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Form 1040ez 2011

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Form 1040ez 2011

Form 1040ez 2011 13. Form 1040ez 2011   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Form 1040ez 2011 It is divided into the following sections. Form 1040ez 2011 Cost basis. Form 1040ez 2011 Adjusted basis. Form 1040ez 2011 Basis other than cost. Form 1040ez 2011 Your basis is the amount of your investment in property for tax purposes. Form 1040ez 2011 Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Form 1040ez 2011 Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Form 1040ez 2011 If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Form 1040ez 2011 Only the basis allocated to the business or investment use of the property can be depreciated. Form 1040ez 2011 Your original basis in property is adjusted (increased or decreased) by certain events. Form 1040ez 2011 For example, if you make improvements to the property, increase your basis. Form 1040ez 2011 If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Form 1040ez 2011 Keep accurate records of all items that affect the basis of your property. Form 1040ez 2011 For more information on keeping records, see chapter 1. Form 1040ez 2011 Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Form 1040ez 2011 The cost is the amount you pay in cash, debt obligations, other property, or services. Form 1040ez 2011 Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). Form 1040ez 2011 In addition, the basis of real estate and business assets may include other items. Form 1040ez 2011 Loans with low or no interest. Form 1040ez 2011    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. Form 1040ez 2011 You generally have unstated interest if your interest rate is less than the applicable federal rate. Form 1040ez 2011   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Form 1040ez 2011 Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Form 1040ez 2011 If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Form 1040ez 2011 Lump sum purchase. Form 1040ez 2011   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Form 1040ez 2011 Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Form 1040ez 2011 Figure the basis of each asset by multiplying the lump sum by a fraction. Form 1040ez 2011 The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Form 1040ez 2011    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Form 1040ez 2011 Fair market value (FMV). Form 1040ez 2011   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Form 1040ez 2011 Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Form 1040ez 2011 Assumption of mortgage. Form 1040ez 2011   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Form 1040ez 2011 Settlement costs. Form 1040ez 2011   Your basis includes the settlement fees and closing costs you paid for buying the property. Form 1040ez 2011 (A fee for buying property is a cost that must be paid even if you buy the property for cash. Form 1040ez 2011 ) Do not include fees and costs for getting a loan on the property in your basis. Form 1040ez 2011   The following are some of the settlement fees or closing costs you can include in the basis of your property. Form 1040ez 2011 Abstract fees (abstract of title fees). Form 1040ez 2011 Charges for installing utility services. Form 1040ez 2011 Legal fees (including fees for the title search and preparation of the sales contract and deed). Form 1040ez 2011 Recording fees. Form 1040ez 2011 Survey fees. Form 1040ez 2011 Transfer taxes. Form 1040ez 2011 Owner's title insurance. Form 1040ez 2011 Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Form 1040ez 2011   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Form 1040ez 2011   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Form 1040ez 2011 Casualty insurance premiums. Form 1040ez 2011 Rent for occupancy of the property before closing. Form 1040ez 2011 Charges for utilities or other services related to occupancy of the property before closing. Form 1040ez 2011 Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Form 1040ez 2011 Fees for refinancing a mortgage. Form 1040ez 2011 Real estate taxes. Form 1040ez 2011   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Form 1040ez 2011 You cannot deduct them as an expense. Form 1040ez 2011    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Form 1040ez 2011 Do not include that amount in the basis of your property. Form 1040ez 2011 If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Form 1040ez 2011 Points. Form 1040ez 2011   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Form 1040ez 2011 Generally, you deduct the points over the term of the loan. Form 1040ez 2011 For more information on how to deduct points, see chapter 23. Form 1040ez 2011 Points on home mortgage. Form 1040ez 2011   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Form 1040ez 2011 If certain requirements are met, you can deduct the points in full for the year in which they are paid. Form 1040ez 2011 Reduce the basis of your home by any seller-paid points. Form 1040ez 2011 Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Form 1040ez 2011 The result is the adjusted basis. Form 1040ez 2011 Increases to Basis Increase the basis of any property by all items properly added to a capital account. Form 1040ez 2011 Examples of items that increase basis are shown in Table 13-1. Form 1040ez 2011 These include the items discussed below. Form 1040ez 2011 Improvements. Form 1040ez 2011   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Form 1040ez 2011 For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. Form 1040ez 2011 Assessments for local improvements. Form 1040ez 2011   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Form 1040ez 2011 Do not deduct them as taxes. Form 1040ez 2011 However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Form 1040ez 2011 Example. Form 1040ez 2011 Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Form 1040ez 2011 Add the assessment to your property's basis. Form 1040ez 2011 In this example, the assessment is a depreciable asset. Form 1040ez 2011 Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Form 1040ez 2011 Examples of items that decrease basis are shown in Table 13-1. Form 1040ez 2011 These include the items discussed below. Form 1040ez 2011 Table 13-1. Form 1040ez 2011 Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Form 1040ez 2011   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Form 1040ez 2011    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Form 1040ez 2011   For more information on casualty and theft losses, see chapter 25. Form 1040ez 2011 Depreciation and section 179 deduction. Form 1040ez 2011   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Form 1040ez 2011   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Form 1040ez 2011 Example. Form 1040ez 2011 You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Form 1040ez 2011 You added an improvement to the duplex that cost $10,000. Form 1040ez 2011 In February last year, the duplex was damaged by fire. Form 1040ez 2011 Up to that time, you had been allowed depreciation of $23,000. Form 1040ez 2011 You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Form 1040ez 2011 You deducted a casualty loss of $1,000 on your income tax return for last year. Form 1040ez 2011 You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Form 1040ez 2011 You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Form 1040ez 2011 Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Form 1040ez 2011 Your basis in the land is its original cost of $5,000. Form 1040ez 2011 Easements. Form 1040ez 2011   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Form 1040ez 2011 It reduces the basis of the affected part of the property. Form 1040ez 2011 If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Form 1040ez 2011   If the gain is on a capital asset, see chapter 16 for information about how to report it. Form 1040ez 2011 If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Form 1040ez 2011 Exclusion of subsidies for energy conservation measures. Form 1040ez 2011   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Form 1040ez 2011 Reduce the basis of the property for which you received the subsidy by the excluded amount. Form 1040ez 2011 For more information about this subsidy, see chapter 12. Form 1040ez 2011 Postponed gain from sale of home. Form 1040ez 2011    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Form 1040ez 2011 For more information on the rules for the sale of a home, see chapter 15. Form 1040ez 2011 Basis Other Than Cost There are many times when you cannot use cost as basis. Form 1040ez 2011 In these cases, the fair market value or the adjusted basis of the property can be used. Form 1040ez 2011 Fair market value (FMV) and adjusted basis were discussed earlier. Form 1040ez 2011 Property Received for Services If you receive property for your services, include the FMV of the property in income. Form 1040ez 2011 The amount you include in income becomes your basis. Form 1040ez 2011 If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Form 1040ez 2011 Restricted property. Form 1040ez 2011   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. Form 1040ez 2011 However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Form 1040ez 2011 Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Form 1040ez 2011 For more information, see Restricted Property in Publication 525. Form 1040ez 2011 Bargain purchases. Form 1040ez 2011   A bargain purchase is a purchase of an item for less than its FMV. Form 1040ez 2011 If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Form 1040ez 2011 Your basis in the property is its FMV (your purchase price plus the amount you include in income). Form 1040ez 2011   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Form 1040ez 2011 However, your basis in the property is still its FMV. Form 1040ez 2011 See Employee Discounts in Publication 15-B. Form 1040ez 2011 Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Form 1040ez 2011 A taxable gain or deductible loss also is known as a recognized gain or loss. Form 1040ez 2011 If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Form 1040ez 2011 Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Form 1040ez 2011 Similar or related property. Form 1040ez 2011   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Form 1040ez 2011 Decrease the basis by the following. Form 1040ez 2011 Any loss you recognize on the involuntary conversion. Form 1040ez 2011 Any money you receive that you do not spend on similar property. Form 1040ez 2011 Increase the basis by the following. Form 1040ez 2011 Any gain you recognize on the involuntary conversion. Form 1040ez 2011 Any cost of acquiring the replacement property. Form 1040ez 2011 Money or property not similar or related. Form 1040ez 2011    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. Form 1040ez 2011 Example. Form 1040ez 2011 The state condemned your property. Form 1040ez 2011 The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Form 1040ez 2011 You realized a gain of $5,000 ($31,000 − $26,000). Form 1040ez 2011 You bought replacement property similar in use to the converted property for $29,000. Form 1040ez 2011 You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Form 1040ez 2011 Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Form 1040ez 2011 The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Form 1040ez 2011   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Form 1040ez 2011 Basis for depreciation. Form 1040ez 2011   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Form 1040ez 2011 For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Form 1040ez 2011 Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Form 1040ez 2011 If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Form 1040ez 2011 See Nontaxable Trades in chapter 14. Form 1040ez 2011 Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Form 1040ez 2011 To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Form 1040ez 2011 Qualifying property. Form 1040ez 2011 Like-kind property. Form 1040ez 2011 The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Form 1040ez 2011 If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Form 1040ez 2011 Qualifying property. Form 1040ez 2011   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Form 1040ez 2011 Like-kind property. Form 1040ez 2011   There must be an exchange of like-kind property. Form 1040ez 2011 Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Form 1040ez 2011 The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Form 1040ez 2011 Example. Form 1040ez 2011 You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Form 1040ez 2011 The dealer allows you $2,000 on the old truck, and you pay $4,800. Form 1040ez 2011 This is a like-kind exchange. Form 1040ez 2011 The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Form 1040ez 2011 If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Form 1040ez 2011 The basis of the new truck is the price you pay the dealer. Form 1040ez 2011 Partially nontaxable exchanges. Form 1040ez 2011   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Form 1040ez 2011 The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Form 1040ez 2011 Decrease the basis by the following amounts. Form 1040ez 2011 Any money you receive. Form 1040ez 2011 Any loss you recognize on the exchange. Form 1040ez 2011 Increase the basis by the following amounts. Form 1040ez 2011 Any additional costs you incur. Form 1040ez 2011 Any gain you recognize on the exchange. Form 1040ez 2011 If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Form 1040ez 2011 Allocation of basis. Form 1040ez 2011   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Form 1040ez 2011 The rest is the basis of the like-kind property. Form 1040ez 2011 More information. Form 1040ez 2011   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Form 1040ez 2011 Basis for depreciation. Form 1040ez 2011   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Form 1040ez 2011 For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Form 1040ez 2011 Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Form 1040ez 2011 The same rule applies to a transfer by your former spouse that is incident to divorce. Form 1040ez 2011 However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Form 1040ez 2011 If the property transferred to you is a series E, series EE, or series I U. Form 1040ez 2011 S. Form 1040ez 2011 savings bond, the transferor must include in income the interest accrued to the date of transfer. Form 1040ez 2011 Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Form 1040ez 2011 For more information on these bonds, see chapter 7. Form 1040ez 2011 At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Form 1040ez 2011 For more information about the transfer of property from a spouse, see chapter 14. Form 1040ez 2011 Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Form 1040ez 2011 FMV less than donor's adjusted basis. Form 1040ez 2011   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Form 1040ez 2011 Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Form 1040ez 2011 Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Form 1040ez 2011 See Adjusted Basis , earlier. Form 1040ez 2011 Example. Form 1040ez 2011 You received an acre of land as a gift. Form 1040ez 2011 At the time of the gift, the land had an FMV of $8,000. Form 1040ez 2011 The donor's adjusted basis was $10,000. Form 1040ez 2011 After you received the property, no events occurred to increase or decrease your basis. Form 1040ez 2011 If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Form 1040ez 2011 If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Form 1040ez 2011 If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Form 1040ez 2011 Business property. Form 1040ez 2011   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Form 1040ez 2011 FMV equal to or greater than donor's adjusted basis. Form 1040ez 2011   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Form 1040ez 2011 Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Form 1040ez 2011   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Form 1040ez 2011 See Adjusted Basis , earlier. Form 1040ez 2011   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Form 1040ez 2011 Figure the increase by multiplying the gift tax paid by a fraction. Form 1040ez 2011 The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Form 1040ez 2011   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Form 1040ez 2011 The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Form 1040ez 2011 Example. Form 1040ez 2011 In 2013, you received a gift of property from your mother that had an FMV of $50,000. Form 1040ez 2011 Her adjusted basis was $20,000. Form 1040ez 2011 The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Form 1040ez 2011 She paid a gift tax of $7,320 on the property. Form 1040ez 2011 Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Form 1040ez 2011 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Form 1040ez 2011 If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Form 1040ez 2011 However, your basis cannot exceed the FMV of the gift at the time it was given to you. Form 1040ez 2011 Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Form 1040ez 2011 The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Form 1040ez 2011 The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Form 1040ez 2011 The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Form 1040ez 2011 If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Form 1040ez 2011 For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Form 1040ez 2011 Property inherited from a decedent who died in 2010. Form 1040ez 2011   If you inherited property from a decedent who died in 2010, special rules may apply. Form 1040ez 2011 For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Form 1040ez 2011 Community property. Form 1040ez 2011   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Form 1040ez 2011 When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Form 1040ez 2011 For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Form 1040ez 2011 Example. Form 1040ez 2011 You and your spouse owned community property that had a basis of $80,000. Form 1040ez 2011 When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Form 1040ez 2011 The FMV of the community interest was $100,000. Form 1040ez 2011 The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Form 1040ez 2011 The basis of the other half to your spouse's heirs is also $50,000. Form 1040ez 2011 For more information about community property, see Publication 555, Community Property. Form 1040ez 2011 Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. Form 1040ez 2011 To do so, you must figure its basis for depreciation at the time of the change. Form 1040ez 2011 An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Form 1040ez 2011 Basis for depreciation. Form 1040ez 2011   The basis for depreciation is the lesser of the following amounts. Form 1040ez 2011 The FMV of the property on the date of the change. Form 1040ez 2011 Your adjusted basis on the date of the change. Form 1040ez 2011 Example. Form 1040ez 2011 Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Form 1040ez 2011 You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Form 1040ez 2011 Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Form 1040ez 2011 Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Form 1040ez 2011 On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Form 1040ez 2011 The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Form 1040ez 2011 Sale of property. Form 1040ez 2011   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Form 1040ez 2011 Gain. Form 1040ez 2011   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Form 1040ez 2011 Example. Form 1040ez 2011 Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Form 1040ez 2011 Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Form 1040ez 2011 Loss. Form 1040ez 2011   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Form 1040ez 2011 Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Form 1040ez 2011 Example. Form 1040ez 2011 Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Form 1040ez 2011 In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Form 1040ez 2011 Reduce that amount ($180,000) by the depreciation deductions ($37,500). Form 1040ez 2011 The basis for loss is $142,500 ($180,000 − $37,500). Form 1040ez 2011 Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Form 1040ez 2011 If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Form 1040ez 2011 You must adjust the basis of stocks for certain events that occur after purchase. Form 1040ez 2011 For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Form 1040ez 2011 This rule applies only when the additional stock received is identical to the stock held. Form 1040ez 2011 Also reduce your basis when you receive nontaxable distributions. Form 1040ez 2011 They are a return of capital. Form 1040ez 2011 Example. Form 1040ez 2011 In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Form 1040ez 2011 In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Form 1040ez 2011 In 2013 XYZ declared a 2-for-1 stock split. Form 1040ez 2011 You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Form 1040ez 2011 Other basis. Form 1040ez 2011   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Form 1040ez 2011 For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Form 1040ez 2011 Identifying stocks or bonds sold. Form 1040ez 2011   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. Form 1040ez 2011 If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Form 1040ez 2011 For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Form 1040ez 2011 Mutual fund shares. Form 1040ez 2011   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Form 1040ez 2011 For more information, see Publication 550. Form 1040ez 2011 Bond premium. Form 1040ez 2011   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Form 1040ez 2011 See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Form 1040ez 2011 Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Form 1040ez 2011 Original issue discount (OID) on debt instruments. Form 1040ez 2011   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Form 1040ez 2011 See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Form 1040ez 2011 Tax-exempt obligations. Form 1040ez 2011    OID on tax-exempt obligations is generally not taxable. Form 1040ez 2011 However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Form 1040ez 2011 The accrued OID is added to the basis of the obligation to determine your gain or loss. Form 1040ez 2011 See chapter 4 of Publication 550. Form 1040ez 2011 Prev  Up  Next   Home   More Online Publications
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Page Last Reviewed or Updated: 05-Mar-2014

The Form 1040ez 2011

Form 1040ez 2011 10. Form 1040ez 2011   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Form 1040ez 2011 Revoking the election. Form 1040ez 2011 More information. Form 1040ez 2011 Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Form 1040ez 2011 Summary. Form 1040ez 2011 Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Form 1040ez 2011 If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Form 1040ez 2011 This method of reporting gain is called the installment method. Form 1040ez 2011 You cannot use the installment method to report a loss. Form 1040ez 2011 You can choose to report all of your gain in the year of sale. Form 1040ez 2011 Installment obligation. Form 1040ez 2011   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Form 1040ez 2011 Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Form 1040ez 2011 Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Form 1040ez 2011 It generally includes the sale of real property and personal property reportable on the installment method. Form 1040ez 2011 It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Form 1040ez 2011 See Inventory , later. Form 1040ez 2011 The selling price must be allocated to determine the amount received for each class of asset. Form 1040ez 2011 The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Form 1040ez 2011 (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Form 1040ez 2011 ) Separate computations must be made to figure the gain or loss for each class of asset sold. Form 1040ez 2011 See Sale of a Farm in chapter 8. Form 1040ez 2011 If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Form 1040ez 2011 See Depreciation recapture , later. Form 1040ez 2011 This applies even if no payments are received in that year. Form 1040ez 2011 Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Form 1040ez 2011 A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Form 1040ez 2011 See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Form 1040ez 2011 If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Form 1040ez 2011 Electing out of the installment method. Form 1040ez 2011   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Form 1040ez 2011   To make this election, do not report your sale on Form 6252. Form 1040ez 2011 Instead, report it on Schedule D (Form 1040), Form 4797, or both. Form 1040ez 2011 When to elect out. Form 1040ez 2011   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Form 1040ez 2011   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Form 1040ez 2011 Write “Filed pursuant to section 301. Form 1040ez 2011 9100-2” at the top of the amended return and file it where the original return was filed. Form 1040ez 2011 Revoking the election. Form 1040ez 2011   Once made, the election can be revoked only with IRS approval. Form 1040ez 2011 A revocation is retroactive. Form 1040ez 2011 More information. Form 1040ez 2011   See Electing Out of the Installment Method in Publication 537 for more information. Form 1040ez 2011 Inventory. Form 1040ez 2011   The sale of farm inventory items cannot be reported on the installment method. Form 1040ez 2011 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Form 1040ez 2011   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Form 1040ez 2011 If you do not, each payment must be allocated between the inventory and the other assets sold. Form 1040ez 2011 Sale at a loss. Form 1040ez 2011   If your sale results in a loss, you cannot use the installment method. Form 1040ez 2011 If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Form 1040ez 2011 Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Form 1040ez 2011 Interest income. Form 1040ez 2011 Return of your adjusted basis in the property. Form 1040ez 2011 Gain on the sale. Form 1040ez 2011 In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Form 1040ez 2011 You do not include in income the part that is the return of your basis in the property. Form 1040ez 2011 Basis is the amount of your investment in the property for installment sale purposes. Form 1040ez 2011 Interest income. Form 1040ez 2011   You must report interest as ordinary income. Form 1040ez 2011 Interest is generally not included in a down payment. Form 1040ez 2011 However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Form 1040ez 2011 Interest provided in the agreement is called stated interest. Form 1040ez 2011 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Form 1040ez 2011 See Unstated interest , later. Form 1040ez 2011    You must continue to report the interest income on payments you receive in subsequent years as interest income. Form 1040ez 2011 Adjusted basis and installment sale income (gain on sale). Form 1040ez 2011   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Form 1040ez 2011 A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Form 1040ez 2011 Figuring adjusted basis for installment sale purposes. Form 1040ez 2011   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Form 1040ez 2011 When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Form 1040ez 2011    Worksheet 10-1. Form 1040ez 2011 Figuring Adjusted Basis and Gross Profit Percentage 1. Form 1040ez 2011 Enter the selling price for the property   2. Form 1040ez 2011 Enter your adjusted basis for the property     3. Form 1040ez 2011 Enter your selling expenses     4. Form 1040ez 2011 Enter any depreciation recapture     5. Form 1040ez 2011 Add lines 2, 3, and 4. Form 1040ez 2011  This is your adjusted basis  for installment sale purposes   6. Form 1040ez 2011 Subtract line 5 from line 1. Form 1040ez 2011 If zero or less, enter -0-. Form 1040ez 2011  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Form 1040ez 2011 You cannot use the installment method. Form 1040ez 2011   7. Form 1040ez 2011 Enter the contract price for the property   8. Form 1040ez 2011 Divide line 6 by line 7. Form 1040ez 2011 This is your gross profit percentage   Selling price. Form 1040ez 2011   The selling price is the total cost of the property to the buyer and includes the following. Form 1040ez 2011 Any money you are to receive. Form 1040ez 2011 The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Form 1040ez 2011 Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Form 1040ez 2011 Any of your selling expenses the buyer pays. Form 1040ez 2011 Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Form 1040ez 2011 Adjusted basis for installment sale purposes. Form 1040ez 2011   Your adjusted basis is the total of the following three items. Form 1040ez 2011 Adjusted basis. Form 1040ez 2011 Selling expenses. Form 1040ez 2011 Depreciation recapture. Form 1040ez 2011 Adjusted basis. Form 1040ez 2011   Basis is your investment in the property for installment sale purposes. Form 1040ez 2011 The way you figure basis depends on how you acquire the property. Form 1040ez 2011 The basis of property you buy is generally its cost. Form 1040ez 2011 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Form 1040ez 2011   While you own property, various events may change your original basis. Form 1040ez 2011 Some events, such as adding rooms or making permanent improvements, increase basis. Form 1040ez 2011 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Form 1040ez 2011 The result is adjusted basis. Form 1040ez 2011 See chapter 6 and Publication 551, Basis of Assets, for more information. Form 1040ez 2011 Selling expenses. Form 1040ez 2011   Selling expenses relate to the sale of the property. Form 1040ez 2011 They include commissions, attorney fees, and any other expenses paid on the sale. Form 1040ez 2011 Selling expenses are added to the basis of the sold property. Form 1040ez 2011 Depreciation recapture. Form 1040ez 2011   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Form 1040ez 2011 See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Form 1040ez 2011 Gross profit. Form 1040ez 2011   Gross profit is the total gain you report on the installment method. Form 1040ez 2011   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Form 1040ez 2011 If the property you sold was your home, subtract from the gross profit any gain you can exclude. Form 1040ez 2011 Contract price. Form 1040ez 2011   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Form 1040ez 2011 Gross profit percentage. Form 1040ez 2011   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Form 1040ez 2011 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Form 1040ez 2011   The gross profit percentage generally remains the same for each payment you receive. Form 1040ez 2011 However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Form 1040ez 2011 Amount to report as installment sale income. Form 1040ez 2011   Multiply the payments you receive each year (less interest) by the gross