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File last years taxes 9. File last years taxes   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. File last years taxes Depletion unit. File last years taxes Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. File last years taxes The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. File last years taxes There are two ways of figuring depletion: cost depletion and percentage depletion. File last years taxes For mineral property, you generally must use the method that gives you the larger deduction. File last years taxes For standing timber, you must use cost depletion. File last years taxes Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. File last years taxes More than one person can have an economic interest in the same mineral deposit or timber. File last years taxes In the case of leased property, the depletion deduction is divided between the lessor and the lessee. File last years taxes You have an economic interest if both the following apply. File last years taxes You have acquired by investment any interest in mineral deposits or standing timber. File last years taxes You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. File last years taxes A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. File last years taxes A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. File last years taxes Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. File last years taxes Basis adjustment for depletion. File last years taxes   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. File last years taxes Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). File last years taxes For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. File last years taxes You can treat two or more separate interests as one property or as separate properties. File last years taxes See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. File last years taxes There are two ways of figuring depletion on mineral property. File last years taxes Cost depletion. File last years taxes Percentage depletion. File last years taxes Generally, you must use the method that gives you the larger deduction. File last years taxes However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. File last years taxes See Oil and Gas Wells , later. File last years taxes Cost Depletion To figure cost depletion you must first determine the following. File last years taxes The property's basis for depletion. File last years taxes The total recoverable units of mineral in the property's natural deposit. File last years taxes The number of units of mineral sold during the tax year. File last years taxes Basis for depletion. File last years taxes   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. File last years taxes Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. File last years taxes The residual value of land and improvements at the end of operations. File last years taxes The cost or value of land acquired for purposes other than mineral production. File last years taxes Adjusted basis. File last years taxes   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. File last years taxes Your adjusted basis can never be less than zero. File last years taxes See Publication 551, Basis of Assets, for more information on adjusted basis. File last years taxes Total recoverable units. File last years taxes   The total recoverable units is the sum of the following. File last years taxes The number of units of mineral remaining at the end of the year (including units recovered but not sold). File last years taxes The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). File last years taxes   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. File last years taxes You must include ores and minerals that are developed, in sight, blocked out, or assured. File last years taxes You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. File last years taxes But see Elective safe harbor for owners of oil and gas property , later. File last years taxes Number of units sold. File last years taxes   You determine the number of units sold during the tax year based on your method of accounting. File last years taxes Use the following table to make this determination. File last years taxes    IF you  use . File last years taxes . File last years taxes . File last years taxes THEN the units sold during the year are . File last years taxes . File last years taxes . File last years taxes The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). File last years taxes An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. File last years taxes   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. File last years taxes Figuring the cost depletion deduction. File last years taxes   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. File last years taxes Step Action Result 1 Divide your property's basis for depletion by total recoverable units. File last years taxes Rate per unit. File last years taxes 2 Multiply the rate per unit by units sold during the tax year. File last years taxes Cost depletion deduction. File last years taxes You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. File last years taxes Elective safe harbor for owners of oil and gas property. File last years taxes   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. File last years taxes If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). File last years taxes For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. File last years taxes irs. File last years taxes gov/pub/irs-irbs/irb04-10. File last years taxes pdf. File last years taxes   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. File last years taxes The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. File last years taxes The election, if made, is effective for the tax year in which it is made and all later years. File last years taxes It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. File last years taxes Once revoked, it cannot be re-elected for the next 5 years. File last years taxes Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. File last years taxes The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . File last years taxes Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . File last years taxes Gross income. File last years taxes   When figuring percentage depletion, subtract from your gross income from the property the following amounts. File last years taxes Any rents or royalties you paid or incurred for the property. File last years taxes The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. File last years taxes A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. File last years taxes   Use the following fraction to figure the part of the bonus you must subtract. File last years taxes No. File last years taxes of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. File last years taxes For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. File last years taxes Taxable income limit. File last years taxes   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. File last years taxes   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. File last years taxes These deductible items include, but are not limited to, the following. File last years taxes Operating expenses. File last years taxes Certain selling expenses. File last years taxes Administrative and financial overhead. File last years taxes Depreciation. File last years taxes Intangible drilling and development costs. File last years taxes Exploration and development expenditures. File last years taxes Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. File last years taxes Losses sustained. File last years taxes   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. File last years taxes Do not deduct any net operating loss deduction from the gross income from the property. File last years taxes Corporations do not deduct charitable contributions from the gross income from the property. File last years taxes If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. File last years taxes See section 1. File last years taxes 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. File last years taxes Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. File last years taxes You are either an independent producer or a royalty owner. File last years taxes The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. File last years taxes If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. File last years taxes For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. File last years taxes Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. File last years taxes However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. File last years taxes For information on figuring the deduction, see Figuring percentage depletion , later. File last years taxes Refiners who cannot claim percentage depletion. File last years taxes   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. File last years taxes The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. File last years taxes Related person. File last years taxes   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. File last years taxes For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. File last years taxes A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. File last years taxes For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. File last years taxes The value of the outstanding stock of a corporation. File last years taxes The interest in the profits or capital of a partnership. File last years taxes The beneficial interests in an estate or trust. File last years taxes Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. File