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Free ez form 1. Free ez form   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Free ez form Amount realized on a recourse debt. Free ez form Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Free ez form S. Free ez form Individual Income Tax Return 1040X Amended U. Free ez form S. Free ez form Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Free ez form However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Free ez form See chapter 5 for information about getting publications and forms. Free ez form Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Free ez form An exchange is a transfer of property for other property or services. Free ez form The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Free ez form Sale or lease. Free ez form    Some agreements that seem to be leases may really be conditional sales contracts. Free ez form The intention of the parties to the agreement can help you distinguish between a sale and a lease. Free ez form   There is no test or group of tests to prove what the parties intended when they made the agreement. Free ez form You should consider each agreement based on its own facts and circumstances. Free ez form For more information, see chapter 3 in Publication 535, Business Expenses. Free ez form Cancellation of a lease. Free ez form    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Free ez form Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Free ez form Copyright. Free ez form    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Free ez form It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Free ez form Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Free ez form   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Free ez form For more information, see Section 1231 Gains and Losses in chapter 3. Free ez form Easement. Free ez form   The amount received for granting an easement is subtracted from the basis of the property. Free ez form If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Free ez form If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Free ez form   Any amount received that is more than the basis to be reduced is a taxable gain. Free ez form The transaction is reported as a sale of property. Free ez form   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Free ez form However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Free ez form   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Free ez form Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Free ez form See Gain or Loss From Condemnations, later. Free ez form Property transferred to satisfy debt. Free ez form   A transfer of property to satisfy a debt is an exchange. Free ez form Note's maturity date extended. Free ez form   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Free ez form Also, it is not considered a closed and completed transaction that would result in a gain or loss. Free ez form However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Free ez form Each case must be determined by its own facts. Free ez form For more information, see Regulations section 1. Free ez form 1001-3. Free ez form Transfer on death. Free ez form   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Free ez form No taxable gain or deductible loss results from the transfer. Free ez form Bankruptcy. Free ez form   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Free ez form Consequently, the transfer generally does not result in gain or loss. Free ez form For more information, see Publication 908, Bankruptcy Tax Guide. Free ez form Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Free ez form A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Free ez form A loss is the adjusted basis of the property that is more than the amount you realize. Free ez form   Table 1-1. Free ez form How To Figure Whether You Have a Gain or Loss IF your. Free ez form . Free ez form . Free ez form THEN you have a. Free ez form . Free ez form . Free ez form Adjusted basis is more than the amount realized, Loss. Free ez form Amount realized is more than the adjusted basis, Gain. Free ez form Basis. Free ez form   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Free ez form The basis of property you buy is usually its cost. Free ez form However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Free ez form See Basis Other Than Cost in Publication 551, Basis of Assets. Free ez form Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Free ez form See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Free ez form Adjusted basis. Free ez form   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Free ez form Increases include costs of any improvements having a useful life of more than 1 year. Free ez form Decreases include depreciation and casualty losses. Free ez form For more details and additional examples, see Adjusted Basis in Publication 551. Free ez form Amount realized. Free ez form   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Free ez form The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Free ez form Fair market value. Free ez form   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Free ez form If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Free ez form If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Free ez form Example. Free ez form You used a building in your business that cost you $70,000. Free ez form You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Free ez form You sold the building for $100,000 plus property having an FMV of $20,000. Free ez form The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Free ez form The selling expenses were $4,000. Free ez form Your gain on the sale is figured as follows. Free ez form Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Free ez form   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Free ez form Recognized gains must be included in gross income. Free ez form Recognized losses are deductible from gross income. Free ez form However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Free ez form See Nontaxable Exchanges, later. Free ez form Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Free ez form Interest in property. Free ez form   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Free ez form If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Free ez form Your basis in the property is disregarded. Free ez form This rule does not apply if all interests in the property are disposed of at the same time. Free ez form Example 1. Free ez form Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Free ez form You decide to sell your life interest in the farm. Free ez form The entire amount you receive is a recognized gain. Free ez form Your basis in the farm is disregarded. Free ez form Example 2. Free ez form The facts are the same as in Example 1, except that your brother joins you in selling the farm. Free ez form The entire interest in the property is sold, so your basis in the farm is not disregarded. Free ez form Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Free ez form Canceling a sale of real property. Free ez form   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Free ez form If the buyer returns the property in the year of sale, no gain or loss is recognized. Free ez form This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Free ez form If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Free ez form When the property is returned in a later year, you acquire a new basis in the property. Free ez form That basis is equal to the amount you pay to the buyer. Free ez form Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Free ez form You have a gain if the amount realized is more than your adjusted basis in the property. Free ez form However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Free ez form Bargain sales to charity. Free ez form   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Free ez form If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Free ez form The adjusted basis of the part sold is figured as follows. Free ez form Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Free ez form This allocation rule does not apply if a charitable contribution deduction is not allowable. Free ez form   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Free ez form Example. Free ez form You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Free ez form Your adjusted basis in the property is $4,000. Free ez form Your gain on the sale is $1,200, figured as follows. Free ez form Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Free ez form You must subtract depreciation you took or could have taken from the basis of the business or rental part. Free ez form However, see the special rule below for a home used partly for business or rental. Free ez form You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Free ez form Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Free ez form Any gain on the personal part of the property is a capital gain. Free ez form You cannot deduct a loss on the personal part. Free ez form Home used partly for business or rental. Free ez form    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Free ez form See Property Used Partly for Business or Rental, in Publication 523. Free ez form Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Free ez form You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Free ez form However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Free ez form Figure the loss you can deduct as follows. Free ez form Use the lesser of the property's adjusted basis or fair market value at the time of the change. Free ez form Add to (1) the cost of any improvements and other increases to basis since the change. Free ez form Subtract from (2) depreciation and any other decreases to basis since the change. Free ez form Subtract the amount you realized on the sale from the result in (3). Free ez form If the amount you realized is more than the result in (3), treat this result as zero. Free ez form The result in (4) is the loss you can deduct. Free ez form Example. Free ez form You changed your main home to rental property 5 years ago. Free ez form At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Free ez form This year, you sold the property for $55,000. Free ez form You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Free ez form Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Free ez form Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Free ez form   If you have a gain on the sale, you generally must recognize the full amount of the gain. Free ez form You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Free ez form   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Free ez form However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Free ez form   For more information, see Business Use or Rental of Home in Publication 523. Free ez form In addition, special rules apply if the home sold was acquired in a like-kind exchange. Free ez form See Special Situations in Publication 523. Free ez form Also see Like-Kind Exchanges, later. Free ez form Abandonments The abandonment of property is a disposition of property. Free ez form You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Free ez form Generally, abandonment is not treated as a sale or exchange of the property. Free ez form If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Free ez form If your adjusted basis is more than the amount you realize (if any), then you have a loss. Free ez form Loss from abandonment of business or investment property is deductible as a loss. Free ez form A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Free ez form This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Free ez form If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Free ez form The abandonment loss is deducted in the tax year in which the loss is sustained. Free ez form If the abandoned property is secured by debt, special rules apply. Free ez form The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Free ez form For more information, including examples, see chapter 3 of Publication 4681. Free ez form You cannot deduct any loss from abandonment of your home or other property held for personal use only. Free ez form Cancellation of debt. Free ez form   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Free ez form This income is separate from any loss realized from abandonment of the property. Free ez form   You must report this income on your tax return unless one of the following applies. Free ez form The cancellation is intended as a gift. Free ez form The debt is qualified farm debt. Free ez form The debt is qualified real property business debt. Free ez form You are insolvent or bankrupt. Free ez form The debt is qualified principal residence indebtedness. Free ez form File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Free ez form For more information, including other exceptions and exclusion, see Publication 4681. Free ez form Forms 1099-A and 1099-C. Free ez form   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Free ez form However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Free ez form The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free ez form For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Free ez form Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Free ez form The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Free ez form This is true even if you voluntarily return the property to the lender. Free ez form You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Free ez form Buyer's (borrower's) gain or loss. Free ez form   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Free ez form The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Free ez form See Gain or Loss From Sales and Exchanges, earlier. Free ez form You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Free ez form Amount realized on a nonrecourse debt. Free ez form   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Free ez form The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Free ez form Example 1. Free ez form Chris bought a new car for $15,000. Free ez form He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Free ez form Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Free ez form The credit company repossessed the car because he stopped making loan payments. Free ez form The balance due after taking into account the payments Chris made was $10,000. Free ez form The fair market value of the car when repossessed was $9,000. Free ez form The amount Chris realized on the repossession is $10,000. Free ez form That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Free ez form Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Free ez form He has a $5,000 nondeductible loss. Free ez form Example 2. Free ez form Abena paid $200,000 for her home. Free ez form She paid $15,000 down and borrowed the remaining $185,000 from a bank. Free ez form Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Free ez form The bank foreclosed on the loan because Abena stopped making payments. Free ez form When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Free ez form The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Free ez form She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Free ez form She has a $5,000 realized gain. Free ez form Amount realized on a recourse debt. Free ez form   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Free ez form You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Free ez form The amount realized does not include the canceled debt that is your income from cancellation of debt. Free ez form See Cancellation of debt, below. Free ez form Seller's (lender's) gain or loss on repossession. Free ez form   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Free ez form For more information, see Repossession in Publication 537. Free ez form    Table 1-2. Free ez form Worksheet for Foreclosures and Repossessions Part 1. Free ez form Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Free ez form Complete this part only  if you were personally liable for the debt. Free ez form Otherwise,  go to Part 2. Free ez form   1. Free ez form Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Free ez form Enter the fair market value of the transferred property   3. Free ez form Ordinary income from cancellation of debt upon foreclosure or    repossession. Free ez form * Subtract line 2 from line 1. Free ez form   If less than zero, enter zero   Part 2. Free ez form Figure your gain or loss from foreclosure or repossession. Free ez form   4. Free ez form If you completed Part 1, enter the smaller of line 1 or line 2. Free ez form   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Free ez form Enter any proceeds you received from the foreclosure sale   6. Free ez form Add lines 4 and 5   7. Free ez form Enter the adjusted basis of the transferred property   8. Free ez form Gain or loss from foreclosure or repossession. Free ez form Subtract line 7  from line 6   * The income may not be taxable. Free ez form See Cancellation of debt. Free ez form Cancellation of debt. Free ez form   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Free ez form This income is separate from any gain or loss realized from the foreclosure or repossession. Free ez form Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Free ez form    You can use Table 1-2 to figure your income from cancellation of debt. Free ez form   You must report this income on your tax return unless one of the following applies. Free ez form The cancellation is intended as a gift. Free ez form The debt is qualified farm debt. Free ez form The debt is qualified real property business debt. Free ez form You are insolvent or bankrupt. Free ez form The debt is qualified principal residence indebtedness. Free ez form File Form 982 to report the income exclusion. Free ez form Example 1. Free ez form Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Free ez form In this case, the amount he realizes is $9,000. Free ez form This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Free ez form Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Free ez form He has a $6,000 nondeductible loss. Free ez form He also is treated as receiving ordinary income from cancellation of debt. Free ez form That income is $1,000 ($10,000 − $9,000). Free ez form This is the part of the canceled debt not included in the amount realized. Free ez form Example 2. Free ez form Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Free ez form In this case, the amount she realizes is $170,000. Free ez form This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Free ez form Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Free ez form She has a $5,000 nondeductible loss. Free ez form She also is treated as receiving ordinary income from cancellation of debt. Free ez form (The debt is not exempt from tax as discussed under Cancellation of debt, above. Free ez form ) That income is $10,000 ($180,000 − $170,000). Free ez form This is the part of the canceled debt not included in the amount realized. Free ez form Forms 1099-A and 1099-C. Free ez form   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Free ez form However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Free ez form The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free ez form For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Free ez form Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Free ez form Involuntary conversions are also called involuntary exchanges. Free ez form Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Free ez form You report the gain or deduct the loss on your tax return for the year you realize it. Free ez form You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Free ez form However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Free ez form Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Free ez form Your basis for the new property is the same as your basis for the converted property. Free ez form This means that the gain is deferred until a taxable sale or exchange occurs. Free ez form If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Free ez form This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Free ez form If you have a gain or loss from the destruction or theft of property, see Publication 547. Free ez form Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Free ez form The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Free ez form The owner receives a condemnation award (money or property) in exchange for the property taken. Free ez form A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Free ez form Example. Free ez form A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Free ez form After the local government took action to condemn your property, you went to court to keep it. Free ez form But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Free ez form This is a condemnation of private property for public use. Free ez form Threat of condemnation. Free ez form   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Free ez form You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Free ez form   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Free ez form If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Free ez form Reports of condemnation. Free ez form   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Free ez form You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Free ez form If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Free ez form Example. Free ez form Your property lies along public utility lines. Free ez form The utility company has the authority to condemn your property. Free ez form The company informs you that it intends to acquire your property by negotiation or condemnation. Free ez form A threat of condemnation exists when you receive the notice. Free ez form Related property voluntarily sold. Free ez form   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Free ez form A substantial economic relationship exists if together the properties were one economic unit. Free ez form You also must show that the condemned property could not reasonably or adequately be replaced. Free ez form You can elect to postpone reporting the gain by buying replacement property. Free ez form See Postponement of Gain, later. Free ez form Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Free ez form If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Free ez form You can postpone reporting gain from a condemnation if you buy replacement property. Free ez form If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Free ez form See Postponement of Gain, later. Free ez form If your net condemnation award is less than your adjusted basis, you have a loss. Free ez form If your loss is from property you held for personal use, you cannot deduct it. Free ez form You must report any deductible loss in the tax year it happened. Free ez form You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Free ez form Main home condemned. Free ez form   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Free ez form You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free ez form For information on this exclusion, see Publication 523. Free ez form If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Free ez form See Postponement of Gain, later. Free ez form Table 1-3. Free ez form Worksheet for Condemnations Part 1. Free ez form Gain from severance damages. Free ez form  If you did not receive severance damages, skip Part 1 and go to Part 2. Free ez form   1. Free ez form Enter gross severance damages received   2. Free ez form Enter your expenses in getting severance damages   3. Free ez form Subtract line 2 from line 1. Free ez form If less than zero, enter -0-   4. Free ez form Enter any special assessment on remaining property taken out of your award   5. Free ez form Net severance damages. Free ez form Subtract line 4 from line 3. Free ez form If less than zero, enter -0-   6. Free ez form Enter the adjusted basis of the remaining property   7. Free ez form Gain from severance damages. Free ez form Subtract line 6 from line 5. Free ez form If less than zero, enter -0-   8. Free ez form Refigured adjusted basis of the remaining property. Free ez form Subtract line 5 from line 6. Free ez form If less than zero, enter -0-   Part 2. Free ez form Gain or loss from condemnation award. Free ez form   9. Free ez form Enter the gross condemnation award received   10. Free ez form Enter your expenses in getting the condemnation award   11. Free ez form If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Free ez form If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Free ez form Otherwise, enter -0-   12. Free ez form Add lines 10 and 11   13. Free ez form Net condemnation award. Free ez form Subtract line 12 from line 9   14. Free ez form Enter the adjusted basis of the condemned property   15. Free ez form Gain from condemnation award. Free ez form If line 14 is more than line 13, enter -0-. Free ez form Otherwise, subtract line 14 from  line 13 and skip line 16   16. Free ez form Loss from condemnation award. Free ez form Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Free ez form )   Part 3. Free ez form Postponed gain from condemnation. Free ez form  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Free ez form )   17. Free ez form If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Free ez form Otherwise, enter -0-   18. Free ez form If line 15 is more than zero, enter the amount from line 13. Free ez form Otherwise, enter -0-   19. Free ez form Add lines 17 and 18. Free ez form If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Free ez form Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Free ez form Subtract line 20 from line 19. Free ez form If less than zero, enter -0-   22. Free ez form If you completed Part 1, add lines 7 and 15. Free ez form Otherwise, enter the amount from line 15. Free ez form If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Free ez form Recognized gain. Free ez form Enter the smaller of line 21 or line 22. Free ez form   24. Free ez form Postponed gain. Free ez form Subtract line 23 from line 22. Free ez form If less than zero, enter -0-   Condemnation award. Free ez form   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Free ez form The award is also the amount you are paid for the sale of your property under threat of condemnation. Free ez form Payment of your debts. Free ez form   Amounts taken out of the award to pay your debts are considered paid to you. Free ez form Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Free ez form Example. Free ez form The state condemned your property for public use. Free ez form The award was set at $200,000. Free ez form The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Free ez form You are considered to have received the entire $200,000 as a condemnation award. Free ez form Interest on award. Free ez form   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Free ez form You must report the interest separately as ordinary income. Free ez form Payments to relocate. Free ez form   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Free ez form Do not include them in your income. Free ez form Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Free ez form Net condemnation award. Free ez form   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Free ez form If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Free ez form This is discussed later under Special assessment taken out of award. Free ez form Severance damages. Free ez form    Severance damages are not part of the award paid for the property condemned. Free ez form They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Free ez form   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Free ez form Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Free ez form   The contracting parties should agree on the specific amount of severance damages in writing. Free ez form If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Free ez form   You cannot make a completely new allocation of the total award after the transaction is completed. Free ez form However, you can show how much of the award both parties intended for severance damages. Free ez form The severance damages part of the award is determined from all the facts and circumstances. Free ez form Example. Free ez form You sold part of your property to the state under threat of condemnation. Free ez form The contract you and the condemning authority signed showed only the total purchase price. Free ez form It did not specify a fixed sum for severance damages. Free ez form However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Free ez form You may treat this part as severance damages. Free ez form Treatment of severance damages. Free ez form   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Free ez form Use them to reduce the basis of the remaining property. Free ez form If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Free ez form   If your net severance damages are more than the basis of your retained property, you have a gain. Free ez form You may be able to postpone reporting the gain. Free ez form See Postponement of Gain, later. Free ez form    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Free ez form Net severance damages. Free ez form   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Free ez form You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Free ez form The balance is your net severance damages. Free ez form Expenses of obtaining a condemnation award and severance damages. Free ez form   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Free ez form Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Free ez form If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Free ez form Example. Free ez form You receive a condemnation award and severance damages. Free ez form One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Free ez form You had legal expenses for the entire condemnation proceeding. Free ez form You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Free ez form You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Free ez form Special assessment retained out of award. Free ez form   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Free ez form An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Free ez form Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Free ez form   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Free ez form Example. Free ez form To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Free ez form You were awarded $5,000 for this and spent $300 to get the award. Free ez form Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Free ez form The city then paid you only $4,300. Free ez form Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Free ez form If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Free ez form The net award would not change, even if you later paid the assessment from the amount you received. Free ez form Severance damages received. Free ez form   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Free ez form Any balance of the special assessment is used to reduce the condemnation award. Free ez form Example. Free ez form You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Free ez form You spent $300 to obtain the severance damages. Free ez form A special assessment of $800 was retained out of the award. Free ez form The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Free ez form Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Free ez form Part business or rental. Free ez form   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Free ez form Figure your gain or loss separately because gain or loss on each part may be treated differently. Free ez form   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Free ez form Example. Free ez form You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Free ez form You rented half the building and lived in the other half. Free ez form You paid $25,000 for the building and spent an additional $1,000 for a new roof. Free ez form You claimed allowable depreciation of $4,600 on the rental half. Free ez form You spent $200 in legal expenses to obtain the condemnation award. Free ez form Figure your gain or loss as follows. Free ez form     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Free ez form Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Free ez form Your basis for the new property is the same as your basis for the old. Free ez form Money or unlike property received. Free ez form   You ordinarily must report the gain if you receive money or unlike property. Free ez form You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Free ez form You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Free ez form See Controlling interest in a corporation, later. Free ez form   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Free ez form If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Free ez form   The basis of the replacement property is its cost, reduced by the postponed gain. Free ez form Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Free ez form See Controlling interest in a corporation, later. Free ez form You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Free ez form Postponing gain on severance damages. Free ez form   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Free ez form See Treatment of severance damages, earlier. Free ez form You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Free ez form   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Free ez form If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Free ez form   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Free ez form Postponing gain on the sale of related property. Free ez form   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Free ez form You must meet the requirements explained earlier under Related property voluntarily sold. Free ez form You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Free ez form Buying replacement property from a related person. Free ez form   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Free ez form For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Free ez form   This rule applies to the following taxpayers. Free ez form C corporations. Free ez form Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Free ez form All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Free ez form   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Free ez form If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free ez form If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free ez form Exception. Free ez form   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Free ez form Advance payment. Free ez form   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Free ez form Replacement property. Free ez form   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Free ez form You do not have to use the actual funds from the condemnation award to acquire the replacement property. Free ez form Property you acquire by gift or inheritance does not qualify as replacement property. Free ez form Similar or related in service or use. Free ez form   Your replacement property must be similar or related in service or use to the property it replaces. Free ez form   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Free ez form For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Free ez form Owner-user. Free ez form   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Free ez form Example. Free ez form Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Free ez form Your replacement property is not similar or related in service or use to the condemned property. Free ez form To be similar or related in service or use, your replacement property must also be used by you as your home. Free ez form Owner-investor. Free ez form   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Free ez form You decide this by determining all the following information. Free ez form Whether the properties are of similar service to you. Free ez form The nature of the business risks connected with the properties. Free ez form What the properties demand of you in the way of management, service, and relations to your tenants. Free ez form Example. Free ez form You owned land and a building you rented to a manufacturing company. Free ez form The building was condemned. Free ez form During the replacement period, you had a new building built on other land you already owned. Free ez form You rented out the new building for use as a wholesale grocery warehouse. Free ez form The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Free ez form Your management activities. Free ez form The amount and kind of services you provide to your tenants. Free ez form The nature of your business risks connected with the properties. Free ez form Leasehold replaced with fee simple property. Free ez form   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Free ez form   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Free ez form A leasehold is property held under a lease, usually for a term of years. Free ez form Outdoor advertising display replaced with real property. Free ez form   You can elect to treat an outdoor advertising display as real property. Free ez form If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Free ez form For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Free ez form   You can make this election only if you did not claim a section 179 deduction for the display. Free ez form You cannot cancel this election unless you get the consent of the IRS. Free ez form   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Free ez form Substituting replacement property. Free ez form   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Free ez form But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Free ez form Controlling interest in a corporation. Free ez form   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Free ez form You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Free ez form Basis adjustment to corporation's property. Free ez form   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Free ez form You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Free ez form   Allocate this reduction to the following classes of property in the order shown below. Free ez form Property that is similar or related in service or use to the condemned property. Free ez form Depreciable property not reduced in (1). Free ez form All other property. Free ez form If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Free ez form The reduced basis of any single property cannot be less than zero. Free ez form Main home replaced. Free ez form   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Free ez form The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Free ez form   You must reduce the basis of your replacement property by the postponed gain. Free ez form Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Free ez form Example. Free ez form City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Free ez form The city paid you a condemnation award of $400,000. Free ez form Your adjusted basis in the property was $80,000. Free ez form You realize a gain of $320,000 ($400,000 − $80,000). Free ez form You purchased a new home for $100,000. Free ez form You can exclude $250,000 of the realized gain from your gross income. Free ez form The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Free ez form You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Free ez form The remaining $20,000 of realized gain is postponed. Free ez form Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Free ez form Replacement period. Free ez form   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Free ez form This is the replacement period. Free ez form   The replacement period for a condemnation begins on the earlier of the following dates. Free ez form The date on which you disposed of the condemned property. Free ez form The date on which the threat of condemnation began. Free ez form   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Free ez form However, see the exceptions below. Free ez form Three-year replacement period for certain property. Free ez form   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Free ez form However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Free ez form Five-year replacement period for certain property. Free ez form   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Free ez form Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Free ez form Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Free ez form Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Free ez form Extended replacement period for taxpayers affected by other federally declared disasters. Free ez form    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Free ez form For more information visit www. Free ez form irs. Free ez form gov/uac/Tax-Relief-in-Disaster-Situations. Free ez form Weather-related sales of livestock in an area eligible for federal assistance. Free ez form   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Free ez form    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Free ez form See Notice 2006-82. Free ez form You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Free ez form irs. Free ez form gov/irb/2006-39_IRB/ar13. Free ez form html. Free ez form    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Free ez form If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Free ez form You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Free ez form irs. Free ez form gov/irb/2013-45_IRB/ar04. Free ez form html. Free ez form The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Free ez form Determining when gain is realized. Free ez form   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Free ez form If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Free ez form   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Free ez form A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Free ez form   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Free ez form All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Free ez form All or part of the award is actually or constructively received. Free ez form For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Free ez form Replacement property bought before the condemnation. Free ez form   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Free ez form Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Free ez form Example. Free ez form On April 3, 2012, city authorities notified you that your property would be condemned. Free ez form On June 5, 2012, you acquired property to replace the property to be condemned. Free ez form You still had the new property when the city took possession of your old property on September 4, 2013. Free ez form You have made a replacement within the replacement period. Free ez form Extension. Free ez form   You can request an extension of the replacement period from the IRS director for your area. Free ez form You should apply before the end of the replacement period. Free ez form Your request should explain in detail why you need an extension. Free ez form The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Free ez form An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Free ez form   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Free ez form Extensions are usually limited to a period of 1 year or less. Free ez form The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Free ez form If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri
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Better Business Bureaus (BBBs) are nonprofit organizations that encourage honest advertising and selling practices and are supported primarily by local businesses. They offer a variety of consumer services, including consumer education materials; business reports, particularly unanswered or unsettled complaints or other problems; mediation and arbitration services; and information about charities and other organizations that are seeking public donations. They also provide ratings (A, B, C, D, or F) of local companies to express the BBB's confidence that the company operates in a trustworthy manner and demonstrates a willingness to resolve customer concerns.

Wallingford, CT

Website: Better Business Bureau

Email: info@ct.bbb.org

Address: Better Business Bureau
94 S. Turnpike Rd.
Wallingford, CT 06492

Phone Number: 203-269-2700

The Free Ez Form

Free ez form 5. Free ez form   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Free ez form Short-term lease. Free ez form Retail space. Free ez form Qualified long-term real property. Free ez form Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Free ez form If there is a connection between any income you receive and your business, the income is business income. Free ez form A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Free ez form You can have business income even if you are not involved in the activity on a regular full-time basis. Free ez form Income from work you do on the side in addition to your regular job can be business income. Free ez form You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Free ez form But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Free ez form For information on selling business assets, see chapter 3. Free ez form Nonemployee compensation. Free ez form Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Free ez form This includes amounts reported as nonemployee compensation in box 7 of the form. Free ez form You can find more information in the instructions on the back of the Form 1099-MISC you received. Free ez form Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Free ez form In most cases, your business income will be in the form of cash, checks, and credit card charges. Free ez form But business income can be in other forms, such as property or services. Free ez form These and other types of income are explained next. Free ez form If you are a U. Free ez form S. Free ez form citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Free ez form S. Free ez form law. Free ez form If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Free ez form For details, see Publication 54, Tax Guide for U. Free ez form S. Free ez form Citizens and Resident Aliens Abroad. Free ez form Bartering for Property or Services Bartering is an exchange of property or services. Free ez form You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Free ez form If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Free ez form Example 1. Free ez form You are a self-employed lawyer. Free ez form You perform legal services for a client, a small corporation. Free ez form In payment for your services, you receive shares of stock in the corporation. Free ez form You must include the fair market value of the shares in income. Free ez form Example 2. Free ez form You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Free ez form You must include the fair rental value of the apartment in your gross receipts. Free ez form Your landlord must include the fair market value of the work of art in his or her rental income. Free ez form Example 3. Free ez form You are a self-employed accountant. Free ez form Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Free ez form Members get in touch with other members directly and bargain for the value of the services to be performed. Free ez form In return for accounting services you provided for the house painter's business, the house painter painted your home. Free ez form You must include in gross receipts the fair market value of the services you received from the house painter. Free ez form The house painter must include the fair market value of your accounting services in his or her gross receipts. Free ez form Example 4. Free ez form You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Free ez form As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Free ez form You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Free ez form The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Free ez form It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Free ez form See Publication 15 (Circular E), Employer's Tax Guide. Free ez form Example 5. Free ez form You operate a plumbing business and use the cash method of accounting. Free ez form You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Free ez form Each member has access to a directory that lists the members of the club and the services available. Free ez form Members contact each other directly and request services to be performed. Free ez form You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Free ez form You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Free ez form Information returns. Free ez form   If you are involved in a bartering transaction, you may have to file either of the following forms. Free ez form Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Free ez form Form 1099-MISC, Miscellaneous Income. Free ez form For information about these forms, see the General Instructions for Certain Information Returns. Free ez form Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Free ez form , who provides services (maid services, etc. Free ez form ) for guests, report the rental income and expenses on Schedule C or C-EZ. Free ez form If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Free ez form For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Free ez form Real estate dealer. Free ez form   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Free ez form Rent you receive from real estate held for sale to customers is subject to SE tax. Free ez form However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Free ez form Trailer park owner. Free ez form   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Free ez form    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Free ez form Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Free ez form   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Free ez form   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Free ez form Hotels, boarding houses, and apartments. Free ez form   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Free ez form   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Free ez form An example of a service that is not normally provided for the convenience of the occupants is maid service. Free ez form However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Free ez form Prepaid rent. Free ez form   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Free ez form This is true no matter what accounting method or period you use. Free ez form Lease bonus. Free ez form   A bonus you receive from a lessee for granting a lease is an addition to the rent. Free ez form Include it in your gross receipts in the year received. Free ez form Lease cancellation payments. Free ez form   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Free ez form Payments to third parties. Free ez form   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Free ez form A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Free ez form Settlement payments. Free ez form   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Free ez form Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Free ez form ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Free ez form Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Free ez form If you receive any of those payments, include them in your gross receipts as explained in that discussion. Free ez form Interest and Dividend Income Interest and dividends may be considered business income. Free ez form Interest. Free ez form   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Free ez form Interest received on loans is business income if you are in the business of lending money. Free ez form Uncollectible loans. Free ez form   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Free ez form If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Free ez form See Bad Debts in chapter 8. Free ez form Unstated interest. Free ez form   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Free ez form See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Free ez form Dividends. Free ez form   Generally, dividends are business income to dealers in securities. Free ez form For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Free ez form If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Free ez form   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Free ez form To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Free ez form Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Free ez form General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Free ez form Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Free ez form If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Free ez form Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Free ez form Price reduced after purchase. Free ez form   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Free ez form Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Free ez form Deductible debt. Free ez form   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Free ez form Example. Free ez form You get accounting services for your business on credit. Free ez form Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Free ez form Your accountant forgives part of the amount you owe for the accounting services. Free ez form How you treat the canceled debt depends on your method of accounting. Free ez form Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Free ez form Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Free ez form   For information on the cash and accrual methods of accounting, see chapter 2. Free ez form Exclusions Do not include canceled debt in income in the following situations. Free ez form However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Free ez form For more information, see Form 982. Free ez form The cancellation takes place in a bankruptcy case under title 11 of the U. Free ez form S. Free ez form Code (relating to bankruptcy). Free ez form See Publication 908, Bankruptcy Tax Guide. Free ez form The cancellation takes place when you are insolvent. Free ez form You can exclude the canceled debt to the extent you are insolvent. Free ez form See Publication 908. Free ez form The canceled debt is a qualified farm debt owed to a qualified person. Free ez form See chapter 3 in Publication 225, Farmer's Tax Guide. Free ez form The canceled debt is a qualified real property business debt. Free ez form This situation is explained later. Free ez form The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Free ez form See Form 982. Free ez form If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Free ez form If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Free ez form Debt. Free ez form   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Free ez form Qualified real property business debt. Free ez form   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Free ez form If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Free ez form Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Free ez form However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Free ez form Cancellation of qualified real property business debt. Free ez form   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Free ez form It was incurred or assumed in connection with real property used in a trade or business. Free ez form It was secured by such real property. Free ez form It was incurred or assumed at either of the following times. Free ez form Before January 1, 1993. Free ez form After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Free ez form It is debt to which you choose to apply these rules. Free ez form   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Free ez form   You cannot exclude more than either of the following amounts. Free ez form The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Free ez form The total adjusted bases of depreciable real property held by you immediately before the cancellation. Free ez form These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Free ez form Do not take into account depreciable real property acquired in contemplation of the cancellation. Free ez form Election. Free ez form   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Free ez form You must file your return by the due date (including extensions). Free ez form If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free ez form For more information, see When To File in the form instructions. Free ez form Other Income The following discussion explains how to treat other types of business income you may receive. Free ez form Restricted property. Free ez form   Restricted property is property that has certain restrictions that affect its value. Free ez form If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Free ez form However, you can choose to be taxed in the year you receive the property. Free ez form For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Free ez form Gains and losses. Free ez form   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Free ez form Instead, you must report these gains and losses on other forms. Free ez form For more information, see chapter 3. Free ez form Promissory notes. Free ez form   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Free ez form In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Free ez form Lost income payments. Free ez form   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Free ez form Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Free ez form Damages. Free ez form   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Free ez form Patent infringement. Free ez form Breach of contract or fiduciary duty. Free ez form Antitrust injury. Free ez form Economic injury. Free ez form   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Free ez form Your deduction is the smaller of the following amounts. Free ez form The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Free ez form Your loss from the injury that you have not yet deducted. Free ez form Punitive damages. Free ez form   You must also include punitive damages in income. Free ez form Kickbacks. Free ez form   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Free ez form However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Free ez form Recovery of items previously deducted. Free ez form   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Free ez form However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Free ez form If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Free ez form Example. Free ez form Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Free ez form He also had 2 personal exemptions for a total of $7,800. Free ez form He would not pay income tax even if he did not deduct the bad debt. Free ez form Therefore, he will not report as income any part of the $300 he may recover in any future year. Free ez form Exception for depreciation. Free ez form   This rule does not apply to depreciation. Free ez form You recover depreciation using the rules explained next. Free ez form Recapture of depreciation. Free ez form   In the following situations, you have to recapture the depreciation deduction. Free ez form This means you include in income part or all of the depreciation you deducted in previous years. Free ez form Listed property. Free ez form   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Free ez form You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Free ez form Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Free ez form For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Free ez form That chapter explains how to determine whether property is used more than 50% in your business. Free ez form Section 179 property. Free ez form   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Free ez form You do this by including in income on Schedule C part of the deduction you took. Free ez form Use Part IV of Form 4797 to figure the amount to include on Schedule C. Free ez form See chapter 2 in Publication 946 to find out when you recapture the deduction. Free ez form Sale or exchange of depreciable property. Free ez form   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Free ez form You figure the income due to depreciation recapture in Part III of Form 4797. Free ez form For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Free ez form Items That Are Not Income In some cases the property or money you receive is not income. Free ez form Appreciation. Free ez form   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Free ez form Consignments. Free ez form   Consignments of merchandise to others to sell for you are not sales. Free ez form The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Free ez form Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Free ez form Merchandise you have shipped out on consignment is included in your inventory until it is sold. Free ez form   Do not include merchandise you receive on consignment in your inventory. Free ez form Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Free ez form Construction allowances. Free ez form   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Free ez form Under a short-term lease of retail space. Free ez form For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Free ez form Amount you can exclude. Free ez form   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Free ez form Short-term lease. Free ez form   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Free ez form The following rules apply in determining whether the lease is for 15 years or less. Free ez form Take into account options to renew when figuring whether the lease is for 15 years or less. Free ez form But do not take into account any option to renew at fair market value determined at the time of renewal. Free ez form Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Free ez form Retail space. Free ez form   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Free ez form Qualified long-term real property. Free ez form   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Free ez form Exchange of like-kind property. Free ez form   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Free ez form This means that the gain is not taxable and the loss is not deductible. Free ez form A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Free ez form For more information, see Form 8824. Free ez form Leasehold improvements. Free ez form   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Free ez form However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Free ez form Loans. Free ez form   Money borrowed through a bona fide loan is not income. Free ez form Sales tax. Free ez form   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Free ez form Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Free ez form Direct seller. Free ez form   You must report all income you receive as a direct seller on Schedule C or C-EZ. Free ez form This includes any of the following. Free ez form Income from sales—payments you receive from customers for products they buy from you. Free ez form Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Free ez form Prizes, awards, and gifts you receive from your selling business. Free ez form You must report this income regardless of whether it is reported to you on an information return. Free ez form   You are a direct seller if you meet all the following conditions. Free ez form You are engaged in one of the following trades or businesses. Free ez form Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Free ez form Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Free ez form Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Free ez form Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Free ez form Executor or administrator. Free ez form   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Free ez form A nonprofessional fiduciary (personal representative) and both of the following apply. Free ez form The estate includes an active trade or business in which you actively participate. Free ez form Your fees are related to the operation of that trade or business. Free ez form A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Free ez form    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Free ez form Fishing crew member. Free ez form    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Free ez form Insurance agent, former. Free ez form   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Free ez form You received payments after your agreement to perform services for the company ended. Free ez form You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Free ez form You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Free ez form The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Free ez form The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Free ez form Insurance agent, retired. Free ez form   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Free ez form Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Free ez form   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Free ez form Newspaper carrier or distributor. Free ez form   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Free ez form You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Free ez form Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Free ez form You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Free ez form   This rule applies whether or not you hire others to help you make deliveries. Free ez form It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Free ez form Newspaper or magazine vendor. Free ez form   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Free ez form You sell newspapers or magazines to ultimate consumers. Free ez form You sell them at a fixed price. Free ez form Your earnings are based on the difference between the sales price and your cost of goods sold. Free ez form   This rule applies whether or not you are guaranteed a minimum amount of earnings. Free ez form It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Free ez form Notary public. Free ez form   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Free ez form These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Free ez form Public official. Free ez form   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Free ez form This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Free ez form Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Free ez form   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Free ez form Real estate agent or direct seller. Free ez form   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Free ez form Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Free ez form You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Free ez form Securities dealer. Free ez form   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Free ez form For more information, see sections 1256 and 1402(i). Free ez form Securities trader. Free ez form   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Free ez form As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Free ez form However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Free ez form For more information about securities traders, see Publication 550, Investment Income and Expenses. Free ez form Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Free ez form This section discusses some of the more common differences that may affect business transactions. Free ez form Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Free ez form If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Free ez form Dealers in real estate are not allowed to use inventories. Free ez form For more information on inventories, see chapter 2. Free ez form Income paid to a third party. Free ez form   All income you earn is taxable to you. Free ez form You cannot avoid tax by having the income paid to a third party. Free ez form Example. Free ez form You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Free ez form The amount paid to your son is gross income to you. Free ez form Cash discounts. Free ez form   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Free ez form For income tax purposes, you can use either of the following two methods to account for cash discounts. Free ez form Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Free ez form Credit the cash discount to a discount income account. Free ez form You must use the chosen method every year for all your purchase discounts. Free ez form   If you use the second method, the credit balance in the account at the end of your tax year is business income. Free ez form Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Free ez form When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Free ez form Trade discounts. Free ez form   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Free ez form Do not enter these discounts on your books of account. Free ez form Instead, use only the net amount as the cost of the merchandise purchased. Free ez form For more information, see Trade discounts in chapter 6. Free ez form Payment placed in escrow. Free ez form   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Free ez form However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Free ez form Sales returns and allowances. Free ez form   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Free ez form Advance payments. Free ez form   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Free ez form Insurance proceeds. Free ez form   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Free ez form You cannot deduct the reimbursed part of a casualty or theft loss. Free ez form   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. 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