2008 taxes You dispose of the shares within 90 days of the purchase date. File 2008 taxes You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. File 2008 taxes   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. File 2008 taxes The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). File 2008 taxes Choosing average basis for mutual fund shares. File 2008 taxes   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. File 2008 taxes The methods you can use to figure average basis are explained later. File 2008 taxes Undistributed capital gains. File 2008 taxes   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. File 2008 taxes See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. File 2008 taxes Reinvestment right. File 2008 taxes   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. File 2008 taxes      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. File 2008 taxes This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. File 2008 taxes Table 4-1. File 2008 taxes This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. File 2008 taxes Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. File 2008 taxes This worksheet will help you figure the adjusted basis when you sell or redeem shares. File 2008 taxes Table 4-1. File 2008 taxes Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. File 2008 taxes 2 Cost plus or minus adjustments. File 2008 taxes Automatic investment service. File 2008 taxes   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. File 2008 taxes Dividend reinvestment plans. File 2008 taxes   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. File 2008 taxes You must include the amount of the discount in your income. File 2008 taxes Public utilities. File 2008 taxes   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. File 2008 taxes Stock dividends. File 2008 taxes   Stock dividends are distributions made by a corporation of its own stock. File 2008 taxes Generally, stock dividends are not taxable to you. File 2008 taxes However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. File 2008 taxes If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. File 2008 taxes New and old stock identical. File 2008 taxes   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. File 2008 taxes The result is your basis for each share of stock. File 2008 taxes Example 1. File 2008 taxes You owned one share of common stock that you bought for $45. File 2008 taxes The corporation distributed two new shares of common stock for each share held. File 2008 taxes You then had three shares of common stock. File 2008 taxes Your basis in each share is $15 ($45 ÷ 3). File 2008 taxes Example 2. File 2008 taxes You owned two shares of common stock. File 2008 taxes You bought one for $30 and the other for $45. File 2008 taxes The corporation distributed two new shares of common stock for each share held. File 2008 taxes You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). File 2008 taxes New and old stock not identical. File 2008 taxes   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. File 2008 taxes Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. File 2008 taxes Example. File 2008 taxes You bought a share of common stock for $100. File 2008 taxes Later, the corporation distributed a share of preferred stock for each share of common stock held. File 2008 taxes At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. File 2008 taxes You figure the basis of the old and new stock by dividing your $100 basis between them. File 2008 taxes The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). File 2008 taxes Stock bought at various times. File 2008 taxes   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. File 2008 taxes Taxable stock dividends. File 2008 taxes   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. File 2008 taxes The basis of your old stock does not change. File 2008 taxes Stock splits. File 2008 taxes   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. File 2008 taxes Stock rights. File 2008 taxes   A stock right is a right to acquire a corporation's stock. File 2008 taxes It may be exercised, it may be sold if it has a market value, or it may expire. File 2008 taxes Stock rights are rarely taxable when you receive them. File 2008 taxes See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. File 2008 taxes Taxable stock rights. File 2008 taxes   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. File 2008 taxes The basis of the old stock does not change. File 2008 taxes Nontaxable stock rights. File 2008 taxes   If you receive nontaxable stock rights and allow them to expire, they have no basis. File 2008 taxes   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. File 2008 taxes Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. File 2008 taxes   If the fair market value of the stock rights was less than 15%, their basis is zero. File 2008 taxes However, you can choose to divide the basis of the old stock between the old stock and the stock rights. File 2008 taxes To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. File 2008 taxes Basis of new stock. File 2008 taxes   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. File 2008 taxes Example. File 2008 taxes You own 100 shares of ABC Company stock, which cost you $22 per share. File 2008 taxes The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. File 2008 taxes At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. File 2008 taxes Each stock right had a market value of $3. File 2008 taxes The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. File 2008 taxes You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. File 2008 taxes 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. File 2008 taxes 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. File 2008 taxes 18 ($21. File 2008 taxes 78 ÷ 10) per right. File 2008 taxes If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. File 2008 taxes 18), or $28. File 2008 taxes 18 per share. File 2008 taxes The remaining basis of the old stock is $21. File 2008 taxes 78 per share. File 2008 taxes Investment property received in liquidation. File 2008 taxes   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. File 2008 taxes S corporation stock. File 2008 taxes   You must increase your basis in stock of an S corporation by your pro rata share of the following items. File 2008 taxes All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. File 2008 taxes The nonseparately stated income of the S corporation. File 2008 taxes The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. File 2008 taxes   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. File 2008 taxes Distributions by the S corporation that were not included in your income. File 2008 taxes All loss and deduction items of the S corporation that are separately stated and passed through to you. File 2008 taxes Any nonseparately stated loss of the S corporation. File 2008 taxes Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. File 2008 taxes The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. File 2008 taxes However, your basis in the stock cannot be reduced below zero. File 2008 taxes Specialized small business investment company stock or partnership interest. File 2008 taxes   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. File 2008 taxes See Rollover of Gain From Publicly Traded Securities , later. File 2008 taxes Qualified small business stock. File 2008 taxes   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. File 2008 taxes See Gains on Qualified Small Business Stock , later. File 2008 taxes Short sales. File 2008 taxes   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. File 2008 taxes   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. File 2008 taxes Premiums on bonds. File 2008 taxes   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. File 2008 taxes If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. File 2008 taxes   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. File 2008 taxes You must reduce the basis of the bond by the premium you amortized for the period you held the bond. File 2008 taxes   See Bond Premium Amortization in chapter 3 for more information. File 2008 taxes Market discount on bonds. File 2008 taxes   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. File 2008 taxes See Market Discount Bonds in chapter 1 for more information. File 2008 taxes Bonds purchased at par value. File 2008 taxes   A bond purchased at par value (face amount) has no premium or discount. File 2008 taxes When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. File 2008 taxes Example. File 2008 taxes You purchased a bond several years ago for its par value of $10,000. File 2008 taxes You sold the bond this year for $10,100. File 2008 taxes You have a gain of $100. File 2008 taxes However, if you had sold the bond for $9,900, you would have a loss of $100. File 2008 taxes Acquisition discount on short-term obligations. File 2008 taxes   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. File 2008 taxes See Discount on Short-Term Obligations in chapter 1 for more information. File 2008 taxes Original issue discount (OID) on debt instruments. File 2008 taxes   Increase the basis of a debt instrument by the OID you include in your income. File 2008 taxes See Original Issue Discount (OID) in chapter 1. File 2008 taxes Discounted tax-exempt obligations. File 2008 taxes   OID on tax-exempt obligations is generally not taxable. File 2008 taxes However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. File 2008 taxes The accrued OID is added to the basis of the obligation to determine your gain or loss. File 2008 taxes   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. File 2008 taxes   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. File 2008 taxes See Discount on Short-Term Obligations in chapter 1. File 2008 taxes Stripped tax-exempt obligation. File 2008 taxes   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. File 2008 taxes For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. File 2008 taxes You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . File 2008 taxes   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. File 2008 taxes Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. File 2008 taxes In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. File 2008 taxes How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. File 2008 taxes Gain. File 2008 taxes   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. File 2008 taxes Loss. File 2008 taxes   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. File 2008 taxes Amount realized. File 2008 taxes   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). File 2008 taxes Amount realized includes the money you receive plus the fair market value of any property or services you receive. File 2008 taxes   If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. File 2008 taxes For more information, see Publication 537. File 2008 taxes   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. File 2008 taxes See Regulations section 1. File 2008 taxes 1001-1(g). File 2008 taxes However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. File 2008 taxes Fair market value. File 2008 taxes   Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. File 2008 taxes Example. File 2008 taxes You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. File 2008 taxes Your gain is $3,000 ($10,000 – $7,000). File 2008 taxes If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). File 2008 taxes Debt paid off. File 2008 taxes   A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. File 2008 taxes This is true even if neither you nor the buyer is personally liable for the debt. File 2008 taxes For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. File 2008 taxes Example. File 2008 taxes You sell stock that you had pledged as security for a bank loan of $8,000. File 2008 taxes Your basis in the stock is $6,000. File 2008 taxes The buyer pays off your bank loan and pays you $20,000 in cash. File 2008 taxes The amount realized is $28,000 ($20,000 + $8,000). File 2008 taxes Your gain is $22,000 ($28,000 – $6,000). File 2008 taxes Payment of cash. File 2008 taxes   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. File 2008 taxes Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. File 2008 taxes If the result is a positive number, it is a gain. File 2008 taxes If the result is a negative number, it is a loss. File 2008 taxes No gain or loss. File 2008 taxes   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. File 2008 taxes In this case, you may have neither a gain nor a loss. File 2008 taxes See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. File 2008 taxes Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. File 2008 taxes If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu