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H&r block coupons 9. H&r block coupons   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. H&r block coupons Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. H&r block coupons Amount to report as ordinary income. H&r block coupons Applicable percentage. H&r block coupons Amount to report as ordinary income. H&r block coupons Applicable percentage. H&r block coupons Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. H&r block coupons When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. H&r block coupons Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. H&r block coupons Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. H&r block coupons Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. H&r block coupons Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. H&r block coupons Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). H&r block coupons Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. H&r block coupons Table 9-1. H&r block coupons Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. H&r block coupons Held 24 mos. H&r block coupons  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. H&r block coupons Held 12 mos. H&r block coupons   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). H&r block coupons Do not take that gain into account as section 1231 gain. H&r block coupons Section 1231 transactions. H&r block coupons   Gain or loss on the following transactions is subject to section 1231 treatment. H&r block coupons Sale or exchange of cattle and horses. H&r block coupons The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. H&r block coupons Sale or exchange of other livestock. H&r block coupons This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. H&r block coupons Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. H&r block coupons Other livestock does not include poultry. H&r block coupons Sale or exchange of depreciable personal property. H&r block coupons This property must be used in your business and held longer than 1 year. H&r block coupons Generally, property held for the production of rents or royalties is considered to be used in a trade or business. H&r block coupons Examples of depreciable personal property include farm machinery and trucks. H&r block coupons It also includes amortizable section 197 intangibles. H&r block coupons Sale or exchange of real estate. H&r block coupons This property must be used in your business and held longer than 1 year. H&r block coupons Examples are your farm or ranch (including barns and sheds). H&r block coupons Sale or exchange of unharvested crops. H&r block coupons The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. H&r block coupons You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). H&r block coupons Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. H&r block coupons Distributive share of partnership gains and losses. H&r block coupons Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). H&r block coupons Cutting or disposal of timber. H&r block coupons Special 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, as described in chapter 8 under Timber . H&r block coupons Condemnation. H&r block coupons The condemned property (defined in chapter 11) must have been held longer than 1 year. H&r block coupons It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. H&r block coupons It cannot be property held for personal use. H&r block coupons Casualty or theft. H&r block coupons The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). H&r block coupons You must have held the property longer than 1 year. H&r block coupons However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. H&r block coupons Section 1231 does not apply to personal casualty gains and losses. H&r block coupons See chapter 11 for information on how to treat those gains and losses. H&r block coupons If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. H&r block coupons See Table 9-1. H&r block coupons Property for sale to customers. H&r block coupons   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. H&r block coupons If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. H&r block coupons Treatment as ordinary or capital. H&r block coupons   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. H&r block coupons If you have a net section 1231 loss, it is an ordinary loss. H&r block coupons If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. H&r block coupons The rest, if any, is long-term capital gain. H&r block coupons Nonrecaptured section 1231 losses. H&r block coupons   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. H&r block coupons These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. H&r block coupons Example. H&r block coupons In 2013, Ben has a $2,000 net section 1231 gain. H&r block coupons To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. H&r block coupons From 2008 through 2012 he had the following section 1231 gains and losses. H&r block coupons Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. H&r block coupons 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. H&r block coupons Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. H&r block coupons To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. H&r block coupons For more information, see chapter 3 of Publication 544. H&r block coupons Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. H&r block coupons Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. H&r block coupons See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. H&r block coupons Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. H&r block coupons Personal property (either tangible or intangible). H&r block coupons Other tangible property (except buildings and their structural components) used as any of the following. H&r block coupons See Buildings and structural components below. H&r block coupons An integral part of manufacturing, production, or extraction, or of furnishing certain services. H&r block coupons A research facility in any of the activities in (a). H&r block coupons A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). H&r block coupons That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. H&r block coupons Amortization of certified pollution control facilities. H&r block coupons The section 179 expense deduction. H&r block coupons Deduction for clean-fuel vehicles and certain refueling property. H&r block coupons Expenditures to remove architectural and transportation barriers to the handicapped and elderly. H&r block coupons Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. H&r block coupons Single purpose agricultural (livestock) or horticultural structures. H&r block coupons Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. H&r block coupons Buildings and structural components. H&r block coupons   Section 1245 property does not include buildings and structural components. H&r block coupons The term building includes a house, barn, warehouse, or garage. H&r block coupons The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. H&r block coupons   Do not treat a structure that is essentially machinery or equipment as a building or structural component. H&r block coupons Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. H&r block coupons   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. H&r block coupons Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. H&r block coupons Facility for bulk storage of fungible commodities. H&r block coupons   This is a facility used mainly for the bulk storage of fungible commodities. H&r block coupons Bulk storage means storage of a commodity in a large mass before it is used. H&r block coupons For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. H&r block coupons To be fungible, a commodity must be such that one part may be used in place of another. H&r block coupons Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. H&r block coupons The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. H&r block coupons The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). H&r block coupons For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. H&r block coupons For details, see chapter 3 of Publication 544. H&r block coupons Use Part III of Form 4797 to figure the ordinary income part of the gain. H&r block coupons Depreciation claimed on other property or claimed by other taxpayers. H&r block coupons   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. H&r block coupons Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. H&r block coupons For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. H&r block coupons Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). H&r block coupons Example. H&r block coupons Jeff Free paid $120,000 for a tractor in 2012. H&r block coupons On February 23, 2013, he traded it for a chopper and paid an additional $30,000. H&r block coupons To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. H&r block coupons Jeff can also depreciate the additional $30,000 for the chopper. H&r block coupons Depreciation and amortization. H&r block coupons   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. H&r block coupons See Depreciation Recapture in chapter 3 of Publication 544 for more details. H&r block coupons Ordinary depreciation deductions. H&r block coupons Section 179 deduction (see chapter 7). H&r block coupons Any special depreciation allowance. H&r block coupons Amortization deductions for all the following costs. H&r block coupons Acquiring a lease. H&r block coupons Lessee improvements. H&r block coupons Pollution control facilities. H&r block coupons Reforestation expenses. H&r block coupons Section 197 intangibles. H&r block coupons Qualified disaster expenses. H&r block coupons Franchises, trademarks, and trade names acquired before August 11, 1993. H&r block coupons Example. H&r block coupons You file your returns on a calendar year basis. H&r block coupons In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. H&r block coupons You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. H&r block coupons You did not claim the section 179 expense deduction for the truck. H&r block coupons You sold it in May 2013 for $7,000. H&r block coupons The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). H&r block coupons Figure the gain treated as ordinary income as follows. H&r block coupons 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. H&r block coupons   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. H&r block coupons If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. H&r block coupons If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. H&r block coupons This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. H&r block coupons Disposition of plants and animals. H&r block coupons   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. H&r block coupons If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. H&r block coupons For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. H&r block coupons For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. H&r block coupons You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. H&r block coupons Example. H&r block coupons Janet Maple sold her apple orchard in 2013 for $80,000. H&r block coupons Her adjusted basis at the time of sale was $60,000. H&r block coupons She bought the orchard in 2006, but the trees did not produce a crop until 2009. H&r block coupons Her pre-productive expenses were $6,000. H&r block coupons She elected not to use the uniform capitalization rules. H&r block coupons Janet must treat $6,000 of the gain as ordinary income. H&r block coupons Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. H&r block coupons It includes buildings and structural components that are not section 1245 property (discussed earlier). H&r block coupons It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. H&r block coupons A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. H&r block coupons Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. H&r block coupons To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. H&r block coupons You will not have additional depreciation if any of the following apply to the property disposed of. H&r block coupons You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. H&r block coupons You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. H&r block coupons The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. H&r block coupons These properties are depreciated using the straight line method. H&r block coupons Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. H&r block coupons This applies even if no payments are received in that year. H&r block coupons If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. H&r block coupons For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. H&r block coupons If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. H&r block coupons To do this, allocate the selling price and the payments you receive in the year of sale to each asset. H&r block coupons Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. H&r block coupons For more information on installment sales, see chapter 10. H&r block coupons Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. H&r block coupons By gift. H&r block coupons At death. H&r block coupons In like-kind exchanges. H&r block coupons In involuntary conversions. H&r block coupons Publication 544 also explains how to handle a single transaction involving multiple properties. H&r block coupons Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. H&r block coupons Deductions for soil and water conservation expenditures (section 1252 property). H&r block coupons Exclusions from income for certain cost sharing payments (section 1255 property). H&r block coupons Section 1252 property. H&r block coupons   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. H&r block coupons Exceptions. H&r block coupons   Do not treat gain on the following transactions as gain on section 1252 property. H&r block coupons Disposition of farmland by gift. H&r block coupons Transfer of farm property at death (except for income in respect of a decedent). H&r block coupons For more information, see Regulations section 1. H&r block coupons 1252-2. H&r block coupons Amount to report as ordinary income. H&r block coupons   You report as ordinary income the lesser of the following amounts. H&r block coupons Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). H&r block coupons The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. H&r block coupons Applicable percentage. H&r block coupons   The applicable percentage is based on the length of time you held the land. H&r block coupons If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. H&r block coupons If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. H&r block coupons If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. H&r block coupons Example. H&r block coupons You acquired farmland on January 19, 2005. H&r block coupons On October 3, 2013, you sold the land at a $30,000 gain. H&r block coupons Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. H&r block coupons The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. H&r block coupons You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. H&r block coupons Section 1255 property. H&r block coupons   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. H&r block coupons If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. H&r block coupons Amount to report as ordinary income. H&r block coupons   You report as ordinary income the lesser of the following amounts. H&r block coupons The applicable percentage of the total excluded cost-sharing payments. H&r block coupons The gain on the disposition of the property. H&r block coupons You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. H&r block coupons However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. H&r block coupons Applicable percentage. H&r block coupons   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. H&r block coupons If the property is held less than 10 years after you receive the payments, the percentage is 100%. H&r block coupons After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. H&r block coupons Form 4797, Part III. H&r block coupons   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. H&r block coupons Prev  Up  Next   Home   More Online Publications