profit percentage. Form 1040ez 2011 The result is your installment sales income for the tax year. Form 1040ez 2011 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Form 1040ez 2011 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Form 1040ez 2011 For a detailed discussion, see Payments Received or Considered Received , later. Form 1040ez 2011 Selling price reduced. Form 1040ez 2011   If the selling price is reduced at a later date, the gross profit on the sale also will change. Form 1040ez 2011 You then must refigure the gross profit percentage for the remaining payments. Form 1040ez 2011 Refigure your gross profit using Worksheet 10-2. Form 1040ez 2011 New Gross Profit Percentage — Selling Price Reduced. Form 1040ez 2011 You will spread any remaining gain over future installments. Form 1040ez 2011    Worksheet 10-2. Form 1040ez 2011 New Gross Profit Percentage — Selling Price Reduced 1. Form 1040ez 2011 Enter the reduced selling  price for the property   2. Form 1040ez 2011 Enter your adjusted  basis for the  property     3. Form 1040ez 2011 Enter your selling  expenses     4. Form 1040ez 2011 Enter any depreciation  recapture     5. Form 1040ez 2011 Add lines 2, 3, and 4. Form 1040ez 2011   6. Form 1040ez 2011 Subtract line 5 from line 1. Form 1040ez 2011  This is your adjusted  gross profit   7. Form 1040ez 2011 Enter any installment sale  income reported in  prior year(s)   8. Form 1040ez 2011 Subtract line 7 from line 6   9. Form 1040ez 2011 Future installments     10. Form 1040ez 2011 Divide line 8 by line 9. Form 1040ez 2011  This is your new  gross profit percentage*. Form 1040ez 2011   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Form 1040ez 2011 Example. Form 1040ez 2011 In 2011, you sold land with a basis of $40,000 for $100,000. Form 1040ez 2011 Your gross profit was $60,000. Form 1040ez 2011 You received a $20,000 down payment and the buyer's note for $80,000. Form 1040ez 2011 The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Form 1040ez 2011 Your gross profit percentage was 60%. Form 1040ez 2011 You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Form 1040ez 2011 You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Form 1040ez 2011 60)) in 2012. Form 1040ez 2011 In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Form 1040ez 2011 The new gross profit percentage, 47. Form 1040ez 2011 32%, is figured in Example — Worksheet 10-2. Form 1040ez 2011 Example — Worksheet 10-2. Form 1040ez 2011 New Gross Profit Percentage — Selling Price Reduced 1. Form 1040ez 2011 Enter the reduced selling  price for the property 85,000 2. Form 1040ez 2011 Enter your adjusted  basis for the  property 40,000   3. Form 1040ez 2011 Enter your selling  expenses -0-   4. Form 1040ez 2011 Enter any depreciation  recapture -0-   5. Form 1040ez 2011 Add lines 2, 3, and 4. Form 1040ez 2011 40,000 6. Form 1040ez 2011 Subtract line 5 from line 1. Form 1040ez 2011  This is your adjusted  gross profit 45,000 7. Form 1040ez 2011 Enter any installment sale  income reported in  prior year(s) 22,605 8. Form 1040ez 2011 Subtract line 7 from line 6 22,395 9. Form 1040ez 2011 Future installments   47,325 10. Form 1040ez 2011 Divide line 8 by line 9. Form 1040ez 2011  This is your new  gross profit percentage*. Form 1040ez 2011 47. Form 1040ez 2011 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Form 1040ez 2011 You will report installment sale income of $6,878 (47. Form 1040ez 2011 32% of $14,535) in 2013, $7,449 (47. Form 1040ez 2011 32% of $15,742) in 2014, and $8,067 (47. Form 1040ez 2011 32% of $17,048) in 2015. Form 1040ez 2011 Form 6252. Form 1040ez 2011   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Form 1040ez 2011 Attach it to your tax return for each year. Form 1040ez 2011 Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Form 1040ez 2011 It is considered gain or loss on the sale of the property for which you received the installment obligation. Form 1040ez 2011 Cancellation. Form 1040ez 2011   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Form 1040ez 2011 Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Form 1040ez 2011 If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Form 1040ez 2011 Transfer due to death. Form 1040ez 2011   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Form 1040ez 2011 Any unreported gain from the installment obligation is not treated as gross income to the decedent. Form 1040ez 2011 No income is reported on the decedent's return due to the transfer. Form 1040ez 2011 Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Form 1040ez 2011   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Form 1040ez 2011 The estate must figure its gain or loss on the disposition. Form 1040ez 2011 If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Form 1040ez 2011 More information. Form 1040ez 2011   For more information on the disposition of an installment obligation, see Publication 537. Form 1040ez 2011 Sale of depreciable property. Form 1040ez 2011   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Form 1040ez 2011 See Sale to a Related Person in Publication 537. Form 1040ez 2011   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Form 1040ez 2011 However, report any gain greater than the recapture income on the installment method. Form 1040ez 2011   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Form 1040ez 2011   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Form 1040ez 2011 Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Form 1040ez 2011    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Form 1040ez 2011 See the Form 6252 instructions for details. Form 1040ez 2011   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Form 1040ez 2011 For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Form 1040ez 2011 Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Form 1040ez 2011 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Form 1040ez 2011 These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Form 1040ez 2011 However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Form 1040ez 2011 Buyer pays seller's expenses. Form 1040ez 2011   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Form 1040ez 2011 Include these expenses in the selling and contract prices when figuring the gross profit percentage. Form 1040ez 2011 Buyer assumes mortgage. Form 1040ez 2011   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Form 1040ez 2011 Mortgage less than basis. Form 1040ez 2011   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Form 1040ez 2011 It is considered a recovery of your basis. Form 1040ez 2011 The contract price is the selling price minus the mortgage. Form 1040ez 2011 Example. Form 1040ez 2011 You sell property with an adjusted basis of $19,000. Form 1040ez 2011 You have selling expenses of $1,000. Form 1040ez 2011 The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Form 1040ez 2011 The selling price is $25,000 ($15,000 + $10,000). Form 1040ez 2011 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Form 1040ez 2011 The contract price is $10,000 ($25,000 − $15,000 mortgage). Form 1040ez 2011 Your gross profit percentage is 50% ($5,000 ÷ $10,000). Form 1040ez 2011 You report half of each $2,000 payment received as gain from the sale. Form 1040ez 2011 You also report all interest you receive as ordinary income. Form 1040ez 2011 Mortgage more than basis. Form 1040ez 2011   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Form 1040ez 2011 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Form 1040ez 2011   To figure the contract price, subtract the mortgage from the selling price. Form 1040ez 2011 This is the total amount (other than interest) you will receive directly from the buyer. Form 1040ez 2011 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Form 1040ez 2011 The contract price is then the same as your gross profit from the sale. Form 1040ez 2011    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Form 1040ez 2011 Example. Form 1040ez 2011 The selling price for your property is $9,000. Form 1040ez 2011 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Form 1040ez 2011 Your adjusted basis in the property is $4,400. Form 1040ez 2011 You have selling expenses of $600, for a total installment sale basis of $5,000. Form 1040ez 2011 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Form 1040ez 2011 This amount is included in the contract price and treated as a payment received in the year of sale. Form 1040ez 2011 The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. Form 1040ez 2011 Report 100% of each payment (less interest) as gain from the sale. Form 1040ez 2011 Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Form 1040ez 2011 Buyer assumes other debts. Form 1040ez 2011   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Form 1040ez 2011   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Form 1040ez 2011 Compare the debt to your installment sale basis in the property being sold. Form 1040ez 2011 If the debt is less than your installment sale basis, none of it is treated as a payment. Form 1040ez 2011 If it is more, only the difference is treated as a payment. Form 1040ez 2011 If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Form 1040ez 2011 These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Form 1040ez 2011 However, they apply only to the following types of debt the buyer assumes. Form 1040ez 2011 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Form 1040ez 2011 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Form 1040ez 2011   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Form 1040ez 2011 The value of the assumed debt is then considered a payment to you in the year of sale. Form 1040ez 2011 Property used as a payment. Form 1040ez 2011   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Form 1040ez 2011 However, see Trading property for like-kind property , later. Form 1040ez 2011 Generally, the amount of the payment is the property's FMV on the date you receive it. Form 1040ez 2011 Exception. Form 1040ez 2011   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Form 1040ez 2011 See Unstated interest , later. Form 1040ez 2011 Examples. Form 1040ez 2011 If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Form 1040ez 2011 If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Form 1040ez 2011 In these examples, use the above rules to determine the amount you should consider as payment in the year received. Form 1040ez 2011 Debt not payable on demand. Form 1040ez 2011   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Form 1040ez 2011 This is true even if the debt is guaranteed by a third party, including a government agency. Form 1040ez 2011 Fair market value (FMV). Form 1040ez 2011   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Form 1040ez 2011 Third-party note. Form 1040ez 2011   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Form 1040ez 2011 Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Form 1040ez 2011 The excess of the note's face value over its FMV is interest. Form 1040ez 2011 Exclude this interest in determining the selling price of the property. Form 1040ez 2011 However, see Exception under Property used as a payment , earlier. Form 1040ez 2011 Example. Form 1040ez 2011 You sold real estate in an installment sale. Form 1040ez 2011 As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Form 1040ez 2011 The FMV of the third-party note at the time of the sale was $30,000. Form 1040ez 2011 This amount, not $50,000, is a payment to you in the year of sale. Form 1040ez 2011 The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Form 1040ez 2011 The remaining 40% is interest taxed as ordinary income. Form 1040ez 2011 Bond. Form 1040ez 2011   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Form 1040ez 2011 For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Form 1040ez 2011   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Form 1040ez 2011 However, see Exception under Property used as a payment , earlier. Form 1040ez 2011 Buyer's note. Form 1040ez 2011   The buyer's note (unless payable on demand) is not considered payment on the sale. Form 1040ez 2011 However, its full face value is included when figuring the selling price and the contract price. Form 1040ez 2011 Payments you receive on the note are used to figure your gain in the year received. Form 1040ez 2011 Sale to a related person. Form 1040ez 2011   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Form 1040ez 2011 For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Form 1040ez 2011 Trading property for like-kind property. Form 1040ez 2011   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Form 1040ez 2011 