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Form 1040ez More:label_form_201040ez More:taxes

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Form 1040ez More:label_form_201040ez More:taxes

Form 1040ez more:label_form_201040ez more:taxes 11. Form 1040ez more:label_form_201040ez more:taxes   Casualties, Thefts, and Condemnations Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Casualties and TheftsDeductible losses. Form 1040ez more:label_form_201040ez more:taxes Nondeductible losses. Form 1040ez more:label_form_201040ez more:taxes Family pet. Form 1040ez more:label_form_201040ez more:taxes Progressive deterioration. Form 1040ez more:label_form_201040ez more:taxes Decline in market value of stock. Form 1040ez more:label_form_201040ez more:taxes Mislaid or lost property. Form 1040ez more:label_form_201040ez more:taxes Farming Losses How To Figure a Loss Deduction Limits on Losses of Personal-Use Property When Loss Is Deductible Proof of Loss Figuring a Gain Other Involuntary ConversionsCondemnation Irrigation Project Livestock Losses Tree Seedlings Postponing GainException. Form 1040ez more:label_form_201040ez more:taxes Related persons. Form 1040ez more:label_form_201040ez more:taxes Replacement Property Replacement Period How To Postpone Gain Disaster Area LossesWho is eligible. Form 1040ez more:label_form_201040ez more:taxes Covered disaster area. Form 1040ez more:label_form_201040ez more:taxes Reporting Gains and Losses Introduction This chapter explains the tax treatment of casualties, thefts, and condemnations. Form 1040ez more:label_form_201040ez more:taxes A casualty occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. Form 1040ez more:label_form_201040ez more:taxes A theft occurs when property is stolen. Form 1040ez more:label_form_201040ez more:taxes A condemnation occurs when private property is legally taken for public use without the owner's consent. Form 1040ez more:label_form_201040ez more:taxes A casualty, theft, or condemnation may result in a deductible loss or taxable gain on your federal income tax return. Form 1040ez more:label_form_201040ez more:taxes You may have a deductible loss or a taxable gain even if only a portion of your property was affected by a casualty, theft, or condemnation. Form 1040ez more:label_form_201040ez more:taxes An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events discussed in this chapter. Form 1040ez more:label_form_201040ez more:taxes If an involuntary conversion results in a gain and you buy qualified replacement property within the specified replacement period, you can postpone reporting the gain on your income tax return. Form 1040ez more:label_form_201040ez more:taxes For more information, see Postponing Gain , later. Form 1040ez more:label_form_201040ez more:taxes Topics - This chapter discusses: Casualties and thefts How to figure a loss or gain Other involuntary conversions Postponing gain Disaster area losses Reporting gains and losses Drought involving property connected with a trade or business or a transaction entered into for profit Useful Items - You may want to see: Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and Theft Loss Workbook Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 4684 Casualties and Thefts 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Form 1040ez more:label_form_201040ez more:taxes Casualties and Thefts If your property is destroyed, damaged, or stolen, you may have a deductible loss. Form 1040ez more:label_form_201040ez more:taxes If the insurance or other reimbursement is more than the adjusted basis of the destroyed, damaged, or stolen property, you may have a taxable gain. Form 1040ez more:label_form_201040ez more:taxes Casualty. Form 1040ez more:label_form_201040ez more:taxes   A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Form 1040ez more:label_form_201040ez more:taxes A sudden event is one that is swift, not gradual or progressive. Form 1040ez more:label_form_201040ez more:taxes An unexpected event is one that is ordinarily unanticipated and unintended. Form 1040ez more:label_form_201040ez more:taxes An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Form 1040ez more:label_form_201040ez more:taxes Deductible losses. Form 1040ez more:label_form_201040ez more:taxes   Deductible casualty losses can result from a number of different causes, including the following. Form 1040ez more:label_form_201040ez more:taxes Airplane crashes. Form 1040ez more:label_form_201040ez more:taxes Car, truck, or farm equipment accidents not resulting from your willful act or willful negligence. Form 1040ez more:label_form_201040ez more:taxes Earthquakes. Form 1040ez more:label_form_201040ez more:taxes Fires (but see Nondeductible losses next for exceptions). Form 1040ez more:label_form_201040ez more:taxes Floods. Form 1040ez more:label_form_201040ez more:taxes Freezing. Form 1040ez more:label_form_201040ez more:taxes Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses, in Publication 547. Form 1040ez more:label_form_201040ez more:taxes Lightning. Form 1040ez more:label_form_201040ez more:taxes Storms, including hurricanes and tornadoes. Form 1040ez more:label_form_201040ez more:taxes Terrorist attacks. Form 1040ez more:label_form_201040ez more:taxes Vandalism. Form 1040ez more:label_form_201040ez more:taxes Volcanic eruptions. Form 1040ez more:label_form_201040ez more:taxes Nondeductible losses. Form 1040ez more:label_form_201040ez more:taxes   A casualty loss is not deductible if the damage or destruction is caused by the following. Form 1040ez more:label_form_201040ez more:taxes Accidentally breaking articles such as glassware or china under normal conditions. Form 1040ez more:label_form_201040ez more:taxes A family pet (explained below). Form 1040ez more:label_form_201040ez more:taxes A fire if you willfully set it, or pay someone else to set it. Form 1040ez more:label_form_201040ez more:taxes A car, truck, or farm equipment accident if your willful negligence or willful act caused it. Form 1040ez more:label_form_201040ez more:taxes The same is true if the willful act or willful negligence of someone acting for you caused the accident. Form 1040ez more:label_form_201040ez more:taxes Progressive deterioration (explained below). Form 1040ez more:label_form_201040ez more:taxes Family pet. Form 1040ez more:label_form_201040ez more:taxes   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed above under Casualty are met. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes You keep your horse in your yard. Form 1040ez more:label_form_201040ez more:taxes The ornamental fruit trees in your yard were damaged when your horse stripped the bark from them. Form 1040ez more:label_form_201040ez more:taxes Some of the trees were completely girdled and died. Form 1040ez more:label_form_201040ez more:taxes Because the damage was not unexpected or unusual, the loss is not deductible. Form 1040ez more:label_form_201040ez more:taxes Progressive deterioration. Form 1040ez more:label_form_201040ez more:taxes   Loss of property due to progressive deterioration is not deductible as a casualty loss. Form 1040ez more:label_form_201040ez more:taxes This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. Form 1040ez more:label_form_201040ez more:taxes Examples of damage due to progressive deterioration include damage from rust, corrosion, or termites. Form 1040ez more:label_form_201040ez more:taxes However, weather-related conditions or disease may cause another type of involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes See Other Involuntary Conversions , later. Form 1040ez more:label_form_201040ez more:taxes Theft. Form 1040ez more:label_form_201040ez more:taxes   A theft is the taking and removing of money or property with the intent to deprive the owner of it. Form 1040ez more:label_form_201040ez more:taxes The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. Form 1040ez more:label_form_201040ez more:taxes You do not need to show a conviction for theft. Form 1040ez more:label_form_201040ez more:taxes   Theft includes the taking of money or property by the following means: Blackmail, Burglary, Embezzlement, Extortion, Kidnapping for ransom, Larceny, Robbery, or Threats. Form 1040ez more:label_form_201040ez more:taxes The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Form 1040ez more:label_form_201040ez more:taxes Decline in market value of stock. Form 1040ez more:label_form_201040ez more:taxes   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. Form 1040ez more:label_form_201040ez more:taxes However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. Form 1040ez more:label_form_201040ez more:taxes You report a capital loss on Schedule D (Form 1040). Form 1040ez more:label_form_201040ez more:taxes For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. Form 1040ez more:label_form_201040ez more:taxes Mislaid or lost property. Form 1040ez more:label_form_201040ez more:taxes   The simple disappearance of money or property is not a theft. Form 1040ez more:label_form_201040ez more:taxes However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Form 1040ez more:label_form_201040ez more:taxes The diamond falls from the ring and is never found. Form 1040ez more:label_form_201040ez more:taxes The loss of the diamond is a casualty. Form 1040ez more:label_form_201040ez more:taxes Farming Losses You can deduct certain casualty or theft losses that occur in the business of farming. Form 1040ez more:label_form_201040ez more:taxes The following is a discussion of some losses you can deduct and some you cannot deduct. Form 1040ez more:label_form_201040ez more:taxes Livestock or produce bought for resale. Form 1040ez more:label_form_201040ez more:taxes   Casualty or theft losses of livestock or produce bought for resale are deductible if you report your income on the cash method. Form 1040ez more:label_form_201040ez more:taxes If you report your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. Form 1040ez more:label_form_201040ez more:taxes You cannot take a separate deduction. Form 1040ez more:label_form_201040ez more:taxes Livestock, plants, produce, and crops raised for sale. Form 1040ez more:label_form_201040ez more:taxes   Losses of livestock, plants, produce, and crops raised for sale are generally not deductible if you report your income on the cash method. Form 1040ez more:label_form_201040ez more:taxes You have already deducted the cost of raising these items as farm expenses, so their basis is equal to zero. Form 1040ez more:label_form_201040ez more:taxes   For plants with a preproductive period of more than 2 years, you may have a deductible loss if you have a tax basis in the plants. Form 1040ez more:label_form_201040ez more:taxes You usually have a tax basis if you capitalized the expenses associated with these plants under the uniform capitalization rules. Form 1040ez more:label_form_201040ez more:taxes The uniform capitalization rules are discussed in chapter 6. Form 1040ez more:label_form_201040ez more:taxes   If you report your income on an accrual method, casualty or theft losses are deductible only if you included the items in your inventory at the beginning of your tax year. Form 1040ez more:label_form_201040ez more:taxes You get the deduction by omitting the item from your inventory at the close of your tax year. Form 1040ez more:label_form_201040ez more:taxes You cannot take a separate casualty or theft deduction. Form 1040ez more:label_form_201040ez more:taxes Income loss. Form 1040ez more:label_form_201040ez more:taxes   A loss of future income is not deductible. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes A severe flood destroyed your crops. Form 1040ez more:label_form_201040ez more:taxes Because you are a cash method taxpayer and already deducted the cost of raising the crops as farm expenses, this loss is not deductible, as explained above under Livestock, plants, produce, and crops raised for sale . Form 1040ez more:label_form_201040ez more:taxes You estimate that the crop loss will reduce your farm income by $25,000. Form 1040ez more:label_form_201040ez more:taxes This loss of future income is also not deductible. Form 1040ez more:label_form_201040ez more:taxes Loss of timber. Form 1040ez more:label_form_201040ez more:taxes   If you sell timber downed as a result of a casualty, treat the proceeds from the sale as a reimbursement. Form 1040ez more:label_form_201040ez more:taxes If you use the proceeds to buy qualified replacement property, you can postpone reporting the gain. Form 1040ez more:label_form_201040ez more:taxes See Postponing Gain , later. Form 1040ez more:label_form_201040ez more:taxes Property used in farming. Form 1040ez more:label_form_201040ez more:taxes   Casualty and theft losses of property used in your farm business usually result in deductible losses. Form 1040ez more:label_form_201040ez more:taxes If a fire or storm destroyed your barn, or you lose by casualty or theft an animal you bought for draft, breeding, dairy, or sport, you may have a deductible loss. Form 1040ez more:label_form_201040ez more:taxes See How To Figure a Loss , later. Form 1040ez more:label_form_201040ez more:taxes Raised draft, breeding, dairy, or sporting animals. Form 1040ez more:label_form_201040ez more:taxes   Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. Form 1040ez more:label_form_201040ez more:taxes However, you may have a basis in the animal and therefore may be able to claim a deduction if either of the following situations applies to you. Form 1040ez more:label_form_201040ez more:taxes You use inventories to determine your income and you included the animals in your inventory. Form 1040ez more:label_form_201040ez more:taxes You capitalized the expenses associated with the animals under the uniform capitalization rules and therefore have a tax basis in the animals subject to a casualty or theft. Form 1040ez more:label_form_201040ez more:taxes When you include livestock in inventory, its last inventory value is its basis. Form 1040ez more:label_form_201040ez more:taxes When you lose an inventoried animal held for draft, breeding, dairy, or sport by casualty or theft during the year, decrease ending inventory by the amount you included in inventory for the animal. Form 1040ez more:label_form_201040ez more:taxes You cannot take a separate deduction. Form 1040ez more:label_form_201040ez more:taxes How To Figure a Loss How you figure a deductible casualty or theft loss depends on whether the loss was to farm or personal-use property and whether the property was stolen or partly or completely destroyed. Form 1040ez more:label_form_201040ez more:taxes Farm property. Form 1040ez more:label_form_201040ez more:taxes   Farm property is the property you use in your farming business. Form 1040ez more:label_form_201040ez more:taxes If your farm property was completely destroyed or stolen, your loss is figured as follows:      Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive      You can use the schedules in Publication 584-B to list your stolen, damaged, or destroyed business property and to figure your loss. Form 1040ez more:label_form_201040ez more:taxes   If your farm property was partially damaged, use the steps shown under Personal-use property next to figure your casualty loss. Form 1040ez more:label_form_201040ez more:taxes However, the deduction limits, discussed later, do not apply to farm property. Form 1040ez more:label_form_201040ez more:taxes Personal-use property. Form 1040ez more:label_form_201040ez more:taxes   Personal-use property is property used by you or your family members for personal purposes and not used in your farm business or for income-producing purposes. Form 1040ez more:label_form_201040ez more:taxes The following items are examples of personal-use property: Your main home. Form 1040ez more:label_form_201040ez more:taxes Furniture and electronics used in your main home and not used in a home office or for business purposes. Form 1040ez more:label_form_201040ez more:taxes Clothing and jewelry. Form 1040ez more:label_form_201040ez more:taxes An automobile used for nonbusiness purposes. Form 1040ez more:label_form_201040ez more:taxes You figure the casualty or theft loss on this property by taking the following steps. Form 1040ez more:label_form_201040ez more:taxes Determine your adjusted basis in the property before the casualty or theft. Form 1040ez more:label_form_201040ez more:taxes Determine the decrease in fair market value of the property as a result of the casualty or theft. Form 1040ez more:label_form_201040ez more:taxes From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive or expect to receive. Form 1040ez more:label_form_201040ez more:taxes You must apply the deduction limits, discussed later, to determine your deductible loss. Form 1040ez more:label_form_201040ez more:taxes    You can use Publication 584 to list your stolen or damaged personal-use property and figure your loss. Form 1040ez more:label_form_201040ez more:taxes It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. Form 1040ez more:label_form_201040ez more:taxes Adjusted basis. Form 1040ez more:label_form_201040ez more:taxes   Adjusted basis is your basis (usually cost) increased or decreased by various events, such as improvements and casualty losses. Form 1040ez more:label_form_201040ez more:taxes For more information about adjusted basis, see chapter 6. Form 1040ez more:label_form_201040ez more:taxes Decrease in fair market value (FMV). Form 1040ez more:label_form_201040ez more:taxes   The decrease in FMV is the difference between the property's value immediately before the casualty or theft and its value immediately afterward. Form 1040ez more:label_form_201040ez more:taxes FMV is defined in chapter 10 under Payments Received or Considered Received . Form 1040ez more:label_form_201040ez more:taxes Appraisal. Form 1040ez more:label_form_201040ez more:taxes   To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. Form 1040ez more:label_form_201040ez more:taxes But other measures, such as the cost of cleaning up or making repairs (discussed next) can be used to establish decreases in FMV. Form 1040ez more:label_form_201040ez more:taxes   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. Form 1040ez more:label_form_201040ez more:taxes The appraiser must recognize the effects of any general market decline that may occur along with the casualty. Form 1040ez more:label_form_201040ez more:taxes This information is needed to limit any deduction to the actual loss resulting from damage to the property. Form 1040ez more:label_form_201040ez more:taxes Cost of cleaning up or making repairs. Form 1040ez more:label_form_201040ez more:taxes   The cost of cleaning up after a casualty is not part of a casualty loss. Form 1040ez more:label_form_201040ez more:taxes Neither is the cost of repairing damaged property after a casualty. Form 1040ez more:label_form_201040ez more:taxes But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. Form 1040ez more:label_form_201040ez more:taxes The repairs are actually made. Form 1040ez more:label_form_201040ez more:taxes The repairs are necessary to bring the property back to its condition before the casualty. Form 1040ez more:label_form_201040ez more:taxes The amount spent for repairs is not excessive. Form 1040ez more:label_form_201040ez more:taxes The repairs fix the damage only. Form 1040ez more:label_form_201040ez more:taxes The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Form 1040ez more:label_form_201040ez more:taxes Related expenses. Form 1040ez more:label_form_201040ez more:taxes   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, temporary housing, or a rental car, are not part of your casualty or theft loss. Form 1040ez more:label_form_201040ez more:taxes However, they may be deductible as farm business expenses if the damaged or stolen property is farm property. Form 1040ez more:label_form_201040ez more:taxes Separate computations for more than one item of property. Form 1040ez more:label_form_201040ez more:taxes   Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for each item of property. Form 1040ez more:label_form_201040ez more:taxes Then combine the losses to determine your total loss. Form 1040ez more:label_form_201040ez more:taxes    There is an exception to this rule for personal-use real property. Form 1040ez more:label_form_201040ez more:taxes See Exception for personal-use real property, later. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes A fire on your farm damaged a tractor and the barn in which it was stored. Form 1040ez more:label_form_201040ez more:taxes The tractor had an adjusted basis of $3,300. Form 1040ez more:label_form_201040ez more:taxes Its FMV was $28,000 just before the fire and $10,000 immediately afterward. Form 1040ez more:label_form_201040ez more:taxes The barn had an adjusted basis of $28,000. Form 1040ez more:label_form_201040ez more:taxes Its FMV was $55,000 just before the fire and $25,000 immediately afterward. Form 1040ez more:label_form_201040ez more:taxes You received insurance reimbursements of $2,100 on the tractor and $26,000 on the barn. Form 1040ez more:label_form_201040ez more:taxes Figure your deductible casualty loss separately for the two items of property. Form 1040ez more:label_form_201040ez more:taxes     Tractor Barn 1) Adjusted basis $3,300 $28,000 2) FMV before fire $28,000 $55,000 3) FMV after fire 10,000 25,000 4) Decrease in FMV  (line 2 − line 3) $18,000 $30,000 5) Loss (lesser of line 1 or line 4) $3,300 $28,000 6) Minus: Insurance 2,100 26,000 7) Deductible casualty loss $1,200 $2,000 8) Total deductible casualty loss $3,200 Exception for personal-use real property. Form 1040ez more:label_form_201040ez more:taxes   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Form 1040ez more:label_form_201040ez more:taxes Figure the loss using the smaller of the following. Form 1040ez more:label_form_201040ez more:taxes The decrease in FMV of the entire property. Form 1040ez more:label_form_201040ez more:taxes The adjusted basis of the entire property. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes You bought a farm in 1990 for $160,000. Form 1040ez more:label_form_201040ez more:taxes The adjusted basis of the residential part is now $128,000. Form 1040ez more:label_form_201040ez more:taxes In 2013, a windstorm blew down shade trees and three ornamental trees planted at a cost of $7,500 on the residential part. Form 1040ez more:label_form_201040ez more:taxes The adjusted basis of the residential part includes the $7,500. Form 1040ez more:label_form_201040ez more:taxes The fair market value (FMV) of the residential part immediately before the storm was $400,000, and $385,000 immediately after the storm. Form 1040ez more:label_form_201040ez more:taxes The trees were not covered by insurance. Form 1040ez more:label_form_201040ez more:taxes 1) Adjusted basis $128,000 2) FMV before the storm $400,000 3) FMV after the storm 385,000 4) Decrease in FMV (line 2 − line 3) $15,000 5) Loss before insurance (lesser of line 1 or line 4) $15,000 6) Minus: Insurance -0- 7) Amount of loss $15,000 Insurance and other reimbursements. Form 1040ez more:label_form_201040ez more:taxes   If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. Form 1040ez more:label_form_201040ez more:taxes You do not have a casualty or theft loss to the extent you are reimbursed. Form 1040ez more:label_form_201040ez more:taxes   If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. Form 1040ez more:label_form_201040ez more:taxes You must reduce your loss even if you do not receive payment until a later tax year. Form 1040ez more:label_form_201040ez more:taxes    Do not subtract from your loss any insurance payments you receive for living expenses if you lose the use of your main home or are denied access to it because of a casualty. Form 1040ez more:label_form_201040ez more:taxes You may have to include a portion of these payments in your income. Form 1040ez more:label_form_201040ez more:taxes See Insurance payments for living expenses in Publication 547 for details. Form 1040ez more:label_form_201040ez more:taxes Disaster relief. Form 1040ez more:label_form_201040ez more:taxes   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. Form 1040ez more:label_form_201040ez more:taxes Excludable cash gifts you receive also do not reduce your casualty loss if there are no limits on how you can use the money. Form 1040ez more:label_form_201040ez more:taxes   Generally, disaster relief grants received under the Robert T. Form 1040ez more:label_form_201040ez more:taxes Stafford Disaster Relief and Emergency Assistance Act are not included in your income. Form 1040ez more:label_form_201040ez more:taxes See Federal disaster relief grants , later, under Disaster Area Losses . Form 1040ez more:label_form_201040ez more:taxes   Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster are not taxable income to you. Form 1040ez more:label_form_201040ez more:taxes See Qualified disaster relief payments , later, under Disaster Area Losses . Form 1040ez more:label_form_201040ez more:taxes Reimbursement received after deducting loss. Form 1040ez more:label_form_201040ez more:taxes   If you figure your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. Form 1040ez more:label_form_201040ez more:taxes Actual reimbursement less than expected. Form 1040ez more:label_form_201040ez more:taxes   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. Form 1040ez more:label_form_201040ez more:taxes Actual reimbursement more than expected. Form 1040ez more:label_form_201040ez more:taxes   If you later receive more reimbursement than you expected after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. Form 1040ez more:label_form_201040ez more:taxes However, if any part of your original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Form 1040ez more:label_form_201040ez more:taxes Do not refigure your tax for the year you claimed the deduction. Form 1040ez more:label_form_201040ez more:taxes See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. Form 1040ez more:label_form_201040ez more:taxes If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. Form 1040ez more:label_form_201040ez more:taxes See Figuring a Gain in Publication 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or theft. Form 1040ez more:label_form_201040ez more:taxes Actual reimbursement same as expected. Form 1040ez more:label_form_201040ez more:taxes   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. Form 1040ez more:label_form_201040ez more:taxes Lump-sum reimbursement. Form 1040ez more:label_form_201040ez more:taxes   If you have a casualty or theft loss of several assets at the same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to the fair market value of each asset at the time of the loss. Form 1040ez more:label_form_201040ez more:taxes Figure the gain or loss separately for each asset that has a separate basis. Form 1040ez more:label_form_201040ez more:taxes Adjustments to basis. Form 1040ez more:label_form_201040ez more:taxes   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. Form 1040ez more:label_form_201040ez more:taxes The result is your adjusted basis in the property. Form 1040ez more:label_form_201040ez more:taxes Amounts you spend on repairs to restore your property to its pre-casualty condition increase your adjusted basis. Form 1040ez more:label_form_201040ez more:taxes See Adjusted Basis in chapter 6 for more information. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes You built a new silo for $25,000. Form 1040ez more:label_form_201040ez more:taxes This is the basis in your silo because that is the total cost you incurred to build it. Form 1040ez more:label_form_201040ez more:taxes During the year, a tornado damaged your silo and your allowable casualty loss deduction was $1,000. Form 1040ez more:label_form_201040ez more:taxes In addition, your insurance company reimbursed you $4,000 for the damage and you spent $6,000 to restore the silo to its pre-casualty condition. Form 1040ez more:label_form_201040ez more:taxes Your adjusted basis in the silo after the casualty is $26,000 ($25,000 - $1,000 - $4,000 + $6,000). Form 1040ez more:label_form_201040ez more:taxes Deduction Limits on Losses of Personal-Use Property Casualty and theft losses of property held for personal use may be deductible if you itemize deductions on Schedule A (Form 1040). Form 1040ez more:label_form_201040ez more:taxes There are two limits on the deduction for casualty or theft loss of personal-use property. Form 1040ez more:label_form_201040ez more:taxes You figure these limits on Form 4684. Form 1040ez more:label_form_201040ez more:taxes $100 rule. Form 1040ez more:label_form_201040ez more:taxes   You must reduce each casualty or theft loss on personal-use property by $100. Form 1040ez more:label_form_201040ez more:taxes This rule applies after you have subtracted any reimbursement. Form 1040ez more:label_form_201040ez more:taxes 10% rule. Form 1040ez more:label_form_201040ez more:taxes   You must further reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Form 1040ez more:label_form_201040ez more:taxes Apply this rule after you reduce each loss by $100. Form 1040ez more:label_form_201040ez more:taxes Adjusted gross income is on line 38 of Form 1040. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes In June, you discovered that your house had been burglarized. Form 1040ez more:label_form_201040ez more:taxes Your loss after insurance reimbursement was $2,000. Form 1040ez more:label_form_201040ez more:taxes Your adjusted gross income for the year you discovered the burglary is $57,000. Form 1040ez more:label_form_201040ez more:taxes Figure your theft loss deduction as follows: 1. Form 1040ez more:label_form_201040ez more:taxes Loss after insurance $2,000 2. Form 1040ez more:label_form_201040ez more:taxes Subtract $100 100 3. Form 1040ez more:label_form_201040ez more:taxes Loss after $100 rule $1,900 4. Form 1040ez more:label_form_201040ez more:taxes Subtract 10% (. Form 1040ez more:label_form_201040ez more:taxes 10) × $57,000 AGI $5,700 5. Form 1040ez more:label_form_201040ez more:taxes Theft loss deduction -0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($5,700). Form 1040ez more:label_form_201040ez more:taxes    If you have a casualty or theft gain in addition to a loss, you will have to make a special computation before you figure your 10% limit. Form 1040ez more:label_form_201040ez more:taxes See 10% Rule in Publication 547. Form 1040ez more:label_form_201040ez more:taxes When Loss Is Deductible Generally, you can deduct casualty losses that are not reimbursable only in the tax year in which they occur. Form 1040ez more:label_form_201040ez more:taxes You generally can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. Form 1040ez more:label_form_201040ez more:taxes However, losses in federally declared disaster areas are subject to different rules. Form 1040ez more:label_form_201040ez more:taxes See Disaster Area Losses , later, for an exception. Form 1040ez more:label_form_201040ez more:taxes If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. Form 1040ez more:label_form_201040ez more:taxes Leased property. Form 1040ez more:label_form_201040ez more:taxes   If you lease property from someone else, you can deduct a loss on the property in the year your liability for the loss is fixed. Form 1040ez more:label_form_201040ez more:taxes This is true even if the loss occurred or the liability was paid in a different year. Form 1040ez more:label_form_201040ez more:taxes You are not entitled to a deduction until your liability under the lease can be determined with reasonable accuracy. Form 1040ez more:label_form_201040ez more:taxes Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes Robert leased a tractor from First Implement, Inc. Form 1040ez more:label_form_201040ez more:taxes , for use in his farm business. Form 1040ez more:label_form_201040ez more:taxes The tractor was destroyed by a tornado in June 2012. Form 1040ez more:label_form_201040ez more:taxes The loss was not insured. Form 1040ez more:label_form_201040ez more:taxes First Implement billed Robert for the fair market value of the tractor on the date of the loss. Form 1040ez more:label_form_201040ez more:taxes Robert disagreed with the bill and refused to pay it. Form 1040ez more:label_form_201040ez more:taxes First Implement later filed suit in court against Robert. Form 1040ez more:label_form_201040ez more:taxes In 2013, Robert and First Implement agreed to settle the suit for $20,000, and the court entered a judgment in favor of First Implement. Form 1040ez more:label_form_201040ez more:taxes Robert paid $20,000 in June 2013. Form 1040ez more:label_form_201040ez more:taxes He can claim the $20,000 as a loss on his 2013 tax return. Form 1040ez more:label_form_201040ez more:taxes Net operating loss (NOL). Form 1040ez more:label_form_201040ez more:taxes   If your deductions, including casualty or theft loss deductions, are more than your income for the year, you may have an NOL. Form 1040ez more:label_form_201040ez more:taxes An NOL can be carried back or carried forward and deducted from income in other years. Form 1040ez more:label_form_201040ez more:taxes See Publication 536 for more information on NOLs. Form 1040ez more:label_form_201040ez more:taxes Proof of Loss To deduct a casualty or theft loss, you must be able to prove that there was a casualty or theft. Form 1040ez more:label_form_201040ez more:taxes You must have records to support the amount you claim for the loss. Form 1040ez more:label_form_201040ez more:taxes Casualty loss proof. Form 1040ez more:label_form_201040ez more:taxes   For a casualty loss, your records should show all the following information. Form 1040ez more:label_form_201040ez more:taxes The type of casualty (car accident, fire, storm, etc. Form 1040ez more:label_form_201040ez more:taxes ) and when it occurred. Form 1040ez more:label_form_201040ez more:taxes That the loss was a direct result of the casualty. Form 1040ez more:label_form_201040ez more:taxes That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. Form 1040ez more:label_form_201040ez more:taxes Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Form 1040ez more:label_form_201040ez more:taxes Theft loss proof. Form 1040ez more:label_form_201040ez more:taxes   For a theft loss, your records should show all the following information. Form 1040ez more:label_form_201040ez more:taxes When you discovered your property was missing. Form 1040ez more:label_form_201040ez more:taxes That your property was stolen. Form 1040ez more:label_form_201040ez more:taxes That you were the owner of the property. Form 1040ez more:label_form_201040ez more:taxes Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Form 1040ez more:label_form_201040ez more:taxes Figuring a Gain A casualty or theft may result in a taxable gain. Form 1040ez more:label_form_201040ez more:taxes If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Form 1040ez more:label_form_201040ez more:taxes You generally report your gain as income in the year you receive the reimbursement. Form 1040ez more:label_form_201040ez more:taxes However, depending on the type of property you receive, you may not have to report your gain. Form 1040ez more:label_form_201040ez more:taxes See Postponing Gain , later. Form 1040ez more:label_form_201040ez more:taxes Your gain is figured as follows: The amount you receive, minus Your adjusted basis in the property at the time of the casualty or theft. Form 1040ez more:label_form_201040ez more:taxes Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. Form 1040ez more:label_form_201040ez more:taxes Amount you receive. Form 1040ez more:label_form_201040ez more:taxes   The amount you receive includes any money plus the value of any property you receive, minus any expenses you have in obtaining reimbursement. Form 1040ez more:label_form_201040ez more:taxes It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes A tornado severely damaged your barn. Form 1040ez more:label_form_201040ez more:taxes The adjusted basis of the barn was $25,000. Form 1040ez more:label_form_201040ez more:taxes Your insurance company reimbursed you $40,000 for the damaged barn. Form 1040ez more:label_form_201040ez more:taxes However, you had legal expenses of $2,000 to collect that insurance. Form 1040ez more:label_form_201040ez more:taxes Your insurance minus your expenses to collect the insurance is more than your adjusted basis in the barn, so you have a gain. Form 1040ez more:label_form_201040ez more:taxes 1) Insurance reimbursement $40,000 2) Legal expenses 2,000 3) Amount received  (line 1 − line 2) $38,000 4) Adjusted basis 25,000 5) Gain on casualty (line 3 − line 4) $13,000 Other Involuntary Conversions In addition to casualties and thefts, other events cause involuntary conversions of property. Form 1040ez more:label_form_201040ez more:taxes Some of these are discussed in the following paragraphs. Form 1040ez more:label_form_201040ez more:taxes Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes. Form 1040ez more:label_form_201040ez more:taxes You report the gain or deduct the loss on your tax return for the year you realize it. Form 1040ez more:label_form_201040ez more:taxes However, depending on the type of property you receive, you may not have to report your gain on the involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes See Postponing Gain , later. Form 1040ez more:label_form_201040ez more:taxes Condemnation Condemnation is the process by which private property is legally taken for public use without the owner's consent. Form 1040ez more:label_form_201040ez more:taxes The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take property. Form 1040ez more:label_form_201040ez more:taxes The owner receives a condemnation award (money or property) in exchange for the property taken. Form 1040ez more:label_form_201040ez more:taxes A condemnation is a forced sale, the owner being the seller and the condemning authority being the buyer. Form 1040ez more:label_form_201040ez more:taxes Threat of condemnation. Form 1040ez more:label_form_201040ez more:taxes   Treat the sale of your property under threat of condemnation as a condemnation, provided you have reasonable grounds to believe that your property will be condemned. Form 1040ez more:label_form_201040ez more:taxes Main home condemned. Form 1040ez more:label_form_201040ez more:taxes   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Form 1040ez more:label_form_201040ez more:taxes For information on this exclusion, see Publication 523. Form 1040ez more:label_form_201040ez more:taxes If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. Form 1040ez more:label_form_201040ez more:taxes See Postponing Gain , later. Form 1040ez more:label_form_201040ez more:taxes (You cannot deduct a loss from the condemnation of your main home. Form 1040ez more:label_form_201040ez more:taxes ) More information. Form 1040ez more:label_form_201040ez more:taxes   For information on how to figure the gain or loss on condemned property, see chapter 1 in Publication 544. Form 1040ez more:label_form_201040ez more:taxes Also see Postponing Gain , later, to find out if you can postpone reporting the gain. Form 1040ez more:label_form_201040ez more:taxes Irrigation Project The sale or other disposition of property located within an irrigation project to conform to the acreage limits of federal reclamation laws is an involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes Livestock Losses Diseased livestock. Form 1040ez more:label_form_201040ez more:taxes   If your livestock die from disease, or are destroyed, sold, or exchanged because of disease, even though the disease is not of epidemic proportions, treat these occurrences as involuntary conversions. Form 1040ez more:label_form_201040ez more:taxes If the livestock were raised or purchased for resale, follow the rules for livestock discussed earlier under Farming Losses . Form 1040ez more:label_form_201040ez more:taxes Otherwise, figure the gain or loss from these conversions using the rules discussed under Determining Gain or Loss in chapter 8. Form 1040ez more:label_form_201040ez more:taxes If you replace the livestock, you may be able to postpone reporting the gain. Form 1040ez more:label_form_201040ez more:taxes See Postponing Gain below. Form 1040ez more:label_form_201040ez more:taxes Reporting dispositions of diseased livestock. Form 1040ez more:label_form_201040ez more:taxes   If you choose to postpone reporting gain on the disposition of diseased livestock, you must attach a statement to your return explaining that the livestock were disposed of because of disease. Form 1040ez more:label_form_201040ez more:taxes You must also include other information on this statement. Form 1040ez more:label_form_201040ez more:taxes See How To Postpone Gain , later, under Postponing Gain . Form 1040ez more:label_form_201040ez more:taxes Weather-related sales of livestock. Form 1040ez more:label_form_201040ez more:taxes   If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes solely because of drought, flood, or other weather-related conditions, treat the sale or exchange as an involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. Form 1040ez more:label_form_201040ez more:taxes Figure the gain or loss using the rules discussed under Determining Gain or Loss in chapter 8. Form 1040ez more:label_form_201040ez more:taxes If you replace the livestock, you may be able to postpone reporting the gain. Form 1040ez more:label_form_201040ez more:taxes See Postponing Gain below. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes It is your usual business practice to sell five of your dairy animals during the year. Form 1040ez more:label_form_201040ez more:taxes This year you sold 20 dairy animals because of drought. Form 1040ez more:label_form_201040ez more:taxes The sale of 15 animals is treated as an involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes    If you do not replace the livestock, you may be able to report the gain in the following year's income. Form 1040ez more:label_form_201040ez more:taxes This rule also applies to other livestock (including poultry). Form 1040ez more:label_form_201040ez more:taxes See Sales Caused by Weather-Related Conditions in chapter 3. Form 1040ez more:label_form_201040ez more:taxes Tree Seedlings If, because of an abnormal drought, the failure of planted tree seedlings is greater than normally anticipated, you may have a deductible loss. Form 1040ez more:label_form_201040ez more:taxes Treat the loss as a loss from an involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes The loss equals the previously capitalized reforestation costs you had to duplicate on replanting. Form 1040ez more:label_form_201040ez more:taxes You deduct the loss on the return for the year the seedlings died. Form 1040ez more:label_form_201040ez more:taxes Postponing Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed, stolen, or other involuntarily converted property. Form 1040ez more:label_form_201040ez more:taxes Your basis in the new property is generally the same as your adjusted basis in the property it replaces. Form 1040ez more:label_form_201040ez more:taxes You must ordinarily report the gain on your stolen, destroyed, or other involuntarily converted property if you receive money or unlike property as reimbursement. Form 1040ez more:label_form_201040ez more:taxes However, you can choose to postpone reporting the gain if you purchase replacement property similar or related in service or use to your destroyed, stolen, or other involuntarily converted property within a specific replacement period. Form 1040ez more:label_form_201040ez more:taxes If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. Form 1040ez more:label_form_201040ez more:taxes To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. Form 1040ez more:label_form_201040ez more:taxes If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. Form 1040ez more:label_form_201040ez more:taxes Example 1. Form 1040ez more:label_form_201040ez more:taxes In 1985, you constructed a barn to store farm equipment at a cost of $20,000. Form 1040ez more:label_form_201040ez more:taxes In 1987, you added a silo to the barn at a cost of $15,000 to store grain. Form 1040ez more:label_form_201040ez more:taxes In May of this year, the property was worth $100,000. Form 1040ez more:label_form_201040ez more:taxes In June the barn and silo were destroyed by a tornado. Form 1040ez more:label_form_201040ez more:taxes At the time of the tornado, you had an adjusted basis of $0 in the property. Form 1040ez more:label_form_201040ez more:taxes You received $85,000 from the insurance company. Form 1040ez more:label_form_201040ez more:taxes You had a gain of $85,000 ($85,000 – $0). Form 1040ez more:label_form_201040ez more:taxes You spent $80,000 to rebuild the barn and silo. Form 1040ez more:label_form_201040ez more:taxes Since this is less than the insurance proceeds received, you must include $5,000 ($85,000 – $80,000) in your income. Form 1040ez more:label_form_201040ez more:taxes Example 2. Form 1040ez more:label_form_201040ez more:taxes In 1970, you bought a cabin in the mountains for your personal use at a cost of $18,000. Form 1040ez more:label_form_201040ez more:taxes You made no further improvements or additions to it. Form 1040ez more:label_form_201040ez more:taxes When a storm destroyed the cabin this January, the cabin was worth $250,000. Form 1040ez more:label_form_201040ez more:taxes You received $146,000 from the insurance company in March. Form 1040ez more:label_form_201040ez more:taxes You had a gain of $128,000 ($146,000 − $18,000). Form 1040ez more:label_form_201040ez more:taxes You spent $144,000 to rebuild the cabin. Form 1040ez more:label_form_201040ez more:taxes Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. Form 1040ez more:label_form_201040ez more:taxes Buying replacement property from a related person. Form 1040ez more:label_form_201040ez more:taxes   You cannot postpone reporting a gain from a casualty, theft, or other involuntary conversion if you buy the replacement property from a related person (discussed later). Form 1040ez more:label_form_201040ez more:taxes This rule applies to the following taxpayers. Form 1040ez more:label_form_201040ez more:taxes C corporations. Form 1040ez more:label_form_201040ez more:taxes Partnerships in which more than 50% of the capital or profits interest is owned by C corporations. Form 1040ez more:label_form_201040ez more:taxes Individuals, partnerships (other than those in (2) above), and S corporations if the total realized gain for the tax year on all involuntarily converted properties on which there are realized gains is more than $100,000. Form 1040ez more:label_form_201040ez more:taxes For involuntary conversions described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. Form 1040ez more:label_form_201040ez more:taxes If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Form 1040ez more:label_form_201040ez more:taxes If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Form 1040ez more:label_form_201040ez more:taxes Exception. Form 1040ez more:label_form_201040ez more:taxes   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the involuntarily converted property. Form 1040ez more:label_form_201040ez more:taxes Related persons. Form 1040ez more:label_form_201040ez more:taxes   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. Form 1040ez more:label_form_201040ez more:taxes For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Form 1040ez more:label_form_201040ez more:taxes Death of a taxpayer. Form 1040ez more:label_form_201040ez more:taxes   If a taxpayer dies after having a gain, but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. Form 1040ez more:label_form_201040ez more:taxes The executor of the estate or the person succeeding to the funds from the involuntary conversion cannot postpone reporting the gain by buying replacement property. Form 1040ez more:label_form_201040ez more:taxes Replacement Property You must buy replacement property for the specific purpose of replacing your property. Form 1040ez more:label_form_201040ez more:taxes Your replacement property must be similar or related in service or use to the property it replaces. Form 1040ez more:label_form_201040ez more:taxes You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. Form 1040ez more:label_form_201040ez more:taxes If you spend the money you receive for other purposes, and borrow money to buy replacement property, you can still choose to postpone reporting the gain if you meet the other requirements. Form 1040ez more:label_form_201040ez more:taxes Property you acquire by gift or inheritance does not qualify as replacement property. Form 1040ez more:label_form_201040ez more:taxes Owner-user. Form 1040ez more:label_form_201040ez more:taxes   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Form 1040ez more:label_form_201040ez more:taxes Examples of property that functions in the same way as the property it replaces are a home that replaces another home, a dairy cow that replaces another dairy cow, and farm land that replaces other farm land. Form 1040ez more:label_form_201040ez more:taxes A grinding mill that replaces a tractor does not qualify. Form 1040ez more:label_form_201040ez more:taxes Neither does a breeding or draft animal that replaces a dairy cow. Form 1040ez more:label_form_201040ez more:taxes Soil or other environmental contamination. Form 1040ez more:label_form_201040ez more:taxes   If, because of soil or other environmental contamination, it is not feasible for you to reinvest your insurance money or other proceeds from destroyed or damaged livestock in property similar or related in service or use to the livestock, you can treat other property (including real property) used for farming purposes, as property similar or related in service or use to the destroyed or damaged livestock. Form 1040ez more:label_form_201040ez more:taxes Weather-related conditions. Form 1040ez more:label_form_201040ez more:taxes   If, because of drought, flood, or other weather-related conditions, it is not feasible for you to reinvest the insurance money or other proceeds in property similar or related in service or use to the livestock, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the livestock you disposed of. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes Each year you normally sell 25 cows from your beef herd. Form 1040ez more:label_form_201040ez more:taxes However, this year you had to sell 50 cows. Form 1040ez more:label_form_201040ez more:taxes This is because a severe drought significantly reduced the amount of hay and pasture yield needed to feed your herd for the rest of the year. Form 1040ez more:label_form_201040ez more:taxes Because, as a result of the severe drought, it is not feasible for you to use the proceeds from selling the extra cows to buy new cows, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the cows you sold. Form 1040ez more:label_form_201040ez more:taxes Standing crop destroyed by casualty. Form 1040ez more:label_form_201040ez more:taxes   If a storm or other casualty destroyed your standing crop and you use the insurance money to acquire either another standing crop or a harvested crop, this purchase qualifies as replacement property. Form 1040ez more:label_form_201040ez more:taxes The costs of planting and raising a new crop qualify as replacement costs for the destroyed crop only if you use the crop method of accounting (discussed in chapter 2). Form 1040ez more:label_form_201040ez more:taxes In that case, the costs of bringing the new crop to the same level of maturity as the destroyed crop qualify as replacement costs to the extent they are incurred during the replacement period. Form 1040ez more:label_form_201040ez more:taxes Timber loss. Form 1040ez more:label_form_201040ez more:taxes   Standing timber you bought with the proceeds from the sale of timber downed as a result of a casualty, such as high winds, earthquakes, or volcanic eruptions, qualifies as replacement property. Form 1040ez more:label_form_201040ez more:taxes If you bought the standing timber within the replacement period, you can postpone reporting the gain. Form 1040ez more:label_form_201040ez more:taxes Business or income-producing property located in a federally declared disaster area. Form 1040ez more:label_form_201040ez more:taxes   If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. Form 1040ez more:label_form_201040ez more:taxes For more information, see Disaster Area Losses in Publication 547. Form 1040ez more:label_form_201040ez more:taxes Substituting replacement property. Form 1040ez more:label_form_201040ez more:taxes   Once you have acquired qualified replacement property that you designate as replacement property in a statement attached to your tax return, you cannot substitute other qualified replacement property. Form 1040ez more:label_form_201040ez more:taxes This is true even if you acquire the other property within the replacement period. Form 1040ez more:label_form_201040ez more:taxes However, if you discover that the original replacement property was not qualified replacement property, you can, within the replacement period, substitute the new qualified replacement property. Form 1040ez more:label_form_201040ez more:taxes Basis of replacement property. Form 1040ez more:label_form_201040ez more:taxes   You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. Form 1040ez more:label_form_201040ez more:taxes In this way, tax on the gain is postponed until you dispose of the replacement property. Form 1040ez more:label_form_201040ez more:taxes Replacement Period To postpone reporting your gain, you must buy replacement property within a specified period of time. Form 1040ez more:label_form_201040ez more:taxes This is the replacement period. Form 1040ez more:label_form_201040ez more:taxes The replacement period begins on the date your property was damaged, destroyed, stolen, sold, or exchanged. Form 1040ez more:label_form_201040ez more:taxes The replacement period generally ends 2 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes You are a calendar year taxpayer. Form 1040ez more:label_form_201040ez more:taxes While you were on vacation, farm equipment that cost $2,200 was stolen from your farm. Form 1040ez more:label_form_201040ez more:taxes You discovered the theft when you returned to your farm on November 11, 2012. Form 1040ez more:label_form_201040ez more:taxes Your insurance company investigated the theft and did not settle your claim until January 5, 2013, when they paid you $3,000. Form 1040ez more:label_form_201040ez more:taxes You first realized a gain from the reimbursement for the theft during 2013, so you have until December 31, 2015, to replace the property. Form 1040ez more:label_form_201040ez more:taxes Main home in disaster area. Form 1040ez more:label_form_201040ez more:taxes   For your main home (or its contents) located in a federally declared disaster area, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes See Disaster Area Losses , later. Form 1040ez more:label_form_201040ez more:taxes Property in the Midwestern disaster areas. Form 1040ez more:label_form_201040ez more:taxes   For property located in the Midwestern disaster areas (defined in Table 4 in the 2008 Publication 547) that was destroyed, damaged, stolen, or condemned, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Form 1040ez more:label_form_201040ez more:taxes This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Midwestern disaster areas. Form 1040ez more:label_form_201040ez more:taxes Property in the Kansas disaster area. Form 1040ez more:label_form_201040ez more:taxes   For property located in the Kansas disaster area that was destroyed, damaged, stolen, or condemned after May 3, 2007, as a result of the Kansas storms and tornadoes, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Form 1040ez more:label_form_201040ez more:taxes This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Kansas disaster area. Form 1040ez more:label_form_201040ez more:taxes Property in the Hurricane Katrina disaster area. Form 1040ez more:label_form_201040ez more:taxes   For property located in the Hurricane Katrina disaster area that was destroyed, damaged, stolen, or condemned after August 24, 2005, as a result of Hurricane Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Form 1040ez more:label_form_201040ez more:taxes This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Form 1040ez more:label_form_201040ez more:taxes Weather-related sales of livestock in an area eligible for federal assistance. Form 1040ez more:label_form_201040ez more:taxes   For the sale or exchange of livestock due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Form 1040ez more:label_form_201040ez more:taxes The IRS may extend the replacement period on a regional basis if the weather-related conditions continue for longer than 3 years. Form 1040ez more:label_form_201040ez more:taxes   For information on extensions of the replacement period because of persistent drought, see Notice 2006-82, 2006-39 I. Form 1040ez more:label_form_201040ez more:taxes R. Form 1040ez more:label_form_201040ez more:taxes B. Form 1040ez more:label_form_201040ez more:taxes 529, available at  www. Form 1040ez more:label_form_201040ez more:taxes irs. Form 1040ez more:label_form_201040ez more:taxes gov/irb/2006-39_IRB/ar11. Form 1040ez more:label_form_201040ez more:taxes html. Form 1040ez more:label_form_201040ez more:taxes For a list of counties for which exceptional, extreme, or severe drought was reported during the 12 months ending August 31, 2013, see Notice 2013-62, available at IRS. Form 1040ez more:label_form_201040ez more:taxes gov. Form 1040ez more:label_form_201040ez more:taxes Condemnation. Form 1040ez more:label_form_201040ez more:taxes   The replacement period for a condemnation begins on the earlier of the following dates. Form 1040ez more:label_form_201040ez more:taxes The date on which you disposed of the condemned property. Form 1040ez more:label_form_201040ez more:taxes The date on which the threat of condemnation began. Form 1040ez more:label_form_201040ez more:taxes The replacement period generally ends 2 years after the close of the first tax year in which any part of the gain on the condemnation is realized. Form 1040ez more:label_form_201040ez more:taxes But see Main home in disaster area , Property in the Midwestern disaster areas , Property in the Kansas disaster area , and Property in the Hurricane Katrina disaster area , earlier, for exceptions. Form 1040ez more:label_form_201040ez more:taxes Business or investment real property. Form 1040ez more:label_form_201040ez more:taxes   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the close of the first tax year in which any part of the gain on the condemnation is realized. Form 1040ez more:label_form_201040ez more:taxes Extension. Form 1040ez more:label_form_201040ez more:taxes   You can apply for an extension of the replacement period. Form 1040ez more:label_form_201040ez more:taxes Send your written application to the Internal Revenue Service Center where you file your tax return. Form 1040ez more:label_form_201040ez more:taxes See your tax return instructions for the address. Form 1040ez more:label_form_201040ez more:taxes Include all the details about your need for an extension. Form 1040ez more:label_form_201040ez more:taxes Make your application before the end of the replacement period. Form 1040ez more:label_form_201040ez more:taxes However, you can file an application within a reasonable time after the replacement period ends if you can show a good reason for the delay. Form 1040ez more:label_form_201040ez more:taxes You will get an extension of the replacement period if you can show reasonable cause for not making the replacement within the regular period. Form 1040ez more:label_form_201040ez more:taxes How To Postpone Gain You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. Form 1040ez more:label_form_201040ez more:taxes You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain. Form 1040ez more:label_form_201040ez more:taxes Required statement. Form 1040ez more:label_form_201040ez more:taxes   You should attach a statement to your return for the year you have the gain. Form 1040ez more:label_form_201040ez more:taxes This statement should include all the following information. Form 1040ez more:label_form_201040ez more:taxes The date and details of the casualty, theft, or other involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes The insurance or other reimbursement you received. Form 1040ez more:label_form_201040ez more:taxes How you figured the gain. Form 1040ez more:label_form_201040ez more:taxes Replacement property acquired before return filed. Form 1040ez more:label_form_201040ez more:taxes   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items. Form 1040ez more:label_form_201040ez more:taxes The replacement property. Form 1040ez more:label_form_201040ez more:taxes The postponed gain. Form 1040ez more:label_form_201040ez more:taxes The basis adjustment that reflects the postponed gain. Form 1040ez more:label_form_201040ez more:taxes Any gain you are reporting as income. Form 1040ez more:label_form_201040ez more:taxes Replacement property acquired after return filed. Form 1040ez more:label_form_201040ez more:taxes   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period. Form 1040ez more:label_form_201040ez more:taxes   You should then attach another statement to your return for the year in which you buy the replacement property. Form 1040ez more:label_form_201040ez more:taxes This statement should contain detailed information on the replacement property. Form 1040ez more:label_form_201040ez more:taxes If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. Form 1040ez more:label_form_201040ez more:taxes Include in the statement detailed information on the replacement property bought in that year. Form 1040ez more:label_form_201040ez more:taxes Reporting weather-related sales of livestock. Form 1040ez more:label_form_201040ez more:taxes   If you choose to postpone reporting the gain on weather-related sales or exchanges of livestock, show all the following information on a statement attached to your return for the tax year in which you first realize any of the gain. Form 1040ez more:label_form_201040ez more:taxes Evidence of the weather-related conditions that forced the sale or exchange of the livestock. Form 1040ez more:label_form_201040ez more:taxes The gain realized on the sale or exchange. Form 1040ez more:label_form_201040ez more:taxes The number and kind of livestock sold or exchanged. Form 1040ez more:label_form_201040ez more:taxes The number of livestock of each kind you would have sold or exchanged under your usual business practice. Form 1040ez more:label_form_201040ez more:taxes   Show all the following information and the preceding information on the return for the year in which you replace the livestock. Form 1040ez more:label_form_201040ez more:taxes The dates you bought the replacement property. Form 1040ez more:label_form_201040ez more:taxes The cost of the replacement property. Form 1040ez more:label_form_201040ez more:taxes Description of the replacement property (for example, the number and kind of the replacement livestock). Form 1040ez more:label_form_201040ez more:taxes Amended return. Form 1040ez more:label_form_201040ez more:taxes   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations. Form 1040ez more:label_form_201040ez more:taxes You do not acquire replacement property within the replacement period, plus extensions. Form 1040ez more:label_form_201040ez more:taxes On this amended return, you must report the gain and pay any additional tax due. Form 1040ez more:label_form_201040ez more:taxes You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. Form 1040ez more:label_form_201040ez more:taxes On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due. Form 1040ez more:label_form_201040ez more:taxes Disaster Area Losses Special rules apply to federally declared disaster area losses. Form 1040ez more:label_form_201040ez more:taxes A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Form 1040ez more:label_form_201040ez more:taxes Stafford Disaster Relief and Emergency Assistance Act. Form 1040ez more:label_form_201040ez more:taxes It includes a major disaster or emergency declaration under the act. Form 1040ez more:label_form_201040ez more:taxes A list of the areas warranting public or individual assistance (or both) under the Act is available at the Federal Emergency Management Agency (FEMA) web site at www. Form 1040ez more:label_form_201040ez more:taxes fema. Form 1040ez more:label_form_201040ez more:taxes gov. Form 1040ez more:label_form_201040ez more:taxes This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. Form 1040ez more:label_form_201040ez more:taxes For other special rules, see Disaster Area Losses in Publication 547. Form 1040ez more:label_form_201040ez more:taxes When to deduct the loss. Form 1040ez more:label_form_201040ez more:taxes   You generally must deduct a casualty loss in the year it occurred. Form 1040ez more:label_form_201040ez more:taxes However, if you have a deductible loss from a disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. Form 1040ez more:label_form_201040ez more:taxes If you make this choice, the loss is treated as having occurred in the preceding year. Form 1040ez more:label_form_201040ez more:taxes    Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund. Form 1040ez more:label_form_201040ez more:taxes   You must make the choice to take your casualty loss for the disaster in the preceding year by the later of the following dates. Form 1040ez more:label_form_201040ez more:taxes The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred. Form 1040ez more:label_form_201040ez more:taxes The due date (with extensions) for the return for the preceding tax year. Form 1040ez more:label_form_201040ez more:taxes Federal disaster relief grants. Form 1040ez more:label_form_201040ez more:taxes   Do not include post-disaster relief grants received under the Robert T. Form 1040ez more:label_form_201040ez more:taxes Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. Form 1040ez more:label_form_201040ez more:taxes Do not deduct casualty losses or medical expenses to the extent they are specifically reimbursed by these disaster relief grants. Form 1040ez more:label_form_201040ez more:taxes If the casualty loss was specifically reimbursed by the grant and you received the grant after the year in which you deducted the casualty loss, see Reimbursement received after deducting loss , earlier. Form 1040ez more:label_form_201040ez more:taxes Unemployment assistance payments under the Act are taxable unemployment compensation. Form 1040ez more:label_form_201040ez more:taxes Qualified disaster relief payments. Form 1040ez more:label_form_201040ez more:taxes   Qualified disaster relief payments are not included in the income of individuals to the extent any expenses compensated by these payments are not otherwise compensated for by insurance or other reimbursement. Form 1040ez more:label_form_201040ez more:taxes These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). Form 1040ez more:label_form_201040ez more:taxes No withholding applies to these payments. Form 1040ez more:label_form_201040ez more:taxes   Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses. Form 1040ez more:label_form_201040ez more:taxes Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster. Form 1040ez more:label_form_201040ez more:taxes Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. Form 1040ez more:label_form_201040ez more:taxes (A personal residence can be a rented residence or one you own. Form 1040ez more:label_form_201040ez more:taxes ) Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster. Form 1040ez more:label_form_201040ez more:taxes   Qualified disaster relief payments include amounts paid by a federal, state, or local government in connection with a federally declared disaster to individuals affected by the disaster. Form 1040ez more:label_form_201040ez more:taxes    Qualified disaster relief payments do not include: Payments for expenses otherwise paid for by insurance or other reimbursements, or Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation. Form 1040ez more:label_form_201040ez more:taxes Qualified disaster mitigation payments. Form 1040ez more:label_form_201040ez more:taxes   Qualified disaster mitigation payments made under the Robert T. Form 1040ez more:label_form_201040ez more:taxes Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not included in income. Form 1040ez more:label_form_201040ez more:taxes These are payments you, as a property owner, receive to reduce the risk of future damage to your property. Form 1040ez more:label_form_201040ez more:taxes You cannot increase your basis in property, or take a deduction or credit, for expenditures made with respect to those payments. Form 1040ez more:label_form_201040ez more:taxes Sale of property under hazard mitigation program. Form 1040ez more:label_form_201040ez more:taxes   Generally, if you sell or otherwise transfer property, you must recognize any gain or loss for tax purposes unless the property is your main home. Form 1040ez more:label_form_201040ez more:taxes You report the gain or deduct the loss on your tax return for the year you realize it. Form 1040ez more:label_form_201040ez more:taxes (You cannot deduct a loss on personal-use property unless the loss resulted from a casualty, as discussed earlier. Form 1040ez more:label_form_201040ez more:taxes ) However, if you sell or otherwise transfer property to the Federal Government, a state or local government, or an Indian tribal government under a hazard mitigation program, you can choose to postpone reporting the gain if you buy qualifying replacement property within a certain period of time. Form 1040ez more:label_form_201040ez more:taxes See Postponing Gain , earlier, for the rules that apply. Form 1040ez more:label_form_201040ez more:taxes Other federal assistance programs. Form 1040ez more:label_form_201040ez more:taxes    For more information about other federal assistance programs, see Crop Insurance and Crop Disaster Payments and Feed Assistance and Payments in chapter 3 earlier. Form 1040ez more:label_form_201040ez more:taxes Postponed tax deadlines. Form 1040ez more:label_form_201040ez more:taxes   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. Form 1040ez more:label_form_201040ez more:taxes The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA. Form 1040ez more:label_form_201040ez more:taxes   If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). Form 1040ez more:label_form_201040ez more:taxes Go to http://www. Form 1040ez more:label_form_201040ez more:taxes irs. Form 1040ez more:label_form_201040ez more:taxes gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. Form 1040ez more:label_form_201040ez more:taxes Who is eligible. Form 1040ez more:label_form_201040ez more:taxes   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. Form 1040ez more:label_form_201040ez more:taxes Any individual whose main home is located in a covered disaster area (defined next). Form 1040ez more:label_form_201040ez more:taxes Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. Form 1040ez more:label_form_201040ez more:taxes Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area. Form 1040ez more:label_form_201040ez more:taxes Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Form 1040ez more:label_form_201040ez more:taxes The main home or principal place of business does not have to be located in the covered disaster area. Form 1040ez more:label_form_201040ez more:taxes Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Form 1040ez more:label_form_201040ez more:taxes The spouse on a joint return with a taxpayer who is eligible for postponements. Form 1040ez more:label_form_201040ez more:taxes Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose necessary records to meet a postponed tax deadline are located in the covered disaster area. Form 1040ez more:label_form_201040ez more:taxes Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. Form 1040ez more:label_form_201040ez more:taxes Any other person determined by the IRS to be affected by a federally declared disaster. Form 1040ez more:label_form_201040ez more:taxes Covered disaster area. Form 1040ez more:label_form_201040ez more:taxes   This is an area of a federally declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year. Form 1040ez more:label_form_201040ez more:taxes Abatement of interest and penalties. Form 1040ez more:label_form_201040ez more:taxes   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines. Form 1040ez more:label_form_201040ez more:taxes Reporting Gains and Losses You will have to file one or more of the following forms to report your gains or losses from involuntary conversions. Form 1040ez more:label_form_201040ez more:taxes Form 4684. Form 1040ez more:label_form_201040ez more:taxes   Use this form to report your gains and losses from casualties and thefts. Form 1040ez more:label_form_201040ez more:taxes Form 4797. Form 1040ez more:label_form_201040ez more:taxes   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. Form 1040ez more:label_form_201040ez more:taxes Also use this form if you have a gain from a casualty or theft on trade, business or income-producing property held for more than 1 year and you have to recapture some or all of your gain as ordinary income. Form 1040ez more:label_form_201040ez more:taxes Form 8949. Form 1040ez more:label_form_201040ez more:taxes   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. Form 1040ez more:label_form_201040ez more:taxes Schedule A (Form 1040). Form 1040ez more:label_form_201040ez more:taxes   Use this form to deduct your losses from casualties and thefts of personal-use property and income-producing property, that you reported on Form 4684. Form 1040ez more:label_form_201040ez more:taxes Schedule D (Form 1040). Form 1040ez more:label_form_201040ez more:taxes   Use this form to carry over the following gains. Form 1040ez more:label_form_201040ez more:taxes Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year. Form 1040ez more:label_form_201040ez more:taxes Net gain shown on Form 4684 from the casualty or theft of personal-use property. Form 1040ez more:label_form_201040ez more:taxes    Also use this form to figure the overall gain or loss from transactions reported on Form 8949. Form 1040ez more:label_form_201040ez more:taxes Schedule F (Form 1040). Form 1040ez more:label_form_201040ez more:taxes   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 32, if you use the cash method of accounting and have not otherwise deducted these losses. Form 1040ez more:label_form_201040ez more:taxes Prev  Up  Next   Home   More Online Publications
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The Form 1040ez More:label_form_201040ez More:taxes

Form 1040ez more:label_form_201040ez more:taxes 1. Form 1040ez more:label_form_201040ez more:taxes   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Form 1040ez more:label_form_201040ez more:taxes Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Form 1040ez more:label_form_201040ez more:taxes The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Form 1040ez more:label_form_201040ez more:taxes If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Form 1040ez more:label_form_201040ez more:taxes Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Form 1040ez more:label_form_201040ez more:taxes Rental income is any payment you receive for the use or occupation of property. Form 1040ez more:label_form_201040ez more:taxes In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Form 1040ez more:label_form_201040ez more:taxes When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Form 1040ez more:label_form_201040ez more:taxes Most individual taxpayers use the cash method. Form 1040ez more:label_form_201040ez more:taxes Cash method. Form 1040ez more:label_form_201040ez more:taxes   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Form 1040ez more:label_form_201040ez more:taxes You constructively receive income when it is made available to you, for example, by being credited to your bank account. Form 1040ez more:label_form_201040ez more:taxes Accrual method. Form 1040ez more:label_form_201040ez more:taxes    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Form 1040ez more:label_form_201040ez more:taxes You generally deduct your expenses when you incur them, rather than when you pay them. Form 1040ez more:label_form_201040ez more:taxes More information. Form 1040ez more:label_form_201040ez more:taxes   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Form 1040ez more:label_form_201040ez more:taxes Types of Income The following are common types of rental income. Form 1040ez more:label_form_201040ez more:taxes Advance rent. Form 1040ez more:label_form_201040ez more:taxes   Advance rent is any amount you receive before the period that it covers. Form 1040ez more:label_form_201040ez more:taxes Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes On March 18, 2013, you signed a 10-year lease to rent your property. Form 1040ez more:label_form_201040ez more:taxes During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Form 1040ez more:label_form_201040ez more:taxes You must include $19,200 in your rental income in the first year. Form 1040ez more:label_form_201040ez more:taxes Canceling a lease. Form 1040ez more:label_form_201040ez more:taxes   If your tenant pays you to cancel a lease, the amount you receive is rent. Form 1040ez more:label_form_201040ez more:taxes Include the payment in your income in the year you receive it regardless of your method of accounting. Form 1040ez more:label_form_201040ez more:taxes Expenses paid by tenant. Form 1040ez more:label_form_201040ez more:taxes   If your tenant pays any of your expenses, those payments are rental income. Form 1040ez more:label_form_201040ez more:taxes Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Form 1040ez more:label_form_201040ez more:taxes For more information, see Rental Expenses , later. Form 1040ez more:label_form_201040ez more:taxes Example 1. Form 1040ez more:label_form_201040ez more:taxes Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Form 1040ez more:label_form_201040ez more:taxes Under the terms of the lease, your tenant does not have to pay this bill. Form 1040ez more:label_form_201040ez more:taxes Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Form 1040ez more:label_form_201040ez more:taxes You can deduct the utility payment made by your tenant as a rental expense. Form 1040ez more:label_form_201040ez more:taxes Example 2. Form 1040ez more:label_form_201040ez more:taxes While you are out of town, the furnace in your rental property stops working. Form 1040ez more:label_form_201040ez more:taxes Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Form 1040ez more:label_form_201040ez more:taxes Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Form 1040ez more:label_form_201040ez more:taxes You can deduct the repair payment made by your tenant as a rental expense. Form 1040ez more:label_form_201040ez more:taxes Property or services. Form 1040ez more:label_form_201040ez more:taxes   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Form 1040ez more:label_form_201040ez more:taxes   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes Your tenant is a house painter. Form 1040ez more:label_form_201040ez more:taxes He offers to paint your rental property instead of paying 2 months rent. Form 1040ez more:label_form_201040ez more:taxes You accept his offer. Form 1040ez more:label_form_201040ez more:taxes Include in your rental income the amount the tenant would have paid for 2 months rent. Form 1040ez more:label_form_201040ez more:taxes You can deduct that same amount as a rental expense for painting your property. Form 1040ez more:label_form_201040ez more:taxes Security deposits. Form 1040ez more:label_form_201040ez more:taxes   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Form 1040ez more:label_form_201040ez more:taxes But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Form 1040ez more:label_form_201040ez more:taxes    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Form 1040ez more:label_form_201040ez more:taxes Include it in your income when you receive it. Form 1040ez more:label_form_201040ez more:taxes Other Sources of Rental Income Lease with option to buy. Form 1040ez more:label_form_201040ez more:taxes   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Form 1040ez more:label_form_201040ez more:taxes If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Form 1040ez more:label_form_201040ez more:taxes Part interest. Form 1040ez more:label_form_201040ez more:taxes   If you own a part interest in rental property, you must report your part of the rental income from the property. Form 1040ez more:label_form_201040ez more:taxes Rental of property also used as your home. Form 1040ez more:label_form_201040ez more:taxes   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Form 1040ez more:label_form_201040ez more:taxes However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Form 1040ez more:label_form_201040ez more:taxes See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040ez more:label_form_201040ez more:taxes Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Form 1040ez more:label_form_201040ez more:taxes Personal use of rental property. Form 1040ez more:label_form_201040ez more:taxes   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Form 1040ez more:label_form_201040ez more:taxes Also, your rental expense deductions may be limited. Form 1040ez more:label_form_201040ez more:taxes See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040ez more:label_form_201040ez more:taxes Part interest. Form 1040ez more:label_form_201040ez more:taxes   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes Roger owns a one-half undivided interest in a rental house. Form 1040ez more:label_form_201040ez more:taxes Last year he paid $968 for necessary repairs on the property. Form 1040ez more:label_form_201040ez more:taxes Roger can deduct $484 (50% × $968) as a rental expense. Form 1040ez more:label_form_201040ez more:taxes He is entitled to reimbursement for the remaining half from the co-owner. Form 1040ez more:label_form_201040ez more:taxes When To Deduct You generally deduct your rental expenses in the year you pay them. Form 1040ez more:label_form_201040ez more:taxes If you use the accrual method, see Publication 538 for more information. Form 1040ez more:label_form_201040ez more:taxes Types of Expenses Listed below are the most common rental expenses. Form 1040ez more:label_form_201040ez more:taxes Advertising. Form 1040ez more:label_form_201040ez more:taxes Auto and travel expenses. Form 1040ez more:label_form_201040ez more:taxes Cleaning and maintenance. Form 1040ez more:label_form_201040ez more:taxes Commissions. Form 1040ez more:label_form_201040ez more:taxes Depreciation. Form 1040ez more:label_form_201040ez more:taxes Insurance. Form 1040ez more:label_form_201040ez more:taxes Interest (other). Form 1040ez more:label_form_201040ez more:taxes Legal and other professional fees. Form 1040ez more:label_form_201040ez more:taxes Local transportation expenses. Form 1040ez more:label_form_201040ez more:taxes Management fees. Form 1040ez more:label_form_201040ez more:taxes Mortgage interest paid to banks, etc. Form 1040ez more:label_form_201040ez more:taxes Points. Form 1040ez more:label_form_201040ez more:taxes Rental payments. Form 1040ez more:label_form_201040ez more:taxes Repairs. Form 1040ez more:label_form_201040ez more:taxes Taxes. Form 1040ez more:label_form_201040ez more:taxes Utilities. Form 1040ez more:label_form_201040ez more:taxes Some of these expenses, as well as other less common ones, are discussed below. Form 1040ez more:label_form_201040ez more:taxes Depreciation. Form 1040ez more:label_form_201040ez more:taxes   Depreciation is a capital expense. Form 1040ez more:label_form_201040ez more:taxes It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Form 1040ez more:label_form_201040ez more:taxes   You can begin to depreciate rental property when it is ready and available for rent. Form 1040ez more:label_form_201040ez more:taxes See Placed in Service under When Does Depreciation Begin and End in chapter 2. Form 1040ez more:label_form_201040ez more:taxes Insurance premiums paid in advance. Form 1040ez more:label_form_201040ez more:taxes   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Form 1040ez more:label_form_201040ez more:taxes You cannot deduct the total premium in the year you pay it. Form 1040ez more:label_form_201040ez more:taxes See chapter 6 of Publication 535 for information on deductible premiums. Form 1040ez more:label_form_201040ez more:taxes Interest expense. Form 1040ez more:label_form_201040ez more:taxes   You can deduct mortgage interest you pay on your rental property. Form 1040ez more:label_form_201040ez more:taxes When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Form 1040ez more:label_form_201040ez more:taxes Chapter 4 of Publication 535 explains mortgage interest in detail. Form 1040ez more:label_form_201040ez more:taxes Expenses paid to obtain a mortgage. Form 1040ez more:label_form_201040ez more:taxes   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Form 1040ez more:label_form_201040ez more:taxes These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Form 1040ez more:label_form_201040ez more:taxes Form 1098, Mortgage Interest Statement. Form 1040ez more:label_form_201040ez more:taxes   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Form 1040ez more:label_form_201040ez more:taxes If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Form 1040ez more:label_form_201040ez more:taxes Attach a statement to your return showing the name and address of the other person. Form 1040ez more:label_form_201040ez more:taxes On the dotted line next to line 13, enter “See attached. Form 1040ez more:label_form_201040ez more:taxes ” Legal and other professional fees. Form 1040ez more:label_form_201040ez more:taxes   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Form 1040ez more:label_form_201040ez more:taxes For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Form 1040ez more:label_form_201040ez more:taxes You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Form 1040ez more:label_form_201040ez more:taxes Local benefit taxes. Form 1040ez more:label_form_201040ez more:taxes   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Form 1040ez more:label_form_201040ez more:taxes These charges are nondepreciable capital expenditures and must be added to the basis of your property. Form 1040ez more:label_form_201040ez more:taxes However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Form 1040ez more:label_form_201040ez more:taxes Local transportation expenses. Form 1040ez more:label_form_201040ez more:taxes   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Form 1040ez more:label_form_201040ez more:taxes However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Form 1040ez more:label_form_201040ez more:taxes See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Form 1040ez more:label_form_201040ez more:taxes   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Form 1040ez more:label_form_201040ez more:taxes For 2013, the standard mileage rate for business use is 56. Form 1040ez more:label_form_201040ez more:taxes 5 cents per mile. Form 1040ez more:label_form_201040ez more:taxes For more information, see chapter 4 of Publication 463. Form 1040ez more:label_form_201040ez more:taxes    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Form 1040ez more:label_form_201040ez more:taxes In addition, you must complete Form 4562, Part V, and attach it to your tax return. Form 1040ez more:label_form_201040ez more:taxes Pre-rental expenses. Form 1040ez more:label_form_201040ez more:taxes   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Form 1040ez more:label_form_201040ez more:taxes Rental of equipment. Form 1040ez more:label_form_201040ez more:taxes   You can deduct the rent you pay for equipment that you use for rental purposes. Form 1040ez more:label_form_201040ez more:taxes However, in some cases, lease contracts are actually purchase contracts. Form 1040ez more:label_form_201040ez more:taxes If so, you cannot deduct these payments. Form 1040ez more:label_form_201040ez more:taxes You can recover the cost of purchased equipment through depreciation. Form 1040ez more:label_form_201040ez more:taxes Rental of property. Form 1040ez more:label_form_201040ez more:taxes   You can deduct the rent you pay for property that you use for rental purposes. Form 1040ez more:label_form_201040ez more:taxes If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Form 1040ez more:label_form_201040ez more:taxes Travel expenses. Form 1040ez more:label_form_201040ez more:taxes   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Form 1040ez more:label_form_201040ez more:taxes You must properly allocate your expenses between rental and nonrental activities. Form 1040ez more:label_form_201040ez more:taxes You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Form 1040ez more:label_form_201040ez more:taxes The cost of improvements is recovered by taking depreciation. Form 1040ez more:label_form_201040ez more:taxes For information on travel expenses, see chapter 1 of Publication 463. Form 1040ez more:label_form_201040ez more:taxes    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Form 1040ez more:label_form_201040ez more:taxes Uncollected rent. Form 1040ez more:label_form_201040ez more:taxes   If you are a cash basis taxpayer, do not deduct uncollected rent. Form 1040ez more:label_form_201040ez more:taxes Because you have not included it in your income, it is not deductible. Form 1040ez more:label_form_201040ez more:taxes   If you use an accrual method, report income when you earn it. Form 1040ez more:label_form_201040ez more:taxes If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Form 1040ez more:label_form_201040ez more:taxes See chapter 10 of Publication 535 for more information about business bad debts. Form 1040ez more:label_form_201040ez more:taxes Vacant rental property. Form 1040ez more:label_form_201040ez more:taxes   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Form 1040ez more:label_form_201040ez more:taxes However, you cannot deduct any loss of rental income for the period the property is vacant. Form 1040ez more:label_form_201040ez more:taxes Vacant while listed for sale. Form 1040ez more:label_form_201040ez more:taxes   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Form 1040ez more:label_form_201040ez more:taxes If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Form 1040ez more:label_form_201040ez more:taxes Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Form 1040ez more:label_form_201040ez more:taxes These charges are also called loan origination fees, maximum loan charges, or premium charges. Form 1040ez more:label_form_201040ez more:taxes Any of these charges (points) that are solely for the use of money are interest. Form 1040ez more:label_form_201040ez more:taxes Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Form 1040ez more:label_form_201040ez more:taxes The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Form 1040ez more:label_form_201040ez more:taxes In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Form 1040ez more:label_form_201040ez more:taxes The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Form 1040ez more:label_form_201040ez more:taxes If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Form 1040ez more:label_form_201040ez more:taxes De minimis OID. Form 1040ez more:label_form_201040ez more:taxes   The OID is de minimis if it is less than one-fourth of 1% (. Form 1040ez more:label_form_201040ez more:taxes 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Form 1040ez more:label_form_201040ez more:taxes   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Form 1040ez more:label_form_201040ez more:taxes On a constant-yield basis over the term of the loan. Form 1040ez more:label_form_201040ez more:taxes On a straight line basis over the term of the loan. Form 1040ez more:label_form_201040ez more:taxes In proportion to stated interest payments. Form 1040ez more:label_form_201040ez more:taxes In its entirety at maturity of the loan. Form 1040ez more:label_form_201040ez more:taxes You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Form 1040ez more:label_form_201040ez more:taxes Example. Form 1040ez more:label_form_201040ez more:taxes Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Form 1040ez more:label_form_201040ez more:taxes The loan is to be repaid over 30 years. Form 1040ez more:label_form_201040ez more:taxes During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Form 1040ez more:label_form_201040ez more:taxes When the loan was made, she paid $1,500 in points to the lender. Form 1040ez more:label_form_201040ez more:taxes The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Form 1040ez more:label_form_201040ez more:taxes Carol determines that the points (OID) she paid are de minimis based on the following computation. Form 1040ez more:label_form_201040ez more:taxes Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Form 1040ez more:label_form_201040ez more:taxes 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Form 1040ez more:label_form_201040ez more:taxes Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Form 1040ez more:label_form_201040ez more:taxes Under the straight line method, she can deduct $50 each year for 30 years. Form 1040ez more:label_form_201040ez more:taxes Constant-yield method. Form 1040ez more:label_form_201040ez more:taxes   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Form 1040ez more:label_form_201040ez more:taxes   You figure your deduction for the first year in the following manner. Form 1040ez more:label_form_201040ez more:taxes Determine the issue price of the loan. Form 1040ez more:label_form_201040ez more:taxes If you paid points on the loan, the issue price generally is the difference between the principal and the points. Form 1040ez more:label_form_201040ez more:taxes Multiply the result in (1) by the yield to maturity (defined later). Form 1040ez more:label_form_201040ez more:taxes Subtract any qualified stated interest payments (defined later) from the result in (2). Form 1040ez more:label_form_201040ez more:taxes This is the OID you can deduct in the first year. Form 1040ez more:label_form_201040ez more:taxes Yield to maturity (YTM). Form 1040ez more:label_form_201040ez more:taxes   This rate is generally shown in the literature you receive from your lender. Form 1040ez more:label_form_201040ez more:taxes If you do not have this information, consult your lender or tax advisor. Form 1040ez more:label_form_201040ez more:taxes In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Form 1040ez more:label_form_201040ez more:taxes Qualified stated interest (QSI). Form 1040ez more:label_form_201040ez more:taxes   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Form 1040ez more:label_form_201040ez more:taxes Example—Year 1. Form 1040ez more:label_form_201040ez more:taxes The facts are the same as in the previous example. Form 1040ez more:label_form_201040ez more:taxes The yield to maturity on Carol's loan is 10. Form 1040ez more:label_form_201040ez more:taxes 2467%, compounded annually. Form 1040ez more:label_form_201040ez more:taxes She figured the amount of points (OID) she could deduct in 2013 as follows. Form 1040ez more:label_form_201040ez more:taxes Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Form 1040ez more:label_form_201040ez more:taxes 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Form 1040ez more:label_form_201040ez more:taxes To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Form 1040ez more:label_form_201040ez more:taxes Then follow steps (2) and (3), earlier. Form 1040ez more:label_form_201040ez more:taxes Example—Year 2. Form 1040ez more:label_form_201040ez more:taxes Carol figured the deduction for 2014 as follows. Form 1040ez more:label_form_201040ez more:taxes Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Form 1040ez more:label_form_201040ez more:taxes 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Form 1040ez more:label_form_201040ez more:taxes    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Form 1040ez more:label_form_201040ez more:taxes A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Form 1040ez more:label_form_201040ez more:taxes However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Form 1040ez more:label_form_201040ez more:taxes Points when loan refinance is more than the previous outstanding balance. Form 1040ez more:label_form_201040ez more:taxes   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Form 1040ez more:label_form_201040ez more:taxes For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Form 1040ez more:label_form_201040ez more:taxes Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Form 1040ez more:label_form_201040ez more:taxes Improvements. Form 1040ez more:label_form_201040ez more:taxes   You must capitalize any expense you pay to improve your rental property. Form 1040ez more:label_form_201040ez more:taxes An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Form 1040ez more:label_form_201040ez more:taxes Betterments. Form 1040ez more:label_form_201040ez more:taxes   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Form 1040ez more:label_form_201040ez more:taxes Restoration. Form 1040ez more:label_form_201040ez more:taxes   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Form 1040ez more:label_form_201040ez more:taxes Adaptation. Form 1040ez more:label_form_201040ez more:taxes   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Form 1040ez more:label_form_201040ez more:taxes Separate the costs of repairs and improvements, and keep accurate records. Form 1040ez more:label_form_201040ez more:taxes You will need to know the cost of improvements when you sell or depreciate your property. Form 1040ez more:label_form_201040ez more:taxes The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Form 1040ez more:label_form_201040ez more:taxes Table 1-1. Form 1040ez more:label_form_201040ez more:taxes Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications