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Free 1040nr software 3. Free 1040nr software   Lifetime Learning Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Free 1040nr software They are the American opportunity credit and the lifetime learning credit. Free 1040nr software This chapter discusses the lifetime learning credit. Free 1040nr software The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . Free 1040nr software This chapter explains: Who can claim the lifetime learning credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Free 1040nr software What is the tax benefit of the lifetime learning credit. Free 1040nr software   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. Free 1040nr software There is no limit on the number of years the lifetime learning credit can be claimed for each student. Free 1040nr software   A tax credit reduces the amount of income tax you may have to pay. Free 1040nr software Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Free 1040nr software The lifetime learning credit is a nonrefundable credit. Free 1040nr software This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. Free 1040nr software   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. Free 1040nr software Can you claim more than one education credit this year. Free 1040nr software   For each student, you can elect for any year only one of the credits. Free 1040nr software For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. Free 1040nr software   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. Free 1040nr software   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. Free 1040nr software This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Free 1040nr software Differences between the American opportunity and lifetime learning credits. Free 1040nr software   There are several differences between these two credits. Free 1040nr software For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. Free 1040nr software However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Free 1040nr software The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Free 1040nr software Overview of the lifetime learning credit. Free 1040nr software   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. Free 1040nr software The details are discussed in this chapter. Free 1040nr software Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. Free 1040nr software Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. Free 1040nr software You pay qualified education expenses of higher education. Free 1040nr software You pay the education expenses for an eligible student. Free 1040nr software The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Free 1040nr software Table 3-1. Free 1040nr software Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. Free 1040nr software Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Free 1040nr software “Qualified education expenses” are defined later under Qualified Education Expenses . Free 1040nr software “Eligible students” are defined later under Who Is an Eligible Student . Free 1040nr software A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Free 1040nr software You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. Free 1040nr software Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. Free 1040nr software Your filing status is married filing separately. Free 1040nr software You are listed as a dependent on another person's tax return (such as your parents'). Free 1040nr software See Who Can Claim a Dependent's Expenses , later. Free 1040nr software Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). Free 1040nr software MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Free 1040nr software You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Free 1040nr software More information on nonresident aliens can be found in Publication 519. Free 1040nr software You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. Free 1040nr software What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Free 1040nr software Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. Free 1040nr software For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. Free 1040nr software Academic period. Free 1040nr software   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Free 1040nr software In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Free 1040nr software Paid with borrowed funds. Free 1040nr software   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. Free 1040nr software You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Free 1040nr software Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. Free 1040nr software Student withdraws from class(es). Free 1040nr software   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. Free 1040nr software Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. Free 1040nr software The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. Free 1040nr software Eligible educational institution. Free 1040nr software   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free 1040nr software S. Free 1040nr software Department of Education. Free 1040nr software It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free 1040nr software The educational institution should be able to tell you if it is an eligible educational institution. Free 1040nr software   Certain educational institutions located outside the United States also participate in the U. Free 1040nr software S. Free 1040nr software Department of Education's Federal Student Aid (FSA) programs. Free 1040nr software Related expenses. Free 1040nr software   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. Free 1040nr software Prepaid expenses. Free 1040nr software   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Free 1040nr software See Academic period , earlier. Free 1040nr software For example, you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Free 1040nr software You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Free 1040nr software In the following examples, assume that each student is an eligible student at an eligible educational institution. Free 1040nr software Example 1. Free 1040nr software   Jackson is a sophomore in University V's degree program in dentistry. Free 1040nr software This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Free 1040nr software Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. Free 1040nr software Example 2. Free 1040nr software   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Free 1040nr software The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Free 1040nr software Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Free 1040nr software Donna bought hers at College W's bookstore. Free 1040nr software Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. Free 1040nr software Example 3. Free 1040nr software   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Free 1040nr software This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. Free 1040nr software No portion of the fee covers personal expenses. Free 1040nr software Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Free 1040nr software Therefore, it is a qualified expense. Free 1040nr software No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. Free 1040nr software Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. Free 1040nr software Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. Free 1040nr software Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Free 1040nr software See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Free 1040nr software Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Free 1040nr software See Adjustments to Qualified Education Expenses, next. Free 1040nr software This image is too large to be displayed in the current screen. Free 1040nr software Please click the link to view the image. Free 1040nr software Figure 3-1 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Free 1040nr software The result is the amount of adjusted qualified education expenses for each student. Free 1040nr software Tax-free educational assistance. Free 1040nr software   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Free 1040nr software See Academic period , earlier. Free 1040nr software   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Free 1040nr software This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Free 1040nr software   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed , later. Free 1040nr software If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed , later. Free 1040nr software   Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free 1040nr software Generally, any scholarship or fellowship is treated as tax free. Free 1040nr software However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Free 1040nr software The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free 1040nr software The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free 1040nr software You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Free 1040nr software For examples, see Coordination with Pell grants and other scholarships, later. Free 1040nr software Refunds. Free 1040nr software   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Free 1040nr software Some tax-free educational assistance received after 2013 may be treated as a refund. Free 1040nr software See Tax-free educational assistance , earlier. Free 1040nr software Refunds received in 2013. Free 1040nr software   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Free 1040nr software Refunds received after 2013 but before your income tax return is filed. Free 1040nr software   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Free 1040nr software Refunds received after 2013 and after your income tax return is filed. Free 1040nr software   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Free 1040nr software See Credit recapture, next. Free 1040nr software Credit recapture. Free 1040nr software    If any tax-free educational assistance for the qualified education expenses paid in 2013 or any refund of your qualified education expenses paid in 2013 is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Free 1040nr software You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Free 1040nr software You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Free 1040nr software Include that amount as an additional tax for the year the refund or tax-free assistance was received. Free 1040nr software Example. Free 1040nr software   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. Free 1040nr software You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. Free 1040nr software You claimed no other tax credits. Free 1040nr software After you filed your return, your child withdrew from two courses and you received a refund of $2,900. Free 1040nr software You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. Free 1040nr software The refigured credit is $1,280 and your tax liability increased by $580. Free 1040nr software See instructions for your 2014 income tax return to determine where to include this tax. Free 1040nr software If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Free 1040nr software Amounts that do not reduce qualified education expenses. Free 1040nr software   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Free 1040nr software   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Free 1040nr software The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free 1040nr software The use of the money is not restricted. Free 1040nr software For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. Free 1040nr software Coordination with Pell grants and other scholarships. Free 1040nr software   In some cases, you may be able to reduce your tax liability by including scholarships in income. Free 1040nr software If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Free 1040nr software The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Free 1040nr software Example 1—No scholarship. Free 1040nr software Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. Free 1040nr software Her AGI and her MAGI, for purposes of the credit, are $27,000. Free 1040nr software Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. Free 1040nr software She claims no credits other than the lifetime learning credit. Free 1040nr software In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. Free 1040nr software Judy and the college meet all requirements for the lifetime learning tax credit. Free 1040nr software She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. Free 1040nr software She claims a $900 lifetime learning credit and her tax after credits is $1,256. Free 1040nr software Example 2—Scholarship excluded from income. Free 1040nr software The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Free 1040nr software Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. Free 1040nr software If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. Free 1040nr software Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. Free 1040nr software Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. Free 1040nr software Example 3—Scholarship included in income. Free 1040nr software The facts are the same as in Example 2—Scholarship excluded from income. Free 1040nr software If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. Free 1040nr software Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. Free 1040nr software She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Free 1040nr software Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. Free 1040nr software Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Free 1040nr software This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Free 1040nr software Sports, games, hobbies, and noncredit courses. Free 1040nr software   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Free 1040nr software However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. Free 1040nr software Comprehensive or bundled fees. Free 1040nr software   Some eligible educational institutions combine all of their fees for an academic period into one amount. Free 1040nr software If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. Free 1040nr software The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. Free 1040nr software See Figuring the Credit , later, for more information about Form 1098-T. Free 1040nr software Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). Free 1040nr software Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year. Free 1040nr software For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. Free 1040nr software You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Free 1040nr software IF you. Free 1040nr software . Free 1040nr software . Free 1040nr software THEN only. Free 1040nr software . Free 1040nr software . Free 1040nr software claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. Free 1040nr software The dependent cannot claim the credit. Free 1040nr software do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. Free 1040nr software You cannot claim the credit based on this dependent's expenses. Free 1040nr software Expenses paid by dependent. Free 1040nr software   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Free 1040nr software Include these expenses when figuring the amount of your lifetime learning credit. Free 1040nr software    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Free 1040nr software Expenses paid by you. Free 1040nr software   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. Free 1040nr software If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. Free 1040nr software Expenses paid by others. Free 1040nr software   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Free 1040nr software In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Free 1040nr software If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Free 1040nr software Example. Free 1040nr software In 2013, Ms. Free 1040nr software Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Free 1040nr software For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Free 1040nr software Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. Free 1040nr software If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. Free 1040nr software If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. Free 1040nr software Tuition reduction. Free 1040nr software   When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Free 1040nr software If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Free 1040nr software For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free 1040nr software Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. Free 1040nr software The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). Free 1040nr software However, that amount may be reduced based on your MAGI. Free 1040nr software See Effect of the Amount of Your Income on the Amount of Your Credit , later. Free 1040nr software Example. Free 1040nr software Bruce and Toni Harper are married and file a joint tax return. Free 1040nr software For 2013, their MAGI is $75,000. Free 1040nr software Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. Free 1040nr software She already has a bachelor's degree in history and wants to become a nurse. Free 1040nr software In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. Free 1040nr software Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. Free 1040nr software Form 1098-T. Free 1040nr software   To help you figure your lifetime learning credit, the student should receive Form 1098-T. Free 1040nr software Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Free 1040nr software An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Free 1040nr software However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. Free 1040nr software When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Free 1040nr software   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Free 1040nr software    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. Free 1040nr software Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). Free 1040nr software You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). Free 1040nr software Modified adjusted gross income (MAGI). Free 1040nr software   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free 1040nr software MAGI when using Form 1040A. Free 1040nr software   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free 1040nr software MAGI when using Form 1040. Free 1040nr software   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free 1040nr software You can use Worksheet 3-1 to figure your MAGI. Free 1040nr software Worksheet 3-1. Free 1040nr software MAGI for the Lifetime Learning Credit 1. Free 1040nr software Enter your adjusted gross income  (Form 1040, line 38)   1. Free 1040nr software   2. Free 1040nr software Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free 1040nr software       3. Free 1040nr software Enter your foreign housing deduction (Form 2555, line 50)   3. Free 1040nr software       4. Free 1040nr software Enter the amount of income from Puerto Rico you are excluding   4. Free 1040nr software       5. Free 1040nr software Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free 1040nr software       6. Free 1040nr software Add the amounts on lines 2, 3, 4, and 5   6. Free 1040nr software   7. Free 1040nr software Add the amounts on lines 1 and 6. Free 1040nr software  This is your modified adjusted  gross income. Free 1040nr software Enter this amount  on Form 8863, line 14   7. Free 1040nr software   Phaseout. Free 1040nr software   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. Free 1040nr software The same method is shown in the following example. Free 1040nr software Example. Free 1040nr software You are filing a joint return with a MAGI of $112,000. Free 1040nr software In 2013, you paid $6,600 of qualified education expenses. Free 1040nr software You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). Free 1040nr software The result is a $1,320 (20% x $6,600) tentative credit. Free 1040nr software Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. Free 1040nr software The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. Free 1040nr software The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). Free 1040nr software The result is the amount of your phased out (reduced) lifetime learning credit ($990). Free 1040nr software   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Free 1040nr software Enter the credit on Form 1040, line 49, or Form 1040A, line 31. Free 1040nr software Note. Free 1040nr software In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Free 1040nr software Prev  Up  Next   Home   More Online Publications
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The Free 1040nr Software

Free 1040nr software 3. Free 1040nr software   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Free 1040nr software Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Free 1040nr software Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Free 1040nr software When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Free 1040nr software Any remaining gain is a section 1231 gain. Free 1040nr software Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Free 1040nr software Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Free 1040nr software Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Free 1040nr software If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Free 1040nr software Do not take that gain into account as section 1231 gain. Free 1040nr software Section 1231 transactions. Free 1040nr software   The following transactions result in gain or loss subject to section 1231 treatment. Free 1040nr software Sales or exchanges of real property or depreciable personal property. Free 1040nr software This property must be used in a trade or business and held longer than 1 year. Free 1040nr software Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Free 1040nr software Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Free 1040nr software Sales or exchanges of leaseholds. Free 1040nr software The leasehold must be used in a trade or business and held longer than 1 year. Free 1040nr software Sales or exchanges of cattle and horses. Free 1040nr software The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Free 1040nr software Sales or exchanges of other livestock. Free 1040nr software This livestock does not include poultry. Free 1040nr software It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Free 1040nr software Sales or exchanges of unharvested crops. Free 1040nr software The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Free 1040nr software You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Free 1040nr software Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Free 1040nr software Cutting of timber or disposal of timber, coal, or iron ore. Free 1040nr software The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Free 1040nr software Condemnations. Free 1040nr software The condemned property must have been held longer than 1 year. Free 1040nr software It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Free 1040nr software It cannot be property held for personal use. Free 1040nr software Casualties and thefts. Free 1040nr software The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Free 1040nr software You must have held the property longer than 1 year. Free 1040nr software However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Free 1040nr software For more information on casualties and thefts, see Publication 547. Free 1040nr software Property for sale to customers. Free 1040nr software   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Free 1040nr software If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Free 1040nr software Example. Free 1040nr software You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Free 1040nr software Customers make deposits on the reels, which you refund if the reels are returned within a year. Free 1040nr software If they are not returned, you keep each deposit as the agreed-upon sales price. Free 1040nr software Most reels are returned within the 1-year period. Free 1040nr software You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Free 1040nr software Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Free 1040nr software Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Free 1040nr software Copyrights. Free 1040nr software    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Free 1040nr software The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Free 1040nr software Treatment as ordinary or capital. Free 1040nr software   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Free 1040nr software If you have a net section 1231 loss, it is ordinary loss. Free 1040nr software If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Free 1040nr software The rest, if any, is long-term capital gain. Free 1040nr software Nonrecaptured section 1231 losses. Free 1040nr software   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Free 1040nr software Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Free 1040nr software These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Free 1040nr software Example. Free 1040nr software In 2013, Ben has a $2,000 net section 1231 gain. Free 1040nr software To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Free 1040nr software From 2008 through 2012 he had the following section 1231 gains and losses. Free 1040nr software Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Free 1040nr software 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Free 1040nr software To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Free 1040nr software This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Free 1040nr software On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Free 1040nr software Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Free 1040nr software Whether the adjusted basis was figured using depreciation or amortization another person claimed. Free 1040nr software Corporate distributions. Free 1040nr software   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Free 1040nr software General asset accounts. Free 1040nr software   Different rules apply to dispositions of property you depreciated using a general asset account. Free 1040nr software For information on these rules, see Publication 946. Free 1040nr software Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Free 1040nr software See Gain Treated as Ordinary Income, later. Free 1040nr software Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Free 1040nr software See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Free 1040nr software Section 1245 property defined. Free 1040nr software   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Free 1040nr software Personal property (either tangible or intangible). Free 1040nr software Other tangible property (except buildings and their structural components) used as any of the following. Free 1040nr software See Buildings and structural components below. Free 1040nr software An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Free 1040nr software A research facility in any of the activities in (a). Free 1040nr software A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Free 1040nr software That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Free 1040nr software Amortization of certified pollution control facilities. Free 1040nr software The section 179 expense deduction. Free 1040nr software Deduction for clean-fuel vehicles and certain refueling property. Free 1040nr software Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Free 1040nr software Deduction for certain qualified refinery property. Free 1040nr software Deduction for qualified energy efficient commercial building property. Free 1040nr software Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Free 1040nr software (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Free 1040nr software ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Free 1040nr software Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Free 1040nr software Deduction for qualified tertiary injectant expenses. Free 1040nr software Certain reforestation expenditures. Free 1040nr software Deduction for election to expense qualified advanced mine safety equipment property. Free 1040nr software Single purpose agricultural (livestock) or horticultural structures. Free 1040nr software Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Free 1040nr software Any railroad grading or tunnel bore. Free 1040nr software Buildings and structural components. Free 1040nr software   Section 1245 property does not include buildings and structural components. Free 1040nr software The term building includes a house, barn, warehouse, or garage. Free 1040nr software The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Free 1040nr software   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Free 1040nr software Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Free 1040nr software   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Free 1040nr software Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Free 1040nr software Facility for bulk storage of fungible commodities. Free 1040nr software   This term includes oil or gas storage tanks and grain storage bins. Free 1040nr software Bulk storage means the storage of a commodity in a large mass before it is used. Free 1040nr software For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Free 1040nr software To be fungible, a commodity must be such that one part may be used in place of another. Free 1040nr software   Stored materials that vary in composition, size, and weight are not fungible. Free 1040nr software Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Free 1040nr software For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Free 1040nr software Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Free 1040nr software The depreciation and amortization allowed or allowable on the property. Free 1040nr software The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Free 1040nr software A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Free 1040nr software For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Free 1040nr software See Gifts and Transfers at Death, later. Free 1040nr software Use Part III of Form 4797 to figure the ordinary income part of the gain. Free 1040nr software Depreciation taken on other property or taken by other taxpayers. Free 1040nr software   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Free 1040nr software Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Free 1040nr software Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Free 1040nr software Depreciation and amortization. Free 1040nr software   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Free 1040nr software Ordinary depreciation deductions. Free 1040nr software Any special depreciation allowance you claimed. Free 1040nr software Amortization deductions for all the following costs. Free 1040nr software Acquiring a lease. Free 1040nr software Lessee improvements. Free 1040nr software Certified pollution control facilities. Free 1040nr software Certain reforestation expenses. Free 1040nr software Section 197 intangibles. Free 1040nr software Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Free 1040nr software Franchises, trademarks, and trade names acquired before August 11, 1993. Free 1040nr software The section 179 deduction. Free 1040nr software Deductions for all the following costs. Free 1040nr software Removing barriers to the disabled and the elderly. Free 1040nr software Tertiary injectant expenses. Free 1040nr software Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Free 1040nr software Environmental cleanup costs. Free 1040nr software Certain reforestation expenses. Free 1040nr software Qualified disaster expenses. Free 1040nr software Any basis reduction for the investment credit (minus any basis increase for credit recapture). Free 1040nr software Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Free 1040nr software Example. Free 1040nr software You file your returns on a calendar year basis. Free 1040nr software In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Free 1040nr software You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Free 1040nr software You did not take the section 179 deduction. Free 1040nr software You sold the truck in May 2013 for $7,000. Free 1040nr software The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Free 1040nr software Figure the gain treated as ordinary income as follows. Free 1040nr software 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Free 1040nr software   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Free 1040nr software   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Free 1040nr software Depreciation allowed or allowable. Free 1040nr software   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Free 1040nr software However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Free 1040nr software If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Free 1040nr software   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Free 1040nr software Multiple asset accounts. Free 1040nr software   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Free 1040nr software Example. Free 1040nr software In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Free 1040nr software All of the depreciation was recorded in a single depreciation account. Free 1040nr software After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Free 1040nr software You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Free 1040nr software However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Free 1040nr software Normal retirement. Free 1040nr software   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Free 1040nr software Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Free 1040nr software To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Free 1040nr software Section 1250 property defined. Free 1040nr software   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Free 1040nr software It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Free 1040nr software A fee simple interest in land is not included because it is not depreciable. Free 1040nr software   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Free 1040nr software Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Free 1040nr software For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Free 1040nr software For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Free 1040nr software If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Free 1040nr software You will not have additional depreciation if any of the following conditions apply to the property disposed of. Free 1040nr software You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Free 1040nr software In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Free 1040nr software The property was residential low-income rental property you held for 162/3 years or longer. Free 1040nr software For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Free 1040nr software You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Free 1040nr software The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Free 1040nr software These properties are depreciated using the straight line method. Free 1040nr software In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Free 1040nr software Depreciation taken by other taxpayers or on other property. Free 1040nr software   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Free 1040nr software Example. Free 1040nr software Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Free 1040nr software Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Free 1040nr software On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Free 1040nr software At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Free 1040nr software Depreciation allowed or allowable. Free 1040nr software   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Free 1040nr software If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Free 1040nr software Retired or demolished property. Free 1040nr software   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Free 1040nr software Example. Free 1040nr software A wing of your building is totally destroyed by fire. Free 1040nr software The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Free 1040nr software Figuring straight line depreciation. Free 1040nr software   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Free 1040nr software If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Free 1040nr software   Salvage value and useful life are not used for the ACRS method of depreciation. Free 1040nr software Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Free 1040nr software   The straight line method is applied without any basis reduction for the investment credit. Free 1040nr software Property held by lessee. Free 1040nr software   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Free 1040nr software This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Free 1040nr software The same rule applies to the cost of acquiring a lease. Free 1040nr software   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Free 1040nr software However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Free 1040nr software Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Free 1040nr software The percentages for these types of real property are as follows. Free 1040nr software Nonresidential real property. Free 1040nr software   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Free 1040nr software For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Free 1040nr software Residential rental property. Free 1040nr software   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Free 1040nr software The percentage for periods before 1976 is zero. Free 1040nr software Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Free 1040nr software Low-income housing. Free 1040nr software    Low-income housing includes all the following types of residential rental property. Free 1040nr software Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Free 1040nr software Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Free 1040nr software Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. Free 1040nr software Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Free 1040nr software   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Free 1040nr software If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Free 1040nr software Foreclosure. Free 1040nr software   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Free 1040nr software Example. Free 1040nr software On June 1, 2001, you acquired low-income housing property. Free 1040nr software On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Free 1040nr software The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Free 1040nr software The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Free 1040nr software Therefore, 70% of the additional depreciation is treated as ordinary income. Free 1040nr software Holding period. Free 1040nr software   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Free 1040nr software For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Free 1040nr software If you sold it on January 2, 2013, the holding period is exactly 192 full months. Free 1040nr software The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Free 1040nr software Holding period for constructed, reconstructed, or erected property. Free 1040nr software   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Free 1040nr software Property acquired by gift or received in a tax-free transfer. Free 1040nr software   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Free 1040nr software   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Free 1040nr software See Low-Income Housing With Two or More Elements, next. Free 1040nr software Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Free 1040nr software The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Free 1040nr software The following are the types of separate elements. Free 1040nr software A separate improvement (defined below). Free 1040nr software The basic section 1250 property plus improvements not qualifying as separate improvements. Free 1040nr software The units placed in service at different times before all the section 1250 property is finished. Free 1040nr software For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Free 1040nr software As a result, the apartment house consists of three separate elements. Free 1040nr software The 36-month test for separate improvements. Free 1040nr software   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Free 1040nr software Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Free 1040nr software Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Free 1040nr software $5,000. Free 1040nr software The 1-year test. Free 1040nr software   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Free 1040nr software The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Free 1040nr software In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Free 1040nr software Example. Free 1040nr software The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Free 1040nr software During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Free 1040nr software The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Free 1040nr software However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Free 1040nr software Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Free 1040nr software Addition to the capital account. Free 1040nr software   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Free 1040nr software   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Free 1040nr software For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Free 1040nr software The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Free 1040nr software The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Free 1040nr software   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Free 1040nr software If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Free 1040nr software Unadjusted basis. Free 1040nr software   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Free 1040nr software However, the cost of components retired before that date is not included in the unadjusted basis. Free 1040nr software Holding period. Free 1040nr software   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Free 1040nr software The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Free 1040nr software The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Free 1040nr software The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Free 1040nr software   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Free 1040nr software Use the first day of a calendar month that is closest to the middle of the tax year. Free 1040nr software If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Free 1040nr software Figuring ordinary income attributable to each separate element. Free 1040nr software   Figure ordinary income attributable to each separate element as follows. Free 1040nr software   Step 1. Free 1040nr software Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Free 1040nr software   Step 2. Free 1040nr software Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Free 1040nr software   Step 3. Free 1040nr software Multiply the result in Step 2 by the applicable percentage for the element. Free 1040nr software Example. Free 1040nr software You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Free 1040nr software The property consisted of four elements (W, X, Y, and Z). Free 1040nr software Step 1. Free 1040nr software The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Free 1040nr software The sum of the additional depreciation for all the elements is $24,000. Free 1040nr software Step 2. Free 1040nr software The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Free 1040nr software Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Free 1040nr software $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Free 1040nr software Step 3. Free 1040nr software The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Free 1040nr software From these facts, the sum of the ordinary income for each element is figured as follows. Free 1040nr software   Step 1 Step 2 Step 3 Ordinary Income W . Free 1040nr software 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Free 1040nr software 25 5,000 92% 4,600 Z . Free 1040nr software 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Free 1040nr software In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Free 1040nr software In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Free 1040nr software Figure the additional depreciation for the periods after 1975. Free 1040nr software Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Free 1040nr software Stop here if this is residential rental property or if (2) is equal to or more than (1). Free 1040nr software This is the gain treated as ordinary income because of additional depreciation. Free 1040nr software Subtract (2) from (1). Free 1040nr software Figure the additional depreciation for periods after 1969 but before 1976. Free 1040nr software Add the lesser of (4) or (5) to the result in (3). Free 1040nr software This is the gain treated as ordinary income because of additional depreciation. Free 1040nr software A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Free 1040nr software Use Form 4797, Part III, to figure the ordinary income part of the gain. Free 1040nr software Corporations. Free 1040nr software   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Free 1040nr software The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Free 1040nr software Report this additional ordinary income on Form 4797, Part III, line 26 (f). Free 1040nr software Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Free 1040nr software This applies even if no payments are received in that year. Free 1040nr software If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Free 1040nr software For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Free 1040nr software If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Free 1040nr software To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Free 1040nr software Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Free 1040nr software For a detailed discussion of installment sales, see Publication 537. Free 1040nr software Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Free 1040nr software However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Free 1040nr software For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Free 1040nr software See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Free 1040nr software Part gift and part sale or exchange. Free 1040nr software   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Free 1040nr software If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Free 1040nr software However, see Bargain sale to charity, later. Free 1040nr software Example. Free 1040nr software You transferred depreciable personal property to your son for $20,000. Free 1040nr software When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Free 1040nr software You took depreciation of $30,000. Free 1040nr software You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Free 1040nr software You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Free 1040nr software You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Free 1040nr software Gift to charitable organization. Free 1040nr software   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Free 1040nr software Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Free 1040nr software   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Free 1040nr software For more information, see Giving Property That Has Increased in Value in Publication 526. Free 1040nr software Bargain sale to charity. Free 1040nr software   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Free 1040nr software First, figure the ordinary income as if you had sold the property at its fair market value. Free 1040nr software Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Free 1040nr software See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Free 1040nr software Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Free 1040nr software Example. Free 1040nr software You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Free 1040nr software Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Free 1040nr software If you had sold the property at its fair market value, your ordinary income would have been $5,000. Free 1040nr software Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Free 1040nr software Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Free 1040nr software For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Free 1040nr software However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Free 1040nr software Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Free 1040nr software Example 1. Free 1040nr software Janet Smith owned depreciable property that, upon her death, was inherited by her son. Free 1040nr software No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Free 1040nr software However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Free 1040nr software Example 2. Free 1040nr software The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Free 1040nr software If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Free 1040nr software Ordinary income from depreciation must be reported by the trust on the transfer. Free 1040nr software Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Free 1040nr software For information on like-kind exchanges and involuntary conversions, see chapter 1. Free 1040nr software Depreciable personal property. Free 1040nr software   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Free 1040nr software The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Free 1040nr software The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Free 1040nr software Example 1. Free 1040nr software You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Free 1040nr software The old machine cost you $5,000 two years ago. Free 1040nr software You took depreciation deductions of $3,950. Free 1040nr software Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Free 1040nr software Example 2. Free 1040nr software You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Free 1040nr software This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Free 1040nr software You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Free 1040nr software Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Free 1040nr software All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Free 1040nr software Example 3. Free 1040nr software A fire destroyed office machinery you bought for $116,000. Free 1040nr software The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Free 1040nr software You received a $117,000 insurance payment, realizing a gain of $92,640. Free 1040nr software You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Free 1040nr software $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Free 1040nr software The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Free 1040nr software The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Free 1040nr software 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Free 1040nr software Depreciable real property. Free 1040nr software   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Free 1040nr software The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Free 1040nr software The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Free 1040nr software   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Free 1040nr software Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Free 1040nr software Example. Free 1040nr software The state paid you $116,000 when it condemned your depreciable real property for public use. Free 1040nr software You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Free 1040nr software You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Free 1040nr software You choose to postpone reporting the gain. Free 1040nr software If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Free 1040nr software The ordinary income to be reported is $6,000, which is the greater of the following amounts. Free 1040nr software The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Free 1040nr software The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Free 1040nr software   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Free 1040nr software Basis of property acquired. Free 1040nr software   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Free 1040nr software   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Free 1040nr software However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Free 1040nr software Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Free 1040nr software Add the fair market value (or cost) of the other property acquired to the result in (1). Free 1040nr software Divide the result in (1) by the result in (2). Free 1040nr software Multiply the total basis by the result in (3). Free 1040nr software This is the basis of the depreciable real property acquired. Free 1040nr software If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Free 1040nr software Subtract the result in (4) from the total basis. Free 1040nr software This is the basis of the other property acquired. Free 1040nr software If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Free 1040nr software Example 1. Free 1040nr software In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Free 1040nr software The property's adjusted basis was $38,400, with additional depreciation of $14,932. Free 1040nr software On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Free 1040nr software Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Free 1040nr software You chose to postpone reporting the gain under the involuntary conversion rules. Free 1040nr software Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Free 1040nr software The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Free 1040nr software The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Free 1040nr software If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Free 1040nr software Example 2. Free 1040nr software John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Free 1040nr software He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Free 1040nr software He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Free 1040nr software Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Free 1040nr software The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Free 1040nr software The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Free 1040nr software The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Free 1040nr software The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Free 1040nr software 4. Free 1040nr software The basis of the depreciable real property is $12,000. Free 1040nr software This is the $30,000 total basis multiplied by the 0. Free 1040nr software 4 figured in (3). Free 1040nr software The basis of the other property (land) is $18,000. Free 1040nr software This is the $30,000 total basis minus the $12,000 figured in (4). Free 1040nr software The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Free 1040nr software Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Free 1040nr software Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Free 1040nr software See chapter 2. Free 1040nr software In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Free 1040nr software In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Free 1040nr software These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Free 1040nr software The comparison should take into account all the following facts and circumstances. Free 1040nr software The original cost and reproduction cost of construction, erection, or production. Free 1040nr software The remaining economic useful life. Free 1040nr software The state of obsolescence. Free 1040nr software The anticipated expenditures required to maintain, renovate, or modernize the properties. Free 1040nr software Like-kind exchanges and involuntary conversions. Free 1040nr software   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Free 1040nr software The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Free 1040nr software The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Free 1040nr software   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Free 1040nr software The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Free 1040nr software If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Free 1040nr software Example. Free 1040nr software A fire destroyed your property with a total fair market value of $50,000. Free 1040nr software It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Free 1040nr software You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Free 1040nr software The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Free 1040nr software You choose to postpone reporting your gain from the involuntary conversion. Free 1040nr software You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Free 1040nr software The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Free 1040nr software The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Free 1040nr software The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Free 1040nr software Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Free 1040nr software The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Free 1040nr software All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Free 1040nr software Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Free 1040nr software However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 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