last years taxes Retailers who cannot claim percentage depletion. File last years taxes   You cannot claim percentage depletion if both the following apply. File last years taxes You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. File last years taxes Through a retail outlet operated by you or a related person. File last years taxes To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. File last years taxes To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. File last years taxes The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. File last years taxes   For the purpose of determining if this rule applies, do not count the following. File last years taxes Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. File last years taxes Bulk sales of aviation fuels to the Department of Defense. File last years taxes Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. File last years taxes Related person. File last years taxes   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. File last years taxes Sales through a related person. File last years taxes   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. File last years taxes   You are not considered to be selling through a related person who is a retailer if all the following apply. File last years taxes You do not have a significant ownership interest in the retailer. File last years taxes You sell your production to persons who are not related to either you or the retailer. File last years taxes The retailer does not buy oil or natural gas from your customers or persons related to your customers. File last years taxes There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. File last years taxes Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. File last years taxes Transferees who cannot claim percentage depletion. File last years taxes   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. File last years taxes For a definition of the term “transfer,” see section 1. File last years taxes 613A-7(n) of the regulations. File last years taxes For a definition of the term “interest in proven oil or gas property,” see section 1. File last years taxes 613A-7(p) of the regulations. File last years taxes Figuring percentage depletion. File last years taxes   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. File last years taxes If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. File last years taxes If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. File last years taxes   In addition, there is a limit on the percentage depletion deduction. File last years taxes See Taxable income limit , later. File last years taxes Average daily production. File last years taxes   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. File last years taxes Partial interest. File last years taxes   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. File last years taxes   You have a partial interest in the production from a property if you have a net profits interest in the property. File last years taxes To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. File last years taxes To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. File last years taxes Then multiply the total production from the property by your percentage participation to figure your share of the production. File last years taxes Example. File last years taxes Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. File last years taxes During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. File last years taxes Javier had expenses of $90,000 attributable to the property. File last years taxes The property generated a net profit of $110,000 ($200,000 − $90,000). File last years taxes Pablo received income of $22,000 ($110,000 × . File last years taxes 20) for his net profits interest. File last years taxes Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). File last years taxes Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). File last years taxes Depletable oil or natural gas quantity. File last years taxes   Generally, your depletable oil quantity is 1,000 barrels. File last years taxes Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. File last years taxes If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. File last years taxes Example. File last years taxes You have both oil and natural gas production. File last years taxes To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. File last years taxes Your depletable natural gas quantity is 2. File last years taxes 16 million cubic feet of gas (360 × 6000). File last years taxes You must reduce your depletable oil quantity to 640 barrels (1000 − 360). File last years taxes If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. File last years taxes Also, see Notice 2012-50, available at www. File last years taxes irs. File last years taxes gov/irb/2012–31_IRB/index. File last years taxes html. File last years taxes Business entities and family members. File last years taxes   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. File last years taxes Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). File last years taxes You and your spouse and minor children. File last years taxes A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. File last years taxes Controlled group of corporations. File last years taxes   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. File last years taxes They share the depletable quantity. File last years taxes A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. File last years taxes ” Gross income from the property. File last years taxes   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. File last years taxes If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. File last years taxes   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. File last years taxes   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. File last years taxes Average daily production exceeds depletable quantities. File last years taxes   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. File last years taxes Figure your average daily production of oil or natural gas for the year. File last years taxes Figure your depletable oil or natural gas quantity for the year. File last years taxes Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. File last years taxes Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). File last years taxes This is your depletion allowance for that property for the year. File last years taxes Taxable income limit. File last years taxes   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. File last years taxes 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. File last years taxes For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. File last years taxes 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. File last years taxes You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. File last years taxes Add it to your depletion allowance (before applying any limits) for the following year. File last years taxes Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. File last years taxes (However, see Electing large partnerships must figure depletion allowance , later. File last years taxes ) Each partner or shareholder must decide whether to use cost or percentage depletion. File last years taxes If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. File last years taxes Partner's or shareholder's adjusted basis. File last years taxes   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. File last years taxes The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. File last years taxes   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. File last years taxes However, in some cases, it is figured according to the partner's interest in partnership income. File last years taxes   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. File last years taxes Recordkeeping. File last years taxes Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. File last years taxes The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. File last years taxes The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. File last years taxes Reporting the deduction. File last years taxes   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). File last years taxes Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). File last years taxes The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. File last years taxes The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. File last years taxes Form 6198, At-Risk Limitations. File last years taxes Form 8582, Passive Activity Loss Limitations. File last years taxes Electing large partnerships must figure depletion allowance. File last years taxes   An electing large partnership, rather than each partner, generally must figure the depletion allowance. File last years taxes The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. File last years taxes Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. File last years taxes   An electing large partnership is one that meets both the following requirements. File last years taxes The partnership had 100 or more partners in the preceding year. File last years taxes The partnership chooses to be an electing large partnership. File last years taxes Disqualified persons. File last years taxes   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. File last years taxes Disqualified persons must figure it themselves, as explained earlier. File last years taxes   All the following are disqualified persons. File last years taxes Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). File last years taxes Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). File last years