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Income Tax Forms 2010

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Income Tax Forms 2010

Income tax forms 2010 Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Income tax forms 2010 Cost Basis The basis of property you buy is usually its cost. Income tax forms 2010 The cost is the amount you pay in cash, debt obligations, other property, or services. Income tax forms 2010 Your cost also includes amounts you pay for the following items. Income tax forms 2010 Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if assumed for the seller). Income tax forms 2010  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. Income tax forms 2010 Loans with low or no interest. Income tax forms 2010   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. Income tax forms 2010 You generally have unstated interest if your interest rate is less than the applicable federal rate. Income tax forms 2010 For more information, see Unstated Interest and Original Issue Discount in Publication 537. Income tax forms 2010 Purchase of a business. Income tax forms 2010   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. Income tax forms 2010 Allocate the price among the various assets, including any section 197 intangibles. Income tax forms 2010 See Allocating the Basis, later. Income tax forms 2010 Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Income tax forms 2010 If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. Income tax forms 2010 You must adjust the basis of stocks for certain events that occur after purchase. Income tax forms 2010 See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. Income tax forms 2010 Identifying stock or bonds sold. Income tax forms 2010   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. Income tax forms 2010 If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Income tax forms 2010 For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Income tax forms 2010 Mutual fund shares. Income tax forms 2010   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. Income tax forms 2010 For more information, see Publication 550. Income tax forms 2010 Real Property Real property, also called real estate, is land and generally anything built on or attached to it. Income tax forms 2010 If you buy real property, certain fees and other expenses become part of your cost basis in the property. Income tax forms 2010 Real estate taxes. Income tax forms 2010   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Income tax forms 2010 You cannot deduct them as taxes. Income tax forms 2010   If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Income tax forms 2010 Do not include that amount in the basis of the property. Income tax forms 2010 If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Income tax forms 2010 Settlement costs. Income tax forms 2010   Your basis includes the settlement fees and closing costs for buying property. Income tax forms 2010 You cannot include in your basis the fees and costs for getting a loan on property. Income tax forms 2010 A fee for buying property is a cost that must be paid even if you bought the property for cash. Income tax forms 2010   The following items are some of the settlement fees or closing costs you can include in the basis of your property. Income tax forms 2010 Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Income tax forms 2010   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Income tax forms 2010   The following items are some settlement fees and closing costs you cannot include in the basis of the property. Income tax forms 2010 Casualty insurance premiums. Income tax forms 2010 Rent for occupancy of the property before closing. Income tax forms 2010 Charges for utilities or other services related to occupancy of the property before closing. Income tax forms 2010 Charges connected with getting a loan. Income tax forms 2010 The following are examples of these charges. Income tax forms 2010 Points (discount points, loan origination fees). Income tax forms 2010 Mortgage insurance premiums. Income tax forms 2010 Loan assumption fees. Income tax forms 2010 Cost of a credit report. Income tax forms 2010 Fees for an appraisal required by a lender. Income tax forms 2010 Fees for refinancing a mortgage. Income tax forms 2010 If these costs relate to business property, items (1) through (3) are deductible as business expenses. Income tax forms 2010 Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. Income tax forms 2010 Points. Income tax forms 2010   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Income tax forms 2010 Generally, you deduct the points over the term of the loan. Income tax forms 2010 For more information on how to deduct points, see Points in chapter 4 of Publication 535. Income tax forms 2010 Points on home mortgage. Income tax forms 2010   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. Income tax forms 2010 If certain requirements are met, you can deduct the points in full for the year in which they are paid. Income tax forms 2010 Reduce the basis of your home by any seller-paid points. Income tax forms 2010 For more information, see Points in Publication 936, Home Mortgage Interest Deduction. Income tax forms 2010 Assumption of mortgage. Income tax forms 2010   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Income tax forms 2010 Example. Income tax forms 2010 If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. Income tax forms 2010 Constructing assets. Income tax forms 2010   If you build property or have assets built for you, your expenses for this construction are part of your basis. Income tax forms 2010 Some of these expenses include the following costs. Income tax forms 2010 Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Income tax forms 2010 In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. Income tax forms 2010 You must include them in the asset's basis. Income tax forms 2010 Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. Income tax forms 2010    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Income tax forms 2010 Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. Income tax forms 2010 If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. Income tax forms 2010 In certain circumstances, you may be subject to the uniform capitalization rules, next. Income tax forms 2010 Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. Income tax forms 2010 Activities subject to the rules. Income tax forms 2010   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. Income tax forms 2010 Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. Income tax forms 2010 However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. Income tax forms 2010   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. Income tax forms 2010 Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. Income tax forms 2010 Tangible personal property includes films, sound recordings, video tapes, books, or similar property. Income tax forms 2010    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. Income tax forms 2010 To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. Income tax forms 2010 You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Income tax forms 2010   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. Income tax forms 2010 Example. Income tax forms 2010 If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. Income tax forms 2010 The nondeductible part of the cost is not subject to the uniform capitalization rules. Income tax forms 2010 More information. Income tax forms 2010   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. Income tax forms 2010 Exceptions. Income tax forms 2010   The following are not subject to the uniform capitalization rules. Income tax forms 2010 Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. Income tax forms 2010 For other exceptions to the uniform capitalization rules, see section 1. Income tax forms 2010 263A-1(b) of the regulations. Income tax forms 2010   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. Income tax forms 2010 Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. Income tax forms 2010 The basis of an intangible asset is usually the cost to buy or create it. Income tax forms 2010 If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. Income tax forms 2010 The basis of certain intangibles can be amortized. Income tax forms 2010 See chapter 8 of Publication 535 for information on the amortization of these costs. Income tax forms 2010 Patents. Income tax forms 2010   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. Income tax forms 2010 If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. Income tax forms 2010 The value of the inventor's time spent on an invention is not part of the basis. Income tax forms 2010 Copyrights. Income tax forms 2010   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. Income tax forms 2010 Do not include the value of your time as the author, or any other person's time you did not pay for. Income tax forms 2010 Franchises, trademarks, and trade names. Income tax forms 2010   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. Income tax forms 2010 Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. Income tax forms 2010 You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Income tax forms 2010 See Trade or Business Acquired below. Income tax forms 2010 Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. Income tax forms 2010 If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Income tax forms 2010 However, see Trade or Business Acquired, next. Income tax forms 2010 Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Income tax forms 2010 Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Income tax forms 2010 Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. Income tax forms 2010 Certificates of deposit, U. Income tax forms 2010 S. Income tax forms 2010 Government securities, foreign currency, and actively traded personal property, including stock and securities. Income tax forms 2010 Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. Income tax forms 2010 Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. Income tax forms 2010 All other assets except section 197 intangibles, goodwill, and going concern value. Income tax forms 2010 Section 197 intangibles except goodwill and going concern value. Income tax forms 2010 Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Income tax forms 2010 Agreement. Income tax forms 2010   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. Income tax forms 2010 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Income tax forms 2010 Reporting requirement. Income tax forms 2010   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Income tax forms 2010 Use Form 8594 to provide this information. Income tax forms 2010 The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Income tax forms 2010 More information. Income tax forms 2010   See Sale of a Business in chapter 2 of Publication 544 for more information. Income tax forms 2010 Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. Income tax forms 2010 Figure the basis of each asset by multiplying the lump sum by a fraction. Income tax forms 2010 The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Income tax forms 2010 If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. Income tax forms 2010 Demolition of building. Income tax forms 2010   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. Income tax forms 2010 Do not claim the costs as a current deduction. Income tax forms 2010 Modification of building. Income tax forms 2010   A modification of a building will not be treated as a demolition if the following conditions are satisfied. Income tax forms 2010 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. Income