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Free tax preparation online Publication 15-A - Additional Material Prev  Up  Next   Home   More Online Publications
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Halloween

On Halloween—October 31—many American children dress up in funny or scary costumes and go "trick or treating" by knocking on doors in their neighborhood. The neighbors are expected to respond by giving them candy or other small gifts. Children and adults also might celebrate Halloween with costume parties.


Halloween Safety

  • Child Pedestrian Safety on Halloween
    Children are four times more likely to be in fatal pedestrian accidents on Halloween than on any other night of the year.
  • Decorative Contact Lenses – How to Buy Them Safely
    Decorative contact lenses are prescription devices that should only be purchased from authorized distributors. Using over-the-counter lenses could lead to eye damage or even blindness. Learn how to buy and use decorative contact lenses safely.
  • Halloween Food Safety
    Party food safety advice from the manager of the USDA Meat and Poultry Hotline.
  • Halloween Food Safety Tips
    Steps to help your children have a safe Halloween, and tips for Halloween parties, from the U.S. Food and Drug Administration.
  • Halloween Health and Safety Tips
    Tips to help make the festivities fun and safe for trick-or-treaters and party guests.
  • Halloween Safety Tips
    Stay safe this Halloween with safety tips from the U.S. Consumer Product Safety Commission. (PDF)
  • Makeup Safety
    Help keep your fun from leaving you with a rash, swollen eyelids, or other grief.
  • Reduce Halloween Candy Overload
    Do you want to stop children from eating too much candy this Halloween? The U.S. Department of Health and Human Services offers tips—like giving out stickers, toys, or bubbles instead of candy, and trading a toy or extra allowance for your children's candy.
  • Stay Safe and Healthy This Halloween
    Ideas for safe costumes, healthy treats, safe trick-or-treating, and staying active this Halloween, from the Centers for Disease Control and Prevention.

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Halloween Facts and Fun

  • Halloween Around the World
    Festivals commemorating the dead can be found in many cultures. Learn more from the National Endowment for the Humanities.
  • Halloween at the White House
    Photos of White House Halloween festivities from years past.
  • Halloween by the Numbers
    How many millions of pounds of pumpkins are produced each year in the U.S.? And how many pounds of candy does an American eat annually? The U.S. Census Department knows.
  • Halloween Capital of the World
    Did you know that Halloween has a capital? Find out where, from the Library of Congress.

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Especially for Kids

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History of Halloween

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Halloween Recipes

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The Free Tax Preparation Online

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