taxes Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. File last years taxes Average daily production is discussed earlier. File last years taxes Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. File last years taxes Natural gas sold under a fixed contract. File last years taxes   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. File last years taxes This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. File last years taxes The contract must have been in effect from February 1, 1975, until the date of sale of the gas. File last years taxes Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. File last years taxes Natural gas from geopressured brine. File last years taxes   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. File last years taxes This is natural gas that is both the following. File last years taxes Produced from a well you began to drill after September 1978 and before 1984. File last years taxes Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. File last years taxes Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. File last years taxes Mines and other natural deposits. File last years taxes   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. File last years taxes   The following is a list of the percentage depletion rates for the more common minerals. File last years taxes DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. File last years taxes Corporate deduction for iron ore and coal. File last years taxes   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). File last years taxes Gross income from the property. File last years taxes   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. File last years taxes Mining includes all the following. File last years taxes Extracting ores or minerals from the ground. File last years taxes Applying certain treatment processes described later. File last years taxes Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. File last years taxes Excise tax. File last years taxes   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. File last years taxes Extraction. File last years taxes   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. File last years taxes This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. File last years taxes Treatment processes. File last years taxes   The processes included as mining depend on the ore or mineral mined. File last years taxes To qualify as mining, the treatment processes must be applied by the mine owner or operator. File last years taxes For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. File last years taxes Transportation of more than 50 miles. File last years taxes   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. File last years taxes    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. File last years taxes Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. File last years taxes For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. File last years taxes irs. File last years taxes gov/irb/2013-01_IRB/ar11. File last years taxes html. File last years taxes Disposal of coal or iron ore. File last years taxes   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. File last years taxes You disposed of it after holding it for more than 1 year. File last years taxes You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. File last years taxes Treat any gain on the disposition as a capital gain. File last years taxes Disposal to related person. File last years taxes   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. File last years taxes A related person (as listed in chapter 2 of Publication 544). File last years taxes A person owned or controlled by the same interests that own or control you. File last years taxes Geothermal deposits. File last years taxes   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. File last years taxes A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. File last years taxes For percentage depletion purposes, a geothermal deposit is not considered a gas well. File last years taxes   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. File last years taxes See Gross income from the property , earlier, under Oil and Gas Wells. File last years taxes Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. File last years taxes Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. File last years taxes A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. File last years taxes Bonuses and advanced royalties. File last years taxes   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. File last years taxes If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. File last years taxes Figuring cost depletion. File last years taxes   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. File last years taxes To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. File last years taxes Figuring percentage depletion. File last years taxes   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . File last years taxes Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. File last years taxes However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. File last years taxes Ending the lease. File last years taxes   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. File last years taxes Do this for the year the lease ends or is abandoned. File last years taxes Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. File last years taxes   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. File last years taxes Include this amount in income for the year the lease ends. File last years taxes Increase your adjusted basis in the property by the amount you include in income. File last years taxes Delay rentals. File last years taxes   These are payments for deferring development of the property. File last years taxes Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. File last years taxes These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. File last years taxes Timber You can figure timber depletion only by the cost method. File last years taxes Percentage depletion does not apply to timber. File last years taxes Base your depletion on your cost or other basis in the timber. File last years taxes Your cost does not include the cost of land or any amounts recoverable through depreciation. File last years taxes Depletion takes place when you cut standing timber. File last years taxes You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. File last years taxes Figuring cost depletion. File last years taxes   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. File last years taxes Timber units. File last years taxes   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. File last years taxes You measure the timber using board feet, log scale, cords, or other units. File last years taxes If you later determine that you have more or less units of timber, you must adjust the original estimate. File last years taxes   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. File last years taxes Depletion unit. File last years taxes   You figure your depletion unit each year by taking the following steps. File last years taxes Determine your cost or adjusted basis of the timber on hand at the beginning of the year. File last years taxes Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. File last years taxes Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. File last years taxes Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. File last years taxes Divide the result of (2) by the result of (3). File last years taxes This is your depletion unit. File last years taxes Example. File last years taxes You bought a timber tract for $160,000 and the land was worth as much as the timber. File last years taxes Your basis for the timber is $80,000. File last years taxes Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). File last years taxes If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). File last years taxes When to claim depletion. File last years taxes   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). File last years taxes Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. File last years taxes The inventory is your basis for determining gain or loss in the tax year you sell the timber products. File last years taxes Example. File last years taxes The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. File last years taxes You would deduct $20,000 of the $40,000 depletion that year. File last years taxes You would add the remaining $20,000 depletion to your closing inventory of timber products. File last years taxes Electing to treat the cutting of timber as a sale or exchange. File last years taxes   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. File last years taxes You must make the election on your income tax return for the tax year to which it applies. File last years taxes If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. File last years taxes You generally report the gain as long-term capital gain. File last years taxes The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. File last years taxes For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. File last years taxes   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. File last years taxes The prior election (and revocation) is disregarded for purposes of making a subsequent election. File last years taxes See Form T (Timber), Forest Activities Schedule, for more information. File last years taxes Form T. File last years taxes   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. File last years taxes Prev  Up  Next   Home   More Online Publications
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Protect Your Privacy on Wireless Networks

Going wireless provides you with freedom to use your computer in multiple locations, without dragging cables and cords with you. However, the privilege of increased freedom comes with the danger of increased vulnerability. Wireless internet requires that you have access to a wireless network via a wireless router. It is important that you secure your network so that strangers can’t use your network without your knowledge (also known as “piggybacking”). In addition, computer hackers could use your network to access personal information you save or send from your computer. This is particularly important if you conduct financial transactions online. These reasons highlight the importance of taking steps to secure your wireless network. If you use the wireless (“Wi-Fi”) network at bookstores, airports or other public places, there are other precautions you should take to protect your privacy.

At home:

  • Turn on encryption. When you buy a wireless router, it is important to turn on the encryption feature. This scrambles information that you send over the Internet so that other people cannot access it.
  • Rename your router. Change the name from the default to something only you would know.
  • Change the password. Routers come with a standard password. Create a new smart password with a mix of letters, numbers, and special characters. Turn off your router when you are not using it.

On public wireless networks:

  • Don’t assume that the network is secure. Most public wireless networks don’t encrypt information you send. Avoid sending private information from public locations.
  • Use encrypted websites. If you must send sensitive from a public network, make certain that URL starts with “https” (“s” means secure). Look for that on every page you visit.
  • Log out of sites after you finish using them rather than using “remember me” features. It is better to deal with the hassle of logging in again than giving away your login credentials to someone else on the network.

For more information about wireless computing visit OnguardOnline.

The File Last Years Taxes

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