tax forms 2010   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. Income tax forms 2010   If these conditions are met, add the costs of the modifications to the basis of the building. Income tax forms 2010 Subdivided lots. Income tax forms 2010   If you buy a tract of land and subdivide it, you must determine the basis of each lot. Income tax forms 2010 This is necessary because you must figure the gain or loss on the sale of each individual lot. Income tax forms 2010 As a result, you do not recover your entire cost in the tract until you have sold all of the lots. Income tax forms 2010   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. Income tax forms 2010 The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. Income tax forms 2010 Future improvement costs. Income tax forms 2010   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. Income tax forms 2010 See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. Income tax forms 2010 Use of erroneous cost basis. Income tax forms 2010   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. Income tax forms 2010 Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. Income tax forms 2010 Example. Income tax forms 2010 You bought a tract of land to which you assigned a cost of $15,000. Income tax forms 2010 You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. Income tax forms 2010 You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. Income tax forms 2010 Several years later you determine that your original basis in the tract was $22,500 and not $15,000. Income tax forms 2010 You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. Income tax forms 2010 You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). Income tax forms 2010 You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. Income tax forms 2010 Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. Income tax forms 2010 The result of these adjustments to the basis is the adjusted basis. Income tax forms 2010 Increases to Basis Increase the basis of any property by all items properly added to a capital account. Income tax forms 2010 These include the cost of any improvements having a useful life of more than 1 year. Income tax forms 2010 Rehabilitation expenses also increase basis. Income tax forms 2010 However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. Income tax forms 2010 If you have to recapture any of the credit, increase your basis by the recaptured amount. Income tax forms 2010 If you make additions or improvements to business property, keep separate accounts for them. Income tax forms 2010 Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. Income tax forms 2010 For more information, see Publication 946. Income tax forms 2010 The following items increase the basis of property. Income tax forms 2010 The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. Income tax forms 2010 Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Income tax forms 2010 Do not deduct them as taxes. Income tax forms 2010 However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. Income tax forms 2010 Example. Income tax forms 2010 Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. Income tax forms 2010 Add the assessment to your property's basis. Income tax forms 2010 In this example, the assessment is a depreciable asset. Income tax forms 2010 Deducting vs. Income tax forms 2010 Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. Income tax forms 2010 For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. Income tax forms 2010 However, you can choose either to deduct or to capitalize certain other costs. Income tax forms 2010 If you capitalize these costs, include them in your basis. Income tax forms 2010 If you deduct them, do not include them in your basis. Income tax forms 2010 See Uniform Capitalization Rules earlier. Income tax forms 2010 The costs you can choose to deduct or to capitalize include the following. Income tax forms 2010 Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. Income tax forms 2010 If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Income tax forms 2010 For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. Income tax forms 2010 Table 1. Income tax forms 2010 Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. Income tax forms 2010 Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. Income tax forms 2010 Some of these items are discussed next. Income tax forms 2010 Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. Income tax forms 2010 You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. Income tax forms 2010 To make this determination, compare the repaired property to the property before the casualty. Income tax forms 2010 For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. Income tax forms 2010 Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. Income tax forms 2010 It reduces the basis of the affected part of the property. Income tax forms 2010 If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Income tax forms 2010 Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. Income tax forms 2010 For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. Income tax forms 2010 Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. Income tax forms 2010 This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. Income tax forms 2010 If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. Income tax forms 2010 Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Income tax forms 2010 For more information about the section 179 deduction, see Publication 946. Income tax forms 2010 Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. Income tax forms 2010 Reduce the basis of the property for which you received the subsidy by the excluded amount. Income tax forms 2010 For more information on this subsidy, see Publication 525. Income tax forms 2010 Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Income tax forms 2010 If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Income tax forms 2010 If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Income tax forms 2010 Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. Income tax forms 2010 If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. Income tax forms 2010 In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. Income tax forms 2010 For information on figuring depreciation, see Publication 946. Income tax forms 2010 If you are claiming depreciation on a business vehicle, see Publication 463. Income tax forms 2010 If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. Income tax forms 2010 Include the excess depreciation in your gross income and add it to your basis in the property. Income tax forms 2010 For information on the computation of excess depreciation, see chapter 4 in Publication 463. Income tax forms 2010 Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Income tax forms 2010 A debt includes any indebtedness for which you are liable or which attaches to property you hold. Income tax forms 2010 You can exclude canceled debt from income in the following situations. Income tax forms 2010 Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). Income tax forms 2010 If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Income tax forms 2010 However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. Income tax forms 2010 For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. Income tax forms 2010 For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. Income tax forms 2010 For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. Income tax forms 2010 Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. Income tax forms 2010 For more information on the rules for the sale of a home, see Publication 523. Income tax forms 2010 Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. Income tax forms 2010 This also applies to amounts you received under an employer's adoption assistance program and excluded from income. Income tax forms 2010 For more information Form 8839, Qualified Adoption Expenses. Income tax forms 2010 Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. Income tax forms 2010 You must reduce your basis in that property by the credit claimed. Income tax forms 2010 For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. Income tax forms 2010 Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. Income tax forms 2010 You also paid commissions of $2,000 and title search and legal fees of $600. Income tax forms 2010 You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. Income tax forms 2010 Immediately you spent $20,000 in remodeling the building before you placed it in service. Income tax forms 2010 You were allowed depreciation of $14,526 for the years 2005 through 2009. Income tax forms 2010 In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. Income tax forms 2010 You claimed a deduction for this loss. Income tax forms 2010 You spent $5,500 to repair the damages and extend the useful life of the building. Income tax forms 2010 The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. Income tax forms 2010 It is not affected by any of the above adjustments. Income tax forms 2010 Basis Other Than Cost There are many times when you cannot use cost as basis. Income tax forms 2010 In these cases, the fair market value or the adjusted basis of property may be used. Income tax forms 2010 Adjusted basis is discussed earlier. Income tax forms 2010 Fair market value (FMV). Income tax forms 2010   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Income tax forms 2010 Sales of similar property on or about the same date may be helpful in figuring the property's FMV. Income tax forms 2010 Property Received for Services If you receive property for services, include the property's FMV in income. Income tax forms 2010 The amount you include in income becomes your basis. Income tax forms 2010 If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Income tax forms 2010 Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. Income tax forms 2010 If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Income tax forms 2010 Your basis in the property is its FMV (your purchase price plus the amount you include in income). Income tax forms 2010 If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. Income tax forms 2010 However, your basis in the property is still its FMV. Income tax forms 2010 See Employee Discounts in Publication 15-B. Income tax forms 2010 Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. Income tax forms 2010 Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. Income tax forms 2010 There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. Income tax forms 2010 When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. Income tax forms 2010 Example. Income tax forms 2010 Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. Income tax forms 2010 The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. Income tax forms 2010 You do not report any income until you have completed the 5 years of service that satisfy the condition. Income tax forms 2010 Fair market value. Income tax forms 2010   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. Income tax forms 2010 Example. Income tax forms 2010 You received stock from your employer for services you performed. Income tax forms 2010 If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. Income tax forms 2010 At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. Income tax forms 2010 This is a restriction that by its terms will never end and you must consider it when you figure the FMV. Income tax forms 2010 Election. Income tax forms 2010   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. Income tax forms 2010 If you make this choice, the substantially vested rules do not apply. Income tax forms 2010 Your basis is the amount you paid plus the amount you included in income. Income tax forms 2010   See the discussion of Restricted Property in Publication 525 for more information. Income tax forms 2010 Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Income tax forms 2010 A taxable gain or deductible loss is also known as a recognized gain or loss. Income tax forms 2010 If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. Income tax forms 2010 A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. Income tax forms 2010 Example. Income tax forms 2010 You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. Income tax forms 2010 You must report a taxable gain of $3,000 for the land. Income tax forms 2010 The tractor has a basis of $6,000. Income tax forms 2010 Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. Income tax forms 2010 Similar or related property. Income tax forms 2010   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. Income tax forms 2010 However, make the following adjustments. Income tax forms 2010 Decrease the basis by the following. Income tax forms 2010 Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. Income tax forms 2010 Increase the basis by the following. Income tax forms 2010 Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. Income tax forms 2010 Money or property not similar or related. Income tax forms 2010   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. Income tax forms 2010 Example. Income tax forms 2010 The state condemned your property. Income tax forms 2010 The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. Income tax forms 2010 You realized a gain of $5,000 ($31,000 − $26,000). Income tax forms 2010 You bought replacement property similar in use to the converted property for $29,000. Income tax forms 2010 You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Income tax forms 2010 Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Income tax forms 2010 The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. Income tax forms 2010   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Income tax forms 2010 Example. Income tax forms 2010 The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. Income tax forms 2010 Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. Income tax forms 2010 More information. Income tax forms 2010   For more information about condemnations, see Involuntary Conversions in Publication 544. Income tax forms 2010 For more information about casualty and theft losses, see Publication 547. Income tax forms 2010 Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Income tax forms 2010 If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Income tax forms 2010 A nontaxable gain or loss is also known as an unrecognized gain or loss. Income tax forms 2010 Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Income tax forms 2010 To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Income tax forms 2010 There must also be an exchange of like-kind property. Income tax forms 2010 For more information, see Like-Kind Exchanges in Publication 544. Income tax forms 2010 The basis of the property you receive is the same as the basis of the property you gave up. Income tax forms 2010 Example. Income tax forms 2010 You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. Income tax forms 2010 Your basis in the new property is the same as the basis of the old ($50,000). Income tax forms 2010 Exchange expenses. Income tax forms 2010   Exchange expenses are generally the closing costs you pay. Income tax forms 2010 They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. Income tax forms 2010 Add them to the basis of the like-kind property received. Income tax forms 2010 Property plus cash. Income tax forms 2010   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. Income tax forms 2010 Example. Income tax forms 2010 You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. Income tax forms 2010 Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). Income tax forms 2010 Special rules for related persons. Income tax forms 2010   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Income tax forms 2010 Each person must report any gain or loss not recognized on the original exchange. Income tax forms 2010 Each person reports it on the tax return filed for the year in which the later disposition occurs. Income tax forms 2010 If this rule applies, the basis of the property received in the original exchange will be its fair market value. Income tax forms 2010   These rules generally do not apply to the following kinds of property dispositions. Income tax forms 2010 Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. Income tax forms 2010 Related persons. Income tax forms 2010   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. Income tax forms 2010   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. Income tax forms 2010 ), see Nondeductible Loss in chapter 2 of Publication 544. Income tax forms 2010 Exchange of business property. Income tax forms 2010   Exchanging the assets of one business for the assets of another business is a multiple property exchange. Income tax forms 2010 For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Income tax forms 2010 Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. Income tax forms 2010 The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. Income tax forms 2010 Decrease the basis by the following amounts. Income tax forms 2010 Any money you receive, and Any loss you recognize on the exchange. Income tax forms 2010 Increase the basis by the following amounts. Income tax forms 2010 Any additional costs you incur, and Any gain you recognize on the exchange. Income tax forms 2010 If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Income tax forms 2010 Example. Income tax forms 2010 You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. Income tax forms 2010 You realized a gain of $200 ($6,200 − $6,000). Income tax forms 2010 This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). Income tax forms 2010 You include all the gain in income (recognized gain) because the gain is less than the cash received. Income tax forms 2010 Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. Income tax forms 2010   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Income tax forms 2010 The rest is the basis of the like property. Income tax forms 2010 Example. Income tax forms 2010 You had an adjusted basis of $15,000 in real estate you held for investment. Income tax forms 2010 You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. Income tax forms 2010 The truck is unlike property. Income tax forms 2010 You realized a gain of $1,500 ($16,500 − $15,000). Income tax forms 2010 This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). Income tax forms 2010 You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Income tax forms 2010 Your basis in the properties you received is figured as follows. Income tax forms 2010 Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). Income tax forms 2010 This is the truck's FMV. Income tax forms 2010 The rest ($12,500) is the basis of the real estate. Income tax forms 2010 Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Income tax forms 2010 Example. Income tax forms 2010 You are a salesperson and you use one of your cars 100% for business. Income tax forms 2010 You have used this car in your sales activities for 2 years and have depreciated it. Income tax forms 2010 Your adjusted basis in the car is $22,600 and its FMV is $23,100. Income tax forms 2010 You are interested in a new car, which sells for $28,000. Income tax forms 2010 If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). Income tax forms 2010 However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. Income tax forms 2010 Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). Income tax forms 2010 Your basis for depreciating the new car is $27,500, the same as if you traded the old car. Income tax forms 2010 Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. Income tax forms 2010 The first is an exchange of like-kind property. Income tax forms 2010 The second is personal-use property on which gain is recognized and loss is not recognized. Income tax forms 2010 First, figure your adjusted basis in the property as if you transferred two separate properties. Income tax forms 2010 Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. Income tax forms 2010 Deduct the depreciation you took or could have taken from the adjusted basis of the business part. Income tax forms 2010 Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. Income tax forms 2010 The business part of the property is permitted to be exchanged tax free. Income tax forms 2010 However, you must recognize any gain from the exchange of the nonbusiness part. Income tax forms 2010 You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. Income tax forms 2010 The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. Income tax forms 2010 If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. Income tax forms 2010 For more information, see Publication 523. Income tax forms 2010 Trade of car used partly in business. Income tax forms 2010   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. Income tax forms 2010   For information on figuring your basis for depreciation, see Publication 463. Income tax forms 2010 Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. Income tax forms 2010 However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. Income tax forms 2010 This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Income tax forms 2010 If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. Income tax forms 2010 Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Income tax forms 2010 For more information on these bonds, see Publication 550. Income tax forms 2010 At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. Income tax forms 2010 For more information, see Publication 504, Divorced or Separated Individuals. Income tax forms 2010 Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Income tax forms 2010 FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Income tax forms 2010 Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Income tax forms 2010 Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). Income tax forms 2010 If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. Income tax forms 2010 Example. Income tax forms 2010 You received an acre of land as a gift. Income tax forms 2010 At the time of the gift, the land had an FMV of $8,000. Income tax forms 2010 The donor's adjusted basis was $10,000. Income tax forms 2010 After you received the land, no events occurred to increase or decrease your basis. Income tax forms 2010 If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. Income tax forms 2010 If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. Income tax forms 2010 If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Income tax forms 2010 For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. Income tax forms 2010 If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. Income tax forms 2010 Business property. Income tax forms 2010   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Income tax forms 2010 FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Income tax forms 2010 Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Income tax forms 2010 Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. Income tax forms 2010 See Adjusted Basis earlier. Income tax forms 2010 Gift received before 1977. Income tax forms 2010   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. Income tax forms 2010 However, do not increase your basis above the FMV of the gift at the time it was given to you. Income tax forms 2010 Example 1. Income tax forms 2010 You were given a house in 1976 with an FMV of $21,000. Income tax forms 2010 The donor's adjusted basis was $20,000. Income tax forms 2010 The donor paid a gift tax of $500. Income tax forms 2010 Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. Income tax forms 2010 Example 2. Income tax forms 2010 If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. Income tax forms 2010 This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. Income tax forms 2010 Gift received after 1976. Income tax forms 2010   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. Income tax forms 2010 Figure the increase by multiplying the gift tax paid by a fraction. Income tax forms 2010 The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Income tax forms 2010   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. Income tax forms 2010 The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Income tax forms 2010 For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Income tax forms 2010 Example. Income tax forms 2010 In 2010, you received a gift of property from your mother that had an FMV of $50,000. Income tax forms 2010 Her adjusted basis was $20,000. Income tax forms 2010 The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). Income tax forms 2010 She paid a gift tax of $9,000. Income tax forms 2010 Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . Income tax forms 2010 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. Income tax forms 2010 See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Income tax forms 2010 If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. Income tax forms 2010 The FMV of the property at the date of the individual's death. Income tax forms 2010 The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. Income tax forms 2010 For information on the alternate valuation date, see the Instructions for Form 706. Income tax forms 2010 The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. Income tax forms 2010 This method is discussed later. Income tax forms 2010 The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Income tax forms 2010 For information on a qualified conservation easement, see the Instructions for Form 706. Income tax forms 2010 If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Income tax forms 2010 For more information, see the Instructions for Form 706. Income tax forms 2010 Appreciated property. Income tax forms 2010   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Income tax forms 2010 Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. Income tax forms 2010 Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. Income tax forms 2010 Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Income tax forms 2010 When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Income tax forms 2010 For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. Income tax forms 2010 For example, you and your spouse owned community property that had a basis of $80,000. Income tax forms 2010 When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Income tax forms 2010 The FMV of the community interest was $100,000. Income tax forms 2010 The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Income tax forms 2010 The basis of the other half to your spouse's heirs is also $50,000. Income tax forms 2010 For more information on community property, see Publication 555, Community Property. Income tax forms 2010 Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. Income tax forms 2010 Example. Income tax forms 2010 John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. Income tax forms 2010 John furnished two-thirds of the purchase price and Jim furnished one-third. Income tax forms 2010 Depreciation deductions allowed before John's death were $12,000. Income tax forms 2010 Under local law, each had a half interest in the income from the property. Income tax forms 2010 At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. Income tax forms 2010 Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. Income tax forms 2010 This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. Income tax forms 2010 If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. Income tax forms 2010 Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. Income tax forms 2010 It does not matter how much each spouse contributed to the purchase price. Income tax forms 2010 Also, it does not matter which spouse dies first. Income tax forms 2010 A qualified joint interest is any interest in property held by husband and wife as either of the following. Income tax forms 2010 Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. Income tax forms 2010 Basis. Income tax forms 2010   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. Income tax forms 2010 Decrease the cost by any deductions allowed to you for depreciation and depletion. Income tax forms 2010 Increase the reduced cost by your basis in the half you inherited. Income tax forms 2010 Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. Income tax forms 2010 If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. Income tax forms 2010 If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. Income tax forms 2010 Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Income tax forms 2010 Special-use valuation. Income tax forms 2010   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. Income tax forms 2010 Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Income tax forms 2010 Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. Income tax forms 2010 Figure all FMVs without regard to the special-use valuation. Income tax forms 2010   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Income tax forms 2010 This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. Income tax forms 2010   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. Income tax forms 2010 If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Income tax forms 2010 The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. Income tax forms 2010   You make the election by filing with Form 706-A a statement that does all of the following. Income tax forms 2010 Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. Income tax forms 2010   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. Income tax forms 2010 Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Income tax forms 2010 An example of changing property held for personal use to business use would be renting out your former main home. Income tax forms 2010 Basis for depreciation. Income tax forms 2010   The basis for depreciation is the lesser of the following amounts. Income tax forms 2010 The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Income tax forms 2010 Example. Income tax forms 2010 Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. Income tax forms 2010 You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Income tax forms 2010 Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Income tax forms 2010 Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Income tax forms 2010 On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Income tax forms 2010 The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). Income tax forms 2010 Sale of property. Income tax forms 2010   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. Income tax forms 2010 Gain. Income tax forms 2010   The basis for figuring a gain is your adjusted basis when you sell the property. Income tax forms 2010 Example. Income tax forms 2010 Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Income tax forms 2010 Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Income tax forms 2010 Loss. Income tax forms 2010   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Income tax forms 2010 Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. Income tax forms 2010 Example. Income tax forms 2010 Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Income tax forms 2010 In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. Income tax forms 2010 Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). Income tax forms 2010 How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. Income tax forms 2010 By selecting the method that is best for you, you will have quick and easy access to tax help. Income tax forms 2010 Contacting your Taxpayer Advocate. Income tax forms 2010   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. Income tax forms 2010 We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. Income tax forms 2010 Here are seven things every taxpayer should know about TAS. Income tax forms 2010 TAS is your voice at the IRS. Income tax forms 2010 Our service is free, confidential, and tailored to meet your needs. Income tax forms 2010 You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. Income tax forms 2010 We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. Income tax forms 2010 This includes businesses as well as individuals. Income tax forms 2010 Our employees know the IRS and how to navigate it. Income tax forms 2010 If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. Income tax forms 2010 We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. Income tax forms 2010 You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. Income tax forms 2010 irs. Income tax forms 2010 gov/advocate. Income tax forms 2010 You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. Income tax forms 2010 You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. Income tax forms 2010 taxtoolkit. Income tax forms 2010 irs. Income tax forms 2010 gov. Income tax forms 2010 You can get updates on hot tax topics by visiting our YouTube channel at www. Income tax forms 2010 youtube. Income tax forms 2010 com/tasnta and our Facebook page at www. Income tax forms 2010 facebook. Income tax forms 2010 com/YourVoiceAtIRS, or by following our tweets at www. Income tax forms 2010 twitter. Income tax forms 2010 com/YourVoiceAtIRS. Income tax forms 2010 Low Income Taxpayer Clinics (LITCs). Income tax forms 2010   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. Income tax forms 2010 LITCs are independent from the IRS. Income tax forms 2010 Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. Income tax forms 2010 If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. Income tax forms 2010 For more information, see Publication 4134, Low Income Taxpayer Clinic List. Income tax forms 2010 This publication is available at IRS. Income tax forms 2010 gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. Income tax forms 2010 Free tax services. Income tax forms 2010   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Income tax forms 2010 Learn about free tax information from the IRS, including publications, services, and education and assistance programs. Income tax forms 2010 The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. Income tax forms 2010 The majority of the information and services listed in this publication are available to you free of charge. Income tax forms 2010 If there is a fee associated with a resource or service, it is listed in the publication. Income tax forms 2010   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d
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The Income Tax Forms 2010

Income tax forms 2010 Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. Income tax forms 2010 S. Income tax forms 2010 Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Income tax forms 2010 If you itemize, you cannot take the standard deduction. Income tax forms 2010 This section explains what expenses you can deduct as a homeowner. Income tax forms 2010 It also points out expenses that you cannot deduct. Income tax forms 2010 There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Income tax forms 2010 Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Income tax forms 2010 Your house payment. Income tax forms 2010   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Income tax forms 2010 Your house payment may include several costs of owning a home. Income tax forms 2010 The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. Income tax forms 2010 These are discussed in more detail later. Income tax forms 2010   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. Income tax forms 2010 Minister's or military housing allowance. Income tax forms 2010   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. Income tax forms 2010 You do not have to reduce your deductions by your nontaxable allowance. Income tax forms 2010 For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. Income tax forms 2010 Nondeductible payments. Income tax forms 2010   You cannot deduct any of the following items. Income tax forms 2010 Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Income tax forms 2010 Wages you pay for domestic help. Income tax forms 2010 Depreciation. Income tax forms 2010 The cost of utilities, such as gas, electricity, or water. Income tax forms 2010 Most settlement costs. Income tax forms 2010 See Settlement or closing costs under Cost as Basis, later, for more information. Income tax forms 2010 Forfeited deposits, down payments, or earnest money. Income tax forms 2010 Hardest Hit Fund and Emergency Homeowners' Loan Programs You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Income tax forms 2010 You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Income tax forms 2010 You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Income tax forms 2010 If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Income tax forms 2010 However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Income tax forms 2010 Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Income tax forms 2010 This is called a real estate tax. Income tax forms 2010 You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Income tax forms 2010 The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. Income tax forms 2010 Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Income tax forms 2010 You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Income tax forms 2010 If you own a cooperative apartment, see Special Rules for Cooperatives , later. Income tax forms 2010 Where to deduct real estate taxes. Income tax forms 2010   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Income tax forms 2010 Real estate taxes paid at settlement or closing. Income tax forms 2010   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Income tax forms 2010 Your share of these taxes is fully deductible if you itemize your deductions. Income tax forms 2010 Division of real estate taxes. Income tax forms 2010   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Income tax forms 2010 You (the buyer) are treated as paying the taxes beginning with the date of sale. Income tax forms 2010 This applies regardless of the lien dates under local law. Income tax forms 2010 Generally, this information is included on the settlement statement you get at closing. Income tax forms 2010   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. Income tax forms 2010 You each can deduct your own share, if you itemize deductions, for the year the property is sold. Income tax forms 2010 Example. Income tax forms 2010 You bought your home on September 1. Income tax forms 2010 The property tax year (the period to which the tax relates) in your area is the calendar year. Income tax forms 2010 The tax for the year was $730 and was due and paid by the seller on August 15. Income tax forms 2010 You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Income tax forms 2010 You figure your deduction for real estate taxes on your home as follows. Income tax forms 2010 1. Income tax forms 2010 Enter the total real estate taxes for the real property tax year $730 2. Income tax forms 2010 Enter the number of days in the property tax year that you owned the property 122 3. Income tax forms 2010 Divide line 2 by 365 . Income tax forms 2010 3342 4. Income tax forms 2010 Multiply line 1 by line 3. Income tax forms 2010 This is your deduction. Income tax forms 2010 Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. Income tax forms 2010 You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. Income tax forms 2010 Delinquent taxes. Income tax forms 2010   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Income tax forms 2010 If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Income tax forms 2010 You treat them as part of the cost of your home. Income tax forms 2010 See Real estate taxes , later, under Basis. Income tax forms 2010 Escrow accounts. Income tax forms 2010   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Income tax forms 2010 You may not be able to deduct the total you pay into the escrow account. Income tax forms 2010 You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Income tax forms 2010 Your real estate tax bill will show this amount. Income tax forms 2010 Refund or rebate of real estate taxes. Income tax forms 2010   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. Income tax forms 2010 If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. Income tax forms 2010 For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Income tax forms 2010 Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Income tax forms 2010 Charges for services. Income tax forms 2010   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. Income tax forms 2010 You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). Income tax forms 2010    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. Income tax forms 2010 If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Income tax forms 2010 Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Income tax forms 2010 Assessments for local benefits. Income tax forms 2010   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Income tax forms 2010 Local benefits include the construction of streets, sidewalks, or water and sewer systems. Income tax forms 2010 You must add these amounts to the basis of your property. Income tax forms 2010   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Income tax forms 2010 An example is a charge to repair an existing sidewalk and any interest included in that charge. Income tax forms 2010   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. Income tax forms 2010 If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Income tax forms 2010   An assessment for a local benefit may be listed as an item in your real estate tax bill. Income tax forms 2010 If so, use the rules in this section to find how much of it, if any, you can deduct. Income tax forms 2010 Transfer taxes (or stamp taxes). Income tax forms 2010   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Income tax forms 2010 If you are the buyer and you pay them, include them in the cost basis of the property. Income tax forms 2010 If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Income tax forms 2010 Homeowners association assessments. Income tax forms 2010   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Income tax forms 2010 Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. Income tax forms 2010 As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Income tax forms 2010 You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. Income tax forms 2010 For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. Income tax forms 2010 At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. Income tax forms 2010 At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. Income tax forms 2010 Tenant-stockholders. Income tax forms 2010   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Income tax forms 2010 The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Income tax forms 2010 The units that the tenant-stockholder has the right to occupy can be rented to others. Income tax forms 2010 Deductible taxes. Income tax forms 2010   You figure your share of real estate taxes in the following way. Income tax forms 2010 Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Income tax forms 2010 Multiply the corporation's deductible real estate taxes by the number you figured in (1). Income tax forms 2010 This is your share of the real estate taxes. Income tax forms 2010   Generally, the corporation will tell you your share of its real estate tax. Income tax forms 2010 This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Income tax forms 2010 Refund of real estate taxes. Income tax forms 2010   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Income tax forms 2010 Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Income tax forms 2010 Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Income tax forms 2010 Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. Income tax forms 2010 For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Income tax forms 2010 If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. Income tax forms 2010 Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. Income tax forms 2010 Most home buyers take out a mortgage (loan) to buy their home. Income tax forms 2010 They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Income tax forms 2010 Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). Income tax forms 2010 However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. Income tax forms 2010 If either of these situations applies to you, see Publication 936 for more information. Income tax forms 2010 Also see Publication 936 if you later refinance your mortgage or buy a second home. Income tax forms 2010 Refund of home mortgage interest. Income tax forms 2010   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. Income tax forms 2010 For more information, see Recoveries in Publication 525. Income tax forms 2010 The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Income tax forms 2010 See Mortgage Interest Statement , later. Income tax forms 2010 Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. Income tax forms 2010 The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Income tax forms 2010 Prepaid interest. Income tax forms 2010   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Income tax forms 2010 Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Income tax forms 2010 An exception (discussed later) applies to points. Income tax forms 2010 Late payment charge on mortgage payment. Income tax forms 2010   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. Income tax forms 2010 Mortgage prepayment penalty. Income tax forms 2010   If you pay off your home mortgage early, you may have to pay a penalty. Income tax forms 2010 You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Income tax forms 2010 Ground rent. Income tax forms 2010   In some states (such as Maryland), you may buy your home subject to a ground rent. Income tax forms 2010 A ground rent is an obligation you assume to pay a fixed amount per year on the property. Income tax forms 2010 Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Income tax forms 2010 Redeemable ground rents. Income tax forms 2010   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Income tax forms 2010 The ground rent is a redeemable ground rent only if all of the following are true. Income tax forms 2010 Your lease, including renewal periods, is for more than 15 years. Income tax forms 2010 You can freely assign the lease. Income tax forms 2010 You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. Income tax forms 2010 The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Income tax forms 2010   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Income tax forms 2010 You cannot deduct them. Income tax forms 2010 Nonredeemable ground rents. Income tax forms 2010   Payments on a nonredeemable ground rent are not mortgage interest. Income tax forms 2010 You can deduct them as rent only if they are a business expense or if they are for rental property. Income tax forms 2010 Cooperative apartment. Income tax forms 2010   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . Income tax forms 2010 In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Income tax forms 2010 Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. Income tax forms 2010 For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Income tax forms 2010 Refund of cooperative's mortgage interest. Income tax forms 2010   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Income tax forms 2010 The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Income tax forms 2010   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Income tax forms 2010 Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Income tax forms 2010 You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Income tax forms 2010 This amount should be included in the mortgage interest statement provided by your lender. Income tax forms 2010 See the discussion under Mortgage Interest Statement , later. Income tax forms 2010 Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Income tax forms 2010 Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Income tax forms 2010 Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Income tax forms 2010 A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Income tax forms 2010 See Points paid by the seller , later. Income tax forms 2010 General rule. Income tax forms 2010   You cannot deduct the full amount of points in the year paid. Income tax forms 2010 They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Income tax forms 2010 Exception. Income tax forms 2010   You can deduct the full amount of points in the year paid if you meet all the following tests. Income tax forms 2010 Your loan is secured by your main home. Income tax forms 2010 (Generally, your main home is the one you live in most of the time. Income tax forms 2010 ) Paying points is an established business practice in the area where the loan was made. Income tax forms 2010 The points paid were not more than the points generally charged in that area. Income tax forms 2010 You use the cash method of accounting. Income tax forms 2010 This means you report income in the year you receive it and deduct expenses in the year you pay them. Income tax forms 2010 Most individuals use this method. Income tax forms 2010 The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Income tax forms 2010 The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Income tax forms 2010 The funds you provided are not required to have been applied to the points. Income tax forms 2010 They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Income tax forms 2010 You cannot have borrowed these funds. Income tax forms 2010 You use your loan to buy or build your main home. Income tax forms 2010 The points were computed as a percentage of the principal amount of the mortgage. Income tax forms 2010 The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. Income tax forms 2010 The points may be shown as paid from either your funds or the seller's. Income tax forms 2010 Note. Income tax forms 2010 If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. Income tax forms 2010 If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. Income tax forms 2010 Home improvement loan. Income tax forms 2010   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. Income tax forms 2010 Refinanced loan. Income tax forms 2010   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Income tax forms 2010 You can deduct the rest of the points over the life of the loan. Income tax forms 2010 Points not fully deductible in year paid. Income tax forms 2010    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. Income tax forms 2010 Figure A. Income tax forms 2010   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Income tax forms 2010    Please click here for the text description of the image. Income tax forms 2010 Figure A. Income tax forms 2010 Are my points fully deductible this year? Amounts charged for services. Income tax forms 2010   Amounts charged by the lender for specific services connected to the loan are not interest. Income tax forms 2010 Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Income tax forms 2010 You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Income tax forms 2010 For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Income tax forms 2010 Points paid by the seller. Income tax forms 2010   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Income tax forms 2010 Treatment by seller. Income tax forms 2010   The seller cannot deduct these fees as interest. Income tax forms 2010 However, they are a selling expense that reduces the seller's amount realized. Income tax forms 2010 See Publication 523 for more information. Income tax forms 2010 Treatment by buyer. Income tax forms 2010   The buyer treats seller-paid points as if he or she had paid them. Income tax forms 2010 If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Income tax forms 2010 If any of those tests are not met, the buyer must deduct the points over the life of the loan. Income tax forms 2010   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Income tax forms 2010 For more information about the basis of your home, see Basis , later. Income tax forms 2010 Funds provided are less than points. Income tax forms 2010   If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. Income tax forms 2010 In addition, you can deduct any points paid by the seller. Income tax forms 2010 Example 1. Income tax forms 2010 When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Income tax forms 2010 You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. Income tax forms 2010 Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Income tax forms 2010 You spread the remaining $250 over the life of the mortgage. Income tax forms 2010 Example 2. Income tax forms 2010 The facts are the same as in Example 1 , except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Income tax forms 2010 In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Income tax forms 2010 You spread the remaining $250 over the life of the mortgage. Income tax forms 2010 You must reduce the basis of your home by the $1,000 paid by the seller. Income tax forms 2010 Excess points. Income tax forms 2010   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. Income tax forms 2010 You must spread any additional points over the life of the mortgage. Income tax forms 2010 Mortgage ending early. Income tax forms 2010   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Income tax forms 2010 A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Income tax forms 2010 Example. Income tax forms 2010 Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Income tax forms 2010 He had deducted $1,400 of these points through 2012. Income tax forms 2010 Dan prepaid his mortgage in full in 2013. Income tax forms 2010 He can deduct the remaining $1,600 of points in 2013. Income tax forms 2010 Exception. Income tax forms 2010   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Income tax forms 2010 Instead, deduct them over the term of the new loan. Income tax forms 2010 Form 1098. Income tax forms 2010   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Income tax forms 2010 See Mortgage Interest Statement , later. Income tax forms 2010 Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). Income tax forms 2010 If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Income tax forms 2010 See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Income tax forms 2010 If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. Income tax forms 2010 The seller must give you this number and you must give the seller your SSN. Income tax forms 2010 Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Income tax forms 2010 Failure to meet either of these requirements may result in a $50 penalty for each failure. Income tax forms 2010 Table 1. Income tax forms 2010 Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Income tax forms 2010 IF you are eligible to deduct . Income tax forms 2010 . Income tax forms 2010 . Income tax forms 2010 THEN report the amount  on Schedule A (Form 1040) . Income tax forms 2010 . Income tax forms 2010 . Income tax forms 2010 real estate taxes line 6. Income tax forms 2010 home mortgage interest and points reported on Form 1098 line 10. Income tax forms 2010 home mortgage interest not reported on  Form 1098 line 11. Income tax forms 2010 points not reported on Form 1098 line 12. Income tax forms 2010 qualified mortgage insurance premiums line 13. Income tax forms 2010 Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. Income tax forms 2010 The statement will show the total interest paid on your mortgage during the year. Income tax forms 2010 If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. Income tax forms 2010 See Points , earlier. Income tax forms 2010 The interest you paid at settlement should be included on the statement. Income tax forms 2010 If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Income tax forms 2010 Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Income tax forms 2010 Write “See attached” to the right of line 10. Income tax forms 2010 A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Income tax forms 2010 If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Income tax forms 2010 Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Income tax forms 2010 If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Income tax forms 2010 A copy of this form will be sent to the IRS also. Income tax forms 2010 Example. Income tax forms 2010 You bought a new home on May 3. Income tax forms 2010 You paid no points on the purchase. Income tax forms 2010 During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Income tax forms 2010 The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Income tax forms 2010 The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Income tax forms 2010 You can deduct the $5,100 if you itemize your deductions. Income tax forms 2010 Refund of overpaid interest. Income tax forms 2010   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Income tax forms 2010 Generally, you must include the refund in income in the year you receive it. Income tax forms 2010 See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Income tax forms 2010 More than one borrower. Income tax forms 2010   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Income tax forms 2010 Show how much of the interest each of you paid, and give the name and address of the person who received the form. Income tax forms 2010 Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Income tax forms 2010 Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Income tax forms 2010 Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Income tax forms 2010 Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Income tax forms 2010 Prepaid mortgage insurance premiums. Income tax forms 2010   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. Income tax forms 2010 The premiums are treated as paid in the year to which they were allocated. Income tax forms 2010 If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Income tax forms 2010 See Publication 936 for details. Income tax forms 2010 Exception for certain mortgage insurance. Income tax forms 2010   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Income tax forms 2010 Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. Income tax forms 2010 It also must be secured by that home. Income tax forms 2010 If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Income tax forms 2010 Home acquisition debt limit. Income tax forms 2010   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). Income tax forms 2010 Discharges of qualified principal residence indebtedness. Income tax forms 2010   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Income tax forms 2010 You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Income tax forms 2010 Principal residence. Income tax forms 2010   Your principal residence is the home where you ordinarily live most of the time. Income tax forms 2010 You can have only one principal residence at any one time. Income tax forms 2010 Qualified principal residence indebtedness. Income tax forms 2010   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. Income tax forms 2010 If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. Income tax forms 2010   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Income tax forms 2010 Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Income tax forms 2010 Amount you can exclude. Income tax forms 2010   You can only exclude debt discharged after 2006 and before 2014. Income tax forms 2010 The most you can exclude is $2 million ($1 million if married filing separately). Income tax forms 2010 You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. Income tax forms 2010 Ordering rule. Income tax forms 2010   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. Income tax forms 2010 Qualified Home This means your main home or your second home. Income tax forms 2010 A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Income tax forms 2010 Main home. Income tax forms 2010   You can have only one main home at any one time. Income tax forms 2010 This is the home where you ordinarily live most of the time. Income tax forms 2010 Second home and other special situations. Income tax forms 2010   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. Income tax forms 2010 Limit on Deduction If your adjusted gross income (AGI) on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are deductible is reduced and may be eliminated. Income tax forms 2010 See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Income tax forms 2010 If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Income tax forms 2010 Form 1098. Income tax forms 2010   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Income tax forms 2010 See Form 1098, Mortgage Interest Statement in Publication 936. Income tax forms 2010 Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Income tax forms 2010 If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Income tax forms 2010 Who qualifies. Income tax forms 2010   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Income tax forms 2010 Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Income tax forms 2010 The MCC will show the certificate credit rate you will use to figure your credit. Income tax forms 2010 It also will show the certified indebtedness amount. Income tax forms 2010 Only the interest on that amount qualifies for the credit. Income tax forms 2010 See Figuring the Credit , later. Income tax forms 2010 You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Income tax forms 2010 Contact your state or local housing finance agency for information about the availability of MCCs in your area. Income tax forms 2010 How to claim the credit. Income tax forms 2010   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Income tax forms 2010 S. Income tax forms 2010 Nonresident Alien Income Tax Return. Income tax forms 2010 Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. Income tax forms 2010 Reducing your home mortgage interest deduction. Income tax forms 2010   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Income tax forms 2010 You must do this even if part of that amount is to be carried forward to 2014. Income tax forms 2010 Selling your home. Income tax forms 2010   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. Income tax forms 2010 For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Income tax forms 2010 Figuring the Credit Figure your credit on Form 8396. Income tax forms 2010 Mortgage not more than certified indebtedness. Income tax forms 2010   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Income tax forms 2010 Mortgage more than certified indebtedness. Income tax forms 2010   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Income tax forms 2010 To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Income tax forms 2010 Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. Income tax forms 2010 Example. Income tax forms 2010 Emily bought a home this year. Income tax forms 2010 Her mortgage loan is $125,000. Income tax forms 2010 The certified indebtedness amount on her MCC is $100,000. Income tax forms 2010 She paid $7,500 interest this year. Income tax forms 2010 Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Income tax forms 2010 80)       $125,000       $7,500 x . Income tax forms 2010 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Income tax forms 2010 In each later year, she will figure her credit using only 80% of the interest she pays for that year. Income tax forms 2010 Limits Two limits may apply to your credit. Income tax forms 2010 A limit based on the credit rate, and A limit based on your tax. Income tax forms 2010 Limit based on credit rate. Income tax forms 2010   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Income tax forms 2010 Limit based on tax. Income tax forms 2010   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Income tax forms 2010 See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Income tax forms 2010 Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. Income tax forms 2010 Example. Income tax forms 2010 John and his brother, George, were issued an MCC. Income tax forms 2010 They used it to get a mortgage on their main home. Income tax forms 2010 John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Income tax forms 2010 John paid $5,400 mortgage interest this year and George paid $3,600. Income tax forms 2010 The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Income tax forms 2010 The loan amount (mortgage) on their home is $120,000. Income tax forms 2010 The credit is limited to $2,000 because the credit rate is more than 20%. Income tax forms 2010 John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. Income tax forms 2010 His credit is limited to $1,200 ($2,000 × 60%). Income tax forms 2010 George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. Income tax forms 2010 His credit is limited to $800 ($2,000 × 40%). Income tax forms 2010 Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Income tax forms 2010 Example. Income tax forms 2010 You receive a mortgage credit certificate from State X. Income tax forms 2010 This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Income tax forms 2010 You claim no other credits. Income tax forms 2010 Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Income tax forms 2010 You can carry forward this amount to the next 3 years or until used, whichever comes first. Income tax forms 2010 Credit rate more than 20%. Income tax forms 2010   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Income tax forms 2010 Example. Income tax forms 2010 In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Income tax forms 2010 The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. Income tax forms 2010 Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. Income tax forms 2010 The amount of credit you can claim on the new loan may change. Income tax forms 2010 Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Income tax forms 2010 Table 2. Income tax forms 2010 Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Income tax forms 2010 . Income tax forms 2010 . Income tax forms 2010 THEN the interest you claim on Form 8396, line 1, is* . Income tax forms 2010 . Income tax forms 2010 . Income tax forms 2010 smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. Income tax forms 2010 larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. Income tax forms 2010         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. Income tax forms 2010  See New MCC cannot increase your credit above. Income tax forms 2010 An issuer may reissue an MCC after you refinance your mortgage. Income tax forms 2010 If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. Income tax forms 2010 Year of refinancing. Income tax forms 2010   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. Income tax forms 2010   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. Income tax forms 2010 The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. Income tax forms 2010 It must show a separate calculation for the part of the year when the new MCC was in effect. Income tax forms 2010 Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. Income tax forms 2010 New MCC cannot increase your credit. Income tax forms 2010   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. Income tax forms 2010   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Income tax forms 2010 However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Income tax forms 2010 In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Income tax forms 2010   There are two methods for figuring the credit you could have claimed. Income tax forms 2010 Under one method, you figure the actual credit that would have been allowed. Income tax forms 2010 This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Income tax forms 2010   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Income tax forms 2010 Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. Income tax forms 2010 The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. Income tax forms 2010 The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Income tax forms 2010    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. Income tax forms 2010    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Income tax forms 2010 Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. Income tax forms 2010 While you own your home, you may add certain items to your basis. Income tax forms 2010 You may subtract certain other items from your basis. Income tax forms 2010 These items are called adjustments to basis and are explained later under Adjusted Basis . Income tax forms 2010 It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. Income tax forms 2010 You also must keep records of the events that affect basis or adjusted basis. Income tax forms 2010 See Keeping Records , below. Income tax forms 2010 Figuring Your Basis How you figure your basis depends on how you acquire your home. Income tax forms 2010 If you buy or build your home, your cost is your basis. Income tax forms 2010 If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. Income tax forms 2010 If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Income tax forms 2010 Each of these topics is discussed later. Income tax forms 2010 Property transferred from a spouse. Income tax forms 2010   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. Income tax forms 2010 Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Income tax forms 2010 Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. Income tax forms 2010 The cost of your home includes most settlement or closing costs you paid when you bought the home. Income tax forms 2010 If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Income tax forms 2010 See Settlement or closing costs , later. Income tax forms 2010 If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. Income tax forms 2010 Purchase. Income tax forms 2010   The basis of a home you bought is the amount you paid for it. Income tax forms 2010 This usually includes your down payment and any debt you assumed. Income tax forms 2010 The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Income tax forms 2010 This amount includes any purchase commissions or other costs of acquiring the shares. Income tax forms 2010 Construction. Income tax forms 2010   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. Income tax forms 2010 This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. Income tax forms 2010 If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Income tax forms 2010 You cannot include in basis the value of your own labor or any other labor for which you did not pay. Income tax forms 2010 Real estate taxes. Income tax forms 2010   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. Income tax forms 2010 See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. Income tax forms 2010   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. Income tax forms 2010 You cannot deduct them as taxes paid. Income tax forms 2010   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Income tax forms 2010 Do not include those taxes in your basis. Income tax forms 2010 If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Income tax forms 2010 Example 1. Income tax forms 2010 You bought your home on September 1. Income tax forms 2010 The property tax year in your area is the calendar year, and the tax is due on August 15. Income tax forms 2010 The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. Income tax forms 2010 You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Income tax forms 2010 You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Income tax forms 2010 You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Income tax forms 2010 Example 2. Income tax forms 2010 You bought your home on May 3, 2013. Income tax forms 2010 The property tax year in your area is the calendar year. Income tax forms 2010 The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Income tax forms 2010 Under state law, the taxes become a lien on May 31. Income tax forms 2010 You agreed to pay all taxes due after the date of sale. Income tax forms 2010 The taxes due in 2013 for 2012 were $1,375. Income tax forms 2010 The taxes due in 2014 for 2013 will be $1,425. Income tax forms 2010 You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. Income tax forms 2010 Instead, you add the $1,375 to the cost (basis) of your home. Income tax forms 2010 You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. Income tax forms 2010 You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Income tax forms 2010 Settlement or closing costs. Income tax forms 2010   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Income tax forms 2010 These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Income tax forms 2010 If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Income tax forms 2010   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Income tax forms 2010 You deduct them in the year you buy your home if you itemize your deductions. Income tax forms 2010 You can add certain other settlement or closing costs to the basis of your home. Income tax forms 2010 Items added to basis. Income tax forms 2010   You can include in your basis the settlement fees and closing costs you paid for buying your home. Income tax forms 2010 A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Income tax forms 2010   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Income tax forms 2010 Abstract fees (abstract of title fees). Income tax forms 2010 Charges for installing utility services. Income tax forms 2010 Legal fees (including fees for the title search and preparation of the sales contract and deed). Income tax forms 2010 Recording fees. Income tax forms 2010 Surveys. Income tax forms 2010 Transfer or stamp taxes. Income tax forms 2010 Owner's title insurance. Income tax forms 2010 Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. Income tax forms 2010   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. Income tax forms 2010 Items not added to basis and not deductible. Income tax forms 2010   Here are some settlement and closing costs that you cannot deduct or add to your basis. Income tax forms 2010 Fire insurance premiums. Income tax forms 2010 Charges for using utilities or other services related to occupancy of the home before closing. Income tax forms 2010 Rent for occupying the home before closing. Income tax forms 2010 Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. Income tax forms 2010 Points paid by seller. Income tax forms 2010   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. Income tax forms 2010   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. Income tax forms 2010 See Points , earlier, for the rules on deducting points. Income tax forms 2010 Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. Income tax forms 2010 Fair market value. Income tax forms 2010   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. Income tax forms 2010 Donor's adjusted basis is more than FMV. Income tax forms 2010   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. Income tax forms 2010 Disposition basis. Income tax forms 2010   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. Income tax forms 2010 Your basis for figuring a gain is the same as the donor's adjusted basis. Income tax forms 2010 Your basis for figuring a loss is the FMV when you received the gift. Income tax forms 2010 If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. Income tax forms 2010 However, if using the FMV results in a gain, then you neither have a gain nor a loss. Income tax forms 2010 Example 1. Income tax forms 2010 Andrew received a house as a gift from Ishmael (the donor). Income tax forms 2010 At the time of the gift, the home had an FMV of $80,000. Income tax forms 2010 Ishmael's adjusted basis was $100,000. Income tax forms 2010 After he received the house, no events occurred to increase or decrease the basis. Income tax forms 2010 If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. Income tax forms 2010 Example 2. Income tax forms 2010 Same facts as Example 1 , except this time Andrew sells the house for $70,000. Income tax forms 2010 He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. Income tax forms 2010 Example 3. Income tax forms 2010 Same facts as Example 1 , except this time Andrew sells the house for $90,000. Income tax forms 2010 Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Income tax forms 2010 Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. Income tax forms 2010 So in this situation, Andrew will neither have a gain nor a loss. Income tax forms 2010 Donor's adjusted basis equal to or less than the FMV. Income tax forms 2010   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. Income tax forms 2010 Part of federal gift tax due to net increase in value. Income tax forms 2010   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Income tax forms 2010 The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. Income tax forms 2010 The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Income tax forms 2010 Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Income tax forms 2010 Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. Income tax forms 2010 If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Income tax forms 2010 If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. Income tax forms 2010 Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Income tax forms 2010 If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Income tax forms 2010 Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Income tax forms 2010 These events can increase or decrease your original basis. Income tax forms 2010 The result is called adjusted basis. Income tax forms 2010 See Table 3, on this page, for a list of some of the items that can adjust your basis. Income tax forms 2010 Table 3. Income tax forms 2010 Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Income tax forms 2010 It is not intended to be all-inclusive. Income tax forms 2010 Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. Income tax forms 2010   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Income tax forms 2010 You must add the cost of any improvements to the basis of your home. Income tax forms 2010 You cannot deduct these costs. Income tax forms 2010   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. Income tax forms 2010 Amount added to basis. Income tax forms 2010   The amount you add to your basis for improvements is your actual cost. Income tax forms 2010 This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Income tax forms 2010 For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Income tax forms 2010   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. Income tax forms 2010 These assessments are discussed earlier under Real Estate Taxes . Income tax forms 2010 Improvements no longer part of home. Income tax forms 2010    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Income tax forms 2010 Example. Income tax forms 2010 You put wall-to-wall carpeting in your home 15 years ago. Income tax forms 2010 Later, you replaced that carpeting with new wall-to-wall carpeting. Income tax forms 2010 The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Income tax forms 2010 Repairs versus improvements. Income tax forms 2010   A repair keeps your home in an ordinary, efficient operating condition. Income tax forms 2010 It does not add to the value of your home or prolong its life. Income tax forms 2010 Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Income tax forms 2010 You cannot deduct repair costs and generally cannot add them to the basis of your home. Income tax forms 2010   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Income tax forms 2010 You add them to the basis of your home. Income tax forms 2010 Records to keep. Income tax forms 2010   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Income tax forms 2010 Also see Keeping Records , below. Income tax forms 2010 Energy conservation subsidy. Income tax forms 2010   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. Income tax forms 2010 You must reduce the basis of your home by that value. Income tax forms 2010   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. Income tax forms 2010 Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. Income tax forms 2010 These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. Income tax forms 2010 You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Income tax forms 2010 In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Income tax forms 2010 How to keep records. Income tax forms 2010   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Income tax forms 2010 How long to keep records. Income tax forms 2010   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Income tax forms 2010   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. Income tax forms 2010 (A period of limitations is the period of time after which no legal action can be brought. Income tax forms 2010 ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Income tax forms 2010 For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Income tax forms 2010 Returns filed before the due date are treated as filed on the due date. Income tax forms 2010   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Income tax forms 2010 Keep those records as long as they are important in figuring the basis of the original or replacement property. Income tax forms 2010 Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Income tax forms 2010 Table 4. Income tax forms 2010 Record of Home Improvements Keep this for your records. Income tax forms 2010 Also, keep receipts or other proof of improvements. Income tax forms 2010 Remove from this record any improvements that are no longer part of your main home. Income tax forms 2010 For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. Income tax forms 2010 (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To