See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Form 1040ez 2011   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Form 1040ez 2011 The contract price is reduced by the FMV of the like-kind property received in the trade. Form 1040ez 2011 The gross profit is reduced by any gain on the trade that can be postponed. Form 1040ez 2011 Like-kind property received in the trade is not considered payment on the installment obligation. Form 1040ez 2011 Unstated interest. Form 1040ez 2011   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Form 1040ez 2011 Interest provided in the contract is called stated interest. Form 1040ez 2011   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Form 1040ez 2011 If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Form 1040ez 2011   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Form 1040ez 2011   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Form 1040ez 2011 Therefore, the buyer cannot deduct the unstated interest. Form 1040ez 2011 The seller must report the unstated interest as income. Form 1040ez 2011 Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Form 1040ez 2011   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Form 1040ez 2011   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Form 1040ez 2011 It increases the seller's interest income and the buyer's interest expense. Form 1040ez 2011   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Form 1040ez 2011    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Form 1040ez 2011 You can get this information by contacting an IRS office. Form 1040ez 2011 IRBs are also available at IRS. Form 1040ez 2011 gov. Form 1040ez 2011 More information. Form 1040ez 2011   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Form 1040ez 2011 Example. Form 1040ez 2011 You sell property at a contract price of $6,000 and your gross profit is $1,500. Form 1040ez 2011 Your gross profit percentage is 25% ($1,500 ÷ $6,000). Form 1040ez 2011 After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Form 1040ez 2011 The remainder (balance) of each payment is the tax-free return of your adjusted basis. Form 1040ez 2011 Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Form 1040ez 2011 You received $50,000 down and the buyer's note for $200,000. Form 1040ez 2011 In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Form 1040ez 2011 The total selling price was $300,000. Form 1040ez 2011 The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Form 1040ez 2011 Your selling expenses were $15,000. Form 1040ez 2011 Adjusted basis and depreciation. Form 1040ez 2011   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Form 1040ez 2011   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Form 1040ez 2011 The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Form 1040ez 2011   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Form 1040ez 2011   The buildings are section 1250 property. Form 1040ez 2011 There is no depreciation recapture income for them because they were depreciated using the straight line method. Form 1040ez 2011 See chapter 9 for more information on depreciation recapture. Form 1040ez 2011   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Form 1040ez 2011 See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Form 1040ez 2011 See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Form 1040ez 2011 Installment sale basis and gross profit. Form 1040ez 2011   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Form 1040ez 2011     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Form 1040ez 2011   The gain on the farm land and buildings is reported as section 1231 gains. Form 1040ez 2011 See Section 1231 Gains and Losses in chapter 9. Form 1040ez 2011 Contract price and gross profit percentage. Form 1040ez 2011   The contract price is $250,000 for the part of the sale reported on the installment method. Form 1040ez 2011 This is the selling price ($300,000) minus the mortgage assumed ($50,000). Form 1040ez 2011   Gross profit percentage for the sale is 47. Form 1040ez 2011 70% ($119,260 gross profit ÷ $250,000 contract price). Form 1040ez 2011 The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Form 1040ez 2011 256 Buildings ($36,120 ÷ $250,000) 14. Form 1040ez 2011 448 Total 47. Form 1040ez 2011 70 Figuring the gain to report on the installment method. Form 1040ez 2011   One hundred percent (100%) of each payment is reported on the installment method. Form 1040ez 2011 The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Form 1040ez 2011 The installment sale part of the total payments received in 2013 is also $75,000. Form 1040ez 2011 Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Form 1040ez 2011   Income Farm land—33. Form 1040ez 2011 256% × $75,000 $24,942 Buildings—14. Form 1040ez 2011 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Form 1040ez 2011   Report the installment sale on Form 6252. Form 1040ez 2011 Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Form 1040ez 2011 Attach a separate page to Form 6252 that shows the computations in the example. Form 1040ez 2011 If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Form 1040ez 2011 Section 1231 gains. Form 1040ez 2011   The gains on the farm land and buildings are section 1231 gains. Form 1040ez 2011 They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Form 1040ez 2011 A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Form 1040ez 2011 Installment income for years after 2013. Form 1040ez 2011   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Form 1040ez 2011 If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Form 1040ez 2011 You realize income as follows:   Income Farm land—33. Form 1040ez 2011 256% × $50,000 $16,628 Buildings—14. Form 1040ez 2011 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Form 1040ez 2011 You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Form 1040ez 2011 The interest received with each payment will be included in full as ordinary income. Form 1040ez 2011 Summary. Form 1040ez 2011   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Form 1040ez 2011 70% 23,850 Gain reported in 2014:   $50,000 × 47. Form 1040ez 2011 70% 23,850 Gain reported in 2015:   $50,000 × 47. Form 1040ez 2011 70% 23,850 Gain reported in 2016:   $25,000 × 47. Form 1040ez 2011 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications