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Instructions On How To Fill Out 1040ez

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Instructions On How To Fill Out 1040ez

Instructions on how to fill out 1040ez 13. Instructions on how to fill out 1040ez   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Instructions on how to fill out 1040ez It is divided into the following sections. Instructions on how to fill out 1040ez Cost basis. Instructions on how to fill out 1040ez Adjusted basis. Instructions on how to fill out 1040ez Basis other than cost. Instructions on how to fill out 1040ez Your basis is the amount of your investment in property for tax purposes. Instructions on how to fill out 1040ez Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Instructions on how to fill out 1040ez Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Instructions on how to fill out 1040ez If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Instructions on how to fill out 1040ez Only the basis allocated to the business or investment use of the property can be depreciated. Instructions on how to fill out 1040ez Your original basis in property is adjusted (increased or decreased) by certain events. Instructions on how to fill out 1040ez For example, if you make improvements to the property, increase your basis. Instructions on how to fill out 1040ez If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Instructions on how to fill out 1040ez Keep accurate records of all items that affect the basis of your property. Instructions on how to fill out 1040ez For more information on keeping records, see chapter 1. Instructions on how to fill out 1040ez Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Instructions on how to fill out 1040ez The cost is the amount you pay in cash, debt obligations, other property, or services. Instructions on how to fill out 1040ez Your cost also includes amounts you pay for the following items: 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 you assume liability for the seller). Instructions on how to fill out 1040ez In addition, the basis of real estate and business assets may include other items. Instructions on how to fill out 1040ez Loans with low or no interest. Instructions on how to fill out 1040ez    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 any amount considered to be unstated interest. Instructions on how to fill out 1040ez You generally have unstated interest if your interest rate is less than the applicable federal rate. Instructions on how to fill out 1040ez   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Instructions on how to fill out 1040ez Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Instructions on how to fill out 1040ez If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Instructions on how to fill out 1040ez Lump sum purchase. Instructions on how to fill out 1040ez   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Instructions on how to fill out 1040ez Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Instructions on how to fill out 1040ez Figure the basis of each asset by multiplying the lump sum by a fraction. Instructions on how to fill out 1040ez The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Instructions on how to fill out 1040ez    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Instructions on how to fill out 1040ez Fair market value (FMV). Instructions on how to fill out 1040ez   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Instructions on how to fill out 1040ez Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Instructions on how to fill out 1040ez Assumption of mortgage. Instructions on how to fill out 1040ez   If you buy property and assume (or buy the property 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. Instructions on how to fill out 1040ez Settlement costs. Instructions on how to fill out 1040ez   Your basis includes the settlement fees and closing costs you paid for buying the property. Instructions on how to fill out 1040ez (A fee for buying property is a cost that must be paid even if you buy the property for cash. Instructions on how to fill out 1040ez ) Do not include fees and costs for getting a loan on the property in your basis. Instructions on how to fill out 1040ez   The following are some of the settlement fees or closing costs you can include in the basis of your property. Instructions on how to fill out 1040ez Abstract fees (abstract of title fees). Instructions on how to fill out 1040ez Charges for installing utility services. Instructions on how to fill out 1040ez Legal fees (including fees for the title search and preparation of the sales contract and deed). Instructions on how to fill out 1040ez Recording fees. Instructions on how to fill out 1040ez Survey fees. Instructions on how to fill out 1040ez Transfer taxes. Instructions on how to fill out 1040ez Owner's title insurance. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Instructions on how to fill out 1040ez   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Instructions on how to fill out 1040ez Casualty insurance premiums. Instructions on how to fill out 1040ez Rent for occupancy of the property before closing. Instructions on how to fill out 1040ez Charges for utilities or other services related to occupancy of the property before closing. Instructions on how to fill out 1040ez Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Instructions on how to fill out 1040ez Fees for refinancing a mortgage. Instructions on how to fill out 1040ez Real estate taxes. Instructions on how to fill out 1040ez   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. Instructions on how to fill out 1040ez You cannot deduct them as an expense. Instructions on how to fill out 1040ez    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. Instructions on how to fill out 1040ez Do not include that amount in the basis of your property. Instructions on how to fill out 1040ez If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Instructions on how to fill out 1040ez Points. Instructions on how to fill out 1040ez   If you pay points to get 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. Instructions on how to fill out 1040ez Generally, you deduct the points over the term of the loan. Instructions on how to fill out 1040ez For more information on how to deduct points, see chapter 23. Instructions on how to fill out 1040ez Points on home mortgage. Instructions on how to fill out 1040ez   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Instructions on how to fill out 1040ez If certain requirements are met, you can deduct the points in full for the year in which they are paid. Instructions on how to fill out 1040ez Reduce the basis of your home by any seller-paid points. Instructions on how to fill out 1040ez 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 (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Instructions on how to fill out 1040ez The result is the adjusted basis. Instructions on how to fill out 1040ez Increases to Basis Increase the basis of any property by all items properly added to a capital account. Instructions on how to fill out 1040ez Examples of items that increase basis are shown in Table 13-1. Instructions on how to fill out 1040ez These include the items discussed below. Instructions on how to fill out 1040ez Improvements. Instructions on how to fill out 1040ez   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Instructions on how to fill out 1040ez For example, 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, or paving your driveway. Instructions on how to fill out 1040ez Assessments for local improvements. Instructions on how to fill out 1040ez   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Instructions on how to fill out 1040ez Do not deduct them as taxes. Instructions on how to fill out 1040ez However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Instructions on how to fill out 1040ez Add the assessment to your property's basis. Instructions on how to fill out 1040ez In this example, the assessment is a depreciable asset. Instructions on how to fill out 1040ez Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Instructions on how to fill out 1040ez Examples of items that decrease basis are shown in Table 13-1. Instructions on how to fill out 1040ez These include the items discussed below. Instructions on how to fill out 1040ez Table 13-1. Instructions on how to fill out 1040ez Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Instructions on how to fill out 1040ez   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Instructions on how to fill out 1040ez    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Instructions on how to fill out 1040ez   For more information on casualty and theft losses, see chapter 25. Instructions on how to fill out 1040ez Depreciation and section 179 deduction. Instructions on how to fill out 1040ez   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Instructions on how to fill out 1040ez   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Instructions on how to fill out 1040ez You added an improvement to the duplex that cost $10,000. Instructions on how to fill out 1040ez In February last year, the duplex was damaged by fire. Instructions on how to fill out 1040ez Up to that time, you had been allowed depreciation of $23,000. Instructions on how to fill out 1040ez You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Instructions on how to fill out 1040ez You deducted a casualty loss of $1,000 on your income tax return for last year. Instructions on how to fill out 1040ez You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Instructions on how to fill out 1040ez You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Instructions on how to fill out 1040ez Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Instructions on how to fill out 1040ez Your basis in the land is its original cost of $5,000. Instructions on how to fill out 1040ez Easements. Instructions on how to fill out 1040ez   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Instructions on how to fill out 1040ez It reduces the basis of the affected part of the property. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez   If the gain is on a capital asset, see chapter 16 for information about how to report it. Instructions on how to fill out 1040ez If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Instructions on how to fill out 1040ez Exclusion of subsidies for energy conservation measures. Instructions on how to fill out 1040ez   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Instructions on how to fill out 1040ez Reduce the basis of the property for which you received the subsidy by the excluded amount. Instructions on how to fill out 1040ez For more information about this subsidy, see chapter 12. Instructions on how to fill out 1040ez Postponed gain from sale of home. Instructions on how to fill out 1040ez    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Instructions on how to fill out 1040ez For more information on the rules for the sale of a home, see chapter 15. Instructions on how to fill out 1040ez Basis Other Than Cost There are many times when you cannot use cost as basis. Instructions on how to fill out 1040ez In these cases, the fair market value or the adjusted basis of the property can be used. Instructions on how to fill out 1040ez Fair market value (FMV) and adjusted basis were discussed earlier. Instructions on how to fill out 1040ez Property Received for Services If you receive property for your services, include the FMV of the property in income. Instructions on how to fill out 1040ez The amount you include in income becomes your basis. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez Restricted property. Instructions on how to fill out 1040ez   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. Instructions on how to fill out 1040ez However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Instructions on how to fill out 1040ez Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Instructions on how to fill out 1040ez For more information, see Restricted Property in Publication 525. Instructions on how to fill out 1040ez Bargain purchases. Instructions on how to fill out 1040ez   A bargain purchase is a purchase of an item for less than its FMV. Instructions on how to fill out 1040ez If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Instructions on how to fill out 1040ez Your basis in the property is its FMV (your purchase price plus the amount you include in income). Instructions on how to fill out 1040ez   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Instructions on how to fill out 1040ez However, your basis in the property is still its FMV. Instructions on how to fill out 1040ez See Employee Discounts in Publication 15-B. Instructions on how to fill out 1040ez Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Instructions on how to fill out 1040ez A taxable gain or deductible loss also is known as a recognized gain or loss. Instructions on how to fill out 1040ez If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Instructions on how to fill out 1040ez Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Instructions on how to fill out 1040ez Similar or related property. Instructions on how to fill out 1040ez   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Instructions on how to fill out 1040ez Decrease the basis by the following. Instructions on how to fill out 1040ez Any loss you recognize on the involuntary conversion. Instructions on how to fill out 1040ez Any money you receive that you do not spend on similar property. Instructions on how to fill out 1040ez Increase the basis by the following. Instructions on how to fill out 1040ez Any gain you recognize on the involuntary conversion. Instructions on how to fill out 1040ez Any cost of acquiring the replacement property. Instructions on how to fill out 1040ez Money or property not similar or related. Instructions on how to fill out 1040ez    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 replacement property is its cost decreased by the gain not recognized on the conversion. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez The state condemned your property. Instructions on how to fill out 1040ez The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Instructions on how to fill out 1040ez You realized a gain of $5,000 ($31,000 − $26,000). Instructions on how to fill out 1040ez You bought replacement property similar in use to the converted property for $29,000. Instructions on how to fill out 1040ez You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Instructions on how to fill out 1040ez Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Instructions on how to fill out 1040ez The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Instructions on how to fill out 1040ez   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Instructions on how to fill out 1040ez Basis for depreciation. Instructions on how to fill out 1040ez   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Instructions on how to fill out 1040ez For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Instructions on how to fill out 1040ez Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Instructions on how to fill out 1040ez If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Instructions on how to fill out 1040ez See Nontaxable Trades in chapter 14. Instructions on how to fill out 1040ez Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Instructions on how to fill out 1040ez To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Instructions on how to fill out 1040ez Qualifying property. Instructions on how to fill out 1040ez Like-kind property. Instructions on how to fill out 1040ez The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Instructions on how to fill out 1040ez If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Instructions on how to fill out 1040ez Qualifying property. Instructions on how to fill out 1040ez   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Instructions on how to fill out 1040ez Like-kind property. Instructions on how to fill out 1040ez   There must be an exchange of like-kind property. Instructions on how to fill out 1040ez Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Instructions on how to fill out 1040ez The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Instructions on how to fill out 1040ez The dealer allows you $2,000 on the old truck, and you pay $4,800. Instructions on how to fill out 1040ez This is a like-kind exchange. Instructions on how to fill out 1040ez The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Instructions on how to fill out 1040ez If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Instructions on how to fill out 1040ez The basis of the new truck is the price you pay the dealer. Instructions on how to fill out 1040ez Partially nontaxable exchanges. Instructions on how to fill out 1040ez   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Instructions on how to fill out 1040ez The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Instructions on how to fill out 1040ez Decrease the basis by the following amounts. Instructions on how to fill out 1040ez Any money you receive. Instructions on how to fill out 1040ez Any loss you recognize on the exchange. Instructions on how to fill out 1040ez Increase the basis by the following amounts. Instructions on how to fill out 1040ez Any additional costs you incur. Instructions on how to fill out 1040ez Any gain you recognize on the exchange. Instructions on how to fill out 1040ez If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Instructions on how to fill out 1040ez Allocation of basis. Instructions on how to fill out 1040ez   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Instructions on how to fill out 1040ez The rest is the basis of the like-kind property. Instructions on how to fill out 1040ez More information. Instructions on how to fill out 1040ez   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Instructions on how to fill out 1040ez Basis for depreciation. Instructions on how to fill out 1040ez   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Instructions on how to fill out 1040ez For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Instructions on how to fill out 1040ez Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Instructions on how to fill out 1040ez The same rule applies to a transfer by your former spouse that is incident to divorce. Instructions on how to fill out 1040ez However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Instructions on how to fill out 1040ez If the property transferred to you is a series E, series EE, or series I U. Instructions on how to fill out 1040ez S. Instructions on how to fill out 1040ez savings bond, the transferor must include in income the interest accrued to the date of transfer. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez For more information on these bonds, see chapter 7. Instructions on how to fill out 1040ez At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Instructions on how to fill out 1040ez For more information about the transfer of property from a spouse, see chapter 14. Instructions on how to fill out 1040ez Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis 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. Instructions on how to fill out 1040ez FMV less than donor's adjusted basis. Instructions on how to fill out 1040ez   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. Instructions on how to fill out 1040ez Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Instructions on how to fill out 1040ez Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Instructions on how to fill out 1040ez See Adjusted Basis , earlier. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez You received an acre of land as a gift. Instructions on how to fill out 1040ez At the time of the gift, the land had an FMV of $8,000. Instructions on how to fill out 1040ez The donor's adjusted basis was $10,000. Instructions on how to fill out 1040ez After you received the property, no events occurred to increase or decrease your basis. Instructions on how to fill out 1040ez If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Instructions on how to fill out 1040ez If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Instructions on how to fill out 1040ez If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Instructions on how to fill out 1040ez Business property. Instructions on how to fill out 1040ez   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Instructions on how to fill out 1040ez FMV equal to or greater than donor's adjusted basis. Instructions on how to fill out 1040ez   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. Instructions on how to fill out 1040ez Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Instructions on how to fill out 1040ez   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Instructions on how to fill out 1040ez See Adjusted Basis , earlier. Instructions on how to fill out 1040ez   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Instructions on how to fill out 1040ez Figure the increase by multiplying the gift tax paid by a fraction. Instructions on how to fill out 1040ez The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Instructions on how to fill out 1040ez   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez In 2013, you received a gift of property from your mother that had an FMV of $50,000. Instructions on how to fill out 1040ez Her adjusted basis was $20,000. Instructions on how to fill out 1040ez The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Instructions on how to fill out 1040ez She paid a gift tax of $7,320 on the property. Instructions on how to fill out 1040ez Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Instructions on how to fill out 1040ez 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Instructions on how to fill out 1040ez If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Instructions on how to fill out 1040ez However, your basis cannot exceed the FMV of the gift at the time it was given to you. Instructions on how to fill out 1040ez Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Instructions on how to fill out 1040ez The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Instructions on how to fill out 1040ez The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Instructions on how to fill out 1040ez Property inherited from a decedent who died in 2010. Instructions on how to fill out 1040ez   If you inherited property from a decedent who died in 2010, special rules may apply. Instructions on how to fill out 1040ez For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Instructions on how to fill out 1040ez Community property. Instructions on how to fill out 1040ez   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. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez You and your spouse owned community property that had a basis of $80,000. Instructions on how to fill out 1040ez When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Instructions on how to fill out 1040ez The FMV of the community interest was $100,000. Instructions on how to fill out 1040ez The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Instructions on how to fill out 1040ez The basis of the other half to your spouse's heirs is also $50,000. Instructions on how to fill out 1040ez For more information about community property, see Publication 555, Community Property. Instructions on how to fill out 1040ez Property Changed From Personal 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 can begin to depreciate the property at the time of the change. Instructions on how to fill out 1040ez To do so, you must figure its basis for depreciation at the time of the change. Instructions on how to fill out 1040ez An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Instructions on how to fill out 1040ez Basis for depreciation. Instructions on how to fill out 1040ez   The basis for depreciation is the lesser of the following amounts. Instructions on how to fill out 1040ez The FMV of the property on the date of the change. Instructions on how to fill out 1040ez Your adjusted basis on the date of the change. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Instructions on how to fill out 1040ez Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Instructions on how to fill out 1040ez Sale of property. Instructions on how to fill out 1040ez   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Instructions on how to fill out 1040ez Gain. Instructions on how to fill out 1040ez   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Instructions on how to fill out 1040ez Loss. Instructions on how to fill out 1040ez   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. Instructions on how to fill out 1040ez Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez 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 (land)) on that date. Instructions on how to fill out 1040ez Reduce that amount ($180,000) by the depreciation deductions ($37,500). Instructions on how to fill out 1040ez The basis for loss is $142,500 ($180,000 − $37,500). Instructions on how to fill out 1040ez Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Instructions on how to fill out 1040ez If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Instructions on how to fill out 1040ez You must adjust the basis of stocks for certain events that occur after purchase. Instructions on how to fill out 1040ez For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Instructions on how to fill out 1040ez This rule applies only when the additional stock received is identical to the stock held. Instructions on how to fill out 1040ez Also reduce your basis when you receive nontaxable distributions. Instructions on how to fill out 1040ez They are a return of capital. Instructions on how to fill out 1040ez Example. Instructions on how to fill out 1040ez In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Instructions on how to fill out 1040ez In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Instructions on how to fill out 1040ez In 2013 XYZ declared a 2-for-1 stock split. Instructions on how to fill out 1040ez You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Instructions on how to fill out 1040ez Other basis. Instructions on how to fill out 1040ez   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Instructions on how to fill out 1040ez For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Instructions on how to fill out 1040ez Identifying stocks or bonds sold. Instructions on how to fill out 1040ez   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 stocks or bonds. Instructions on how to fill out 1040ez 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. Instructions on how to fill out 1040ez For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Instructions on how to fill out 1040ez Mutual fund shares. Instructions on how to fill out 1040ez   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Instructions on how to fill out 1040ez For more information, see Publication 550. Instructions on how to fill out 1040ez Bond premium. Instructions on how to fill out 1040ez   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Instructions on how to fill out 1040ez See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Instructions on how to fill out 1040ez Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Instructions on how to fill out 1040ez Original issue discount (OID) on debt instruments. Instructions on how to fill out 1040ez   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Instructions on how to fill out 1040ez See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Instructions on how to fill out 1040ez Tax-exempt obligations. Instructions on how to fill out 1040ez    OID on tax-exempt obligations is generally not taxable. Instructions on how to fill out 1040ez However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Instructions on how to fill out 1040ez The accrued OID is added to the basis of the obligation to determine your gain or loss. Instructions on how to fill out 1040ez See chapter 4 of Publication 550. Instructions on how to fill out 1040ez Prev  Up  Next   Home   More Online Publications
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The Instructions On How To Fill Out 1040ez

Instructions on how to fill out 1040ez 4. Instructions on how to fill out 1040ez   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Instructions on how to fill out 1040ez However, the information shown on the filled-in forms is not from any actual person or scenario. Instructions on how to fill out 1040ez Example 1—Mortgage loan modification. Instructions on how to fill out 1040ez    In 2007, Nancy Oak bought a main home for $435,000. Instructions on how to fill out 1040ez Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Instructions on how to fill out 1040ez The loan was secured by the home. Instructions on how to fill out 1040ez The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Instructions on how to fill out 1040ez In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Instructions on how to fill out 1040ez    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Instructions on how to fill out 1040ez The FMV of Nancy's home at the time of the refinancing was $500,000. Instructions on how to fill out 1040ez Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Instructions on how to fill out 1040ez After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Instructions on how to fill out 1040ez   In 2013, Nancy was unable to make her mortgage loan payments. Instructions on how to fill out 1040ez On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Instructions on how to fill out 1040ez Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Instructions on how to fill out 1040ez   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Instructions on how to fill out 1040ez Identifiable event code "F" appears in box 6. Instructions on how to fill out 1040ez This box shows the reason the creditor has filed Form 1099-C. Instructions on how to fill out 1040ez To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Instructions on how to fill out 1040ez Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Instructions on how to fill out 1040ez   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Instructions on how to fill out 1040ez Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Instructions on how to fill out 1040ez Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Instructions on how to fill out 1040ez Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Instructions on how to fill out 1040ez   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Instructions on how to fill out 1040ez Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Instructions on how to fill out 1040ez Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Instructions on how to fill out 1040ez You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Instructions on how to fill out 1040ez Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Instructions on how to fill out 1040ez Please click the link to view the image. Instructions on how to fill out 1040ez Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Instructions on how to fill out 1040ez Please click the link to view the image. Instructions on how to fill out 1040ez Form 1040, U. Instructions on how to fill out 1040ez S. Instructions on how to fill out 1040ez Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Instructions on how to fill out 1040ez Please click the link to view the image. Instructions on how to fill out 1040ez Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Instructions on how to fill out 1040ez    In 2005, John and Mary Elm bought a main home for $335,000. Instructions on how to fill out 1040ez John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Instructions on how to fill out 1040ez The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Instructions on how to fill out 1040ez   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Instructions on how to fill out 1040ez Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Instructions on how to fill out 1040ez   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Instructions on how to fill out 1040ez Identifiable event code "D" appears in box 6. Instructions on how to fill out 1040ez This box shows the reason the creditor has filed Form 1099-C. Instructions on how to fill out 1040ez In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Instructions on how to fill out 1040ez In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Instructions on how to fill out 1040ez Their sample Form 1099-C is shown on this page. Instructions on how to fill out 1040ez   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Instructions on how to fill out 1040ez However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Instructions on how to fill out 1040ez   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Instructions on how to fill out 1040ez Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Instructions on how to fill out 1040ez Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Instructions on how to fill out 1040ez As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Instructions on how to fill out 1040ez Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Instructions on how to fill out 1040ez Thus, John and Mary leave line 10b of Form 982 blank. Instructions on how to fill out 1040ez   John and Mary must also determine whether they have a gain or loss from the foreclosure. Instructions on how to fill out 1040ez John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Instructions on how to fill out 1040ez Because this loss relates to their home, it is a nondeductible loss. Instructions on how to fill out 1040ez   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Instructions on how to fill out 1040ez John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Instructions on how to fill out 1040ez Please click the link to view the image. Instructions on how to fill out 1040ez Form 1099-C, Cancellation of Debt Table 1-1. Instructions on how to fill out 1040ez Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Instructions on how to fill out 1040ez Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Instructions on how to fill out 1040ez Otherwise, go to Part 2. Instructions on how to fill out 1040ez 1. Instructions on how to fill out 1040ez Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Instructions on how to fill out 1040ez 00 2. Instructions on how to fill out 1040ez Enter the fair market value of the transferred property $290,000. Instructions on how to fill out 1040ez 00 3. Instructions on how to fill out 1040ez Ordinary income from the cancellation of debt upon foreclosure or repossession. Instructions on how to fill out 1040ez * Subtract line 2 from line 1. Instructions on how to fill out 1040ez If less than zero, enter zero. Instructions on how to fill out 1040ez Next, go to Part 2 $ 25,000. Instructions on how to fill out 1040ez 00 Part 2. Instructions on how to fill out 1040ez Gain or loss from foreclosure or repossession. Instructions on how to fill out 1040ez   4. Instructions on how to fill out 1040ez Enter the smaller of line 1 or line 2. Instructions on how to fill out 1040ez If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Instructions on how to fill out 1040ez 00 5. Instructions on how to fill out 1040ez Enter any proceeds you received from the foreclosure sale   6. Instructions on how to fill out 1040ez Add line 4 and line 5 $290,000. Instructions on how to fill out 1040ez 00 7. Instructions on how to fill out 1040ez Enter the adjusted basis of the transferred property $335,000. Instructions on how to fill out 1040ez 00 8. Instructions on how to fill out 1040ez Gain or loss from foreclosure or repossession. Instructions on how to fill out 1040ez Subtract line 7 from line 6 ($ 45,000. Instructions on how to fill out 1040ez 00) * The income may not be taxable. Instructions on how to fill out 1040ez See chapter 1 for more details. Instructions on how to fill out 1040ez Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Instructions on how to fill out 1040ez Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Instructions on how to fill out 1040ez Credit card debt $ 5,500 2. Instructions on how to fill out 1040ez Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Instructions on how to fill out 1040ez Car and other vehicle loans $ 4. Instructions on how to fill out 1040ez Medical bills owed $ 5. Instructions on how to fill out 1040ez Student loans $ 6. Instructions on how to fill out 1040ez Accrued or past-due mortgage interest $ 7. Instructions on how to fill out 1040ez Accrued or past-due real estate taxes $ 8. Instructions on how to fill out 1040ez Accrued or past-due utilities (water, gas, electric) $ 9. Instructions on how to fill out 1040ez Accrued or past-due child care costs $ 10. Instructions on how to fill out 1040ez Federal or state income taxes remaining due (for prior tax years) $ 11. Instructions on how to fill out 1040ez Judgments $ 12. Instructions on how to fill out 1040ez Business debts (including those owed as a sole proprietor or partner) $ 13. Instructions on how to fill out 1040ez Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Instructions on how to fill out 1040ez Other liabilities (debts) not included above $ 15. Instructions on how to fill out 1040ez Total liabilities immediately before the cancellation. Instructions on how to fill out 1040ez Add lines 1 through 14. Instructions on how to fill out 1040ez $ 320,500 Part II. Instructions on how to fill out 1040ez Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Instructions on how to fill out 1040ez Cash and bank account balances $ 6,000 17. Instructions on how to fill out 1040ez Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Instructions on how to fill out 1040ez Cars and other vehicles $ 19. Instructions on how to fill out 1040ez Computers $ 20. Instructions on how to fill out 1040ez Household goods and furnishings (for example, appliances, electronics, furniture, etc. Instructions on how to fill out 1040ez ) $ 21. Instructions on how to fill out 1040ez Tools $ 22. Instructions on how to fill out 1040ez Jewelry $ 23. Instructions on how to fill out 1040ez Clothing $ 24. Instructions on how to fill out 1040ez Books $ 25. Instructions on how to fill out 1040ez Stocks and bonds $ 26. Instructions on how to fill out 1040ez Investments in coins, stamps, paintings, or other collectibles $ 27. Instructions on how to fill out 1040ez Firearms, sports, photographic, and other hobby equipment $ 28. Instructions on how to fill out 1040ez Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Instructions on how to fill out 1040ez Interest in a pension plan $ 30. Instructions on how to fill out 1040ez Interest in education accounts $ 31. Instructions on how to fill out 1040ez Cash value of life insurance $ 32. Instructions on how to fill out 1040ez Security deposits with landlords, utilities, and others $ 33. Instructions on how to fill out 1040ez Interests in partnerships $ 34. Instructions on how to fill out 1040ez Value of investment in a business $ 35. Instructions on how to fill out 1040ez Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Instructions on how to fill out 1040ez Other assets not included above $ 37. Instructions on how to fill out 1040ez FMV of total assets immediately before the cancellation. Instructions on how to fill out 1040ez Add lines 16 through 36. Instructions on how to fill out 1040ez $ 309,000 Part III. Instructions on how to fill out 1040ez Insolvency 38. Instructions on how to fill out 1040ez Amount of Insolvency. Instructions on how to fill out 1040ez Subtract line 37 from line 15. Instructions on how to fill out 1040ez If zero or less, you are not insolvent. Instructions on how to fill out 1040ez $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Instructions on how to fill out 1040ez Please click the link to view the image. Instructions on how to fill out 1040ez Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Instructions on how to fill out 1040ez    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Instructions on how to fill out 1040ez Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Instructions on how to fill out 1040ez Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Instructions on how to fill out 1040ez   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Instructions on how to fill out 1040ez The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Instructions on how to fill out 1040ez On December 26, 2013, the lender canceled the remaining debt. Instructions on how to fill out 1040ez Kathy and Frank have no tax attributes other than basis of personal-use property. Instructions on how to fill out 1040ez   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Instructions on how to fill out 1040ez Identifiable event code "D" appears in box 6. Instructions on how to fill out 1040ez This box shows the reason the creditor has filed Form 1099-C. Instructions on how to fill out 1040ez Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Instructions on how to fill out 1040ez Kathy and Frank are filing a joint return for 2013. Instructions on how to fill out 1040ez   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Instructions on how to fill out 1040ez Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Instructions on how to fill out 1040ez Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Instructions on how to fill out 1040ez Because this loss relates to their home, it is a nondeductible loss. Instructions on how to fill out 1040ez   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Instructions on how to fill out 1040ez Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Instructions on how to fill out 1040ez Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Instructions on how to fill out 1040ez The household furnishings originally cost $30,000. Instructions on how to fill out 1040ez The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Instructions on how to fill out 1040ez Kathy and Frank had no adjustments to the cost basis of the car. Instructions on how to fill out 1040ez Kathy and Frank had no other assets or liabilities at the time of the cancellation. Instructions on how to fill out 1040ez Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Instructions on how to fill out 1040ez   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Instructions on how to fill out 1040ez Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Instructions on how to fill out 1040ez Kathy and Frank had no other assets or liabilities at that time. Instructions on how to fill out 1040ez Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Instructions on how to fill out 1040ez   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Instructions on how to fill out 1040ez The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Instructions on how to fill out 1040ez The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Instructions on how to fill out 1040ez Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Instructions on how to fill out 1040ez Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Instructions on how to fill out 1040ez This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Instructions on how to fill out 1040ez   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Instructions on how to fill out 1040ez Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Instructions on how to fill out 1040ez Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Instructions on how to fill out 1040ez Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Instructions on how to fill out 1040ez   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Instructions on how to fill out 1040ez Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Instructions on how to fill out 1040ez Thus, Kathy and Frank leave line 10b of Form 982 blank. Instructions on how to fill out 1040ez However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Instructions on how to fill out 1040ez As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Instructions on how to fill out 1040ez Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Instructions on how to fill out 1040ez Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Instructions on how to fill out 1040ez Kathy and Frank reduce the basis in the car by $14,956. Instructions on how to fill out 1040ez 52 ($43,000 x $16,000/$46,000). Instructions on how to fill out 1040ez And they reduce the basis in the household furnishings by $28,043. Instructions on how to fill out 1040ez 48 ($43,000 x $30,000/$46,000). Instructions on how to fill out 1040ez   Following are Kathy and Frank's sample forms and worksheets. Instructions on how to fill out 1040ez Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Instructions on how to fill out 1040ez Please click the link to view the image. Instructions on how to fill out 1040ez Form 1099-C, Cancellation of Debt Table 1-1. Instructions on how to fill out 1040ez Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Instructions on how to fill out 1040ez Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Instructions on how to fill out 1040ez Otherwise, go to Part 2. Instructions on how to fill out 1040ez 1. Instructions on how to fill out 1040ez Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Instructions on how to fill out 1040ez 00 2. Instructions on how to fill out 1040ez Enter the fair market value of the transferred property $1,750,000. Instructions on how to fill out 1040ez 00 3. Instructions on how to fill out 1040ez Ordinary income from the cancellation of debt upon foreclosure or repossession. Instructions on how to fill out 1040ez * Subtract line 2 from line 1. Instructions on how to fill out 1040ez If less than zero, enter zero. Instructions on how to fill out 1040ez Next, go to Part 2 $0. Instructions on how to fill out 1040ez 00 Part 2. Instructions on how to fill out 1040ez Gain or loss from foreclosure or repossession. Instructions on how to fill out 1040ez   4. Instructions on how to fill out 1040ez Enter the smaller of line 1 or line 2. Instructions on how to fill out 1040ez If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Instructions on how to fill out 1040ez $1,750,000. Instructions on how to fill out 1040ez 00 5. Instructions on how to fill out 1040ez Enter any proceeds you received from the foreclosure sale   6. Instructions on how to fill out 1040ez Add line 4 and line 5 $1,750,000. Instructions on how to fill out 1040ez 00 7. Instructions on how to fill out 1040ez Enter the adjusted basis of the transferred property $3,000,000. Instructions on how to fill out 1040ez 00 8. Instructions on how to fill out 1040ez Gain or loss from foreclosure or repossession. Instructions on how to fill out 1040ez Subtract line 7 from line 6 ($1,250,000. Instructions on how to fill out 1040ez 00) * The income may not be taxable. Instructions on how to fill out 1040ez See chapter 1 for more details. Instructions on how to fill out 1040ez    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Instructions on how to fill out 1040ez Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Instructions on how to fill out 1040ez Credit card debt $ 18,000 2. Instructions on how to fill out 1040ez Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Instructions on how to fill out 1040ez Car and other vehicle loans $ 4. Instructions on how to fill out 1040ez Medical bills owed $ 5. Instructions on how to fill out 1040ez Student loans $ 6. Instructions on how to fill out 1040ez Accrued or past-due mortgage interest $ 7. Instructions on how to fill out 1040ez Accrued or past-due real estate taxes $ 8. Instructions on how to fill out 1040ez Accrued or past-due utilities (water, gas, electric) $ 9. Instructions on how to fill out 1040ez Accrued or past-due child care costs $ 10. Instructions on how to fill out 1040ez Federal or state income taxes remaining due (for prior tax years) $ 11. Instructions on how to fill out 1040ez Judgments $ 12. Instructions on how to fill out 1040ez Business debts (including those owed as a sole proprietor or partner) $ 13. Instructions on how to fill out 1040ez Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Instructions on how to fill out 1040ez Other liabilities (debts) not included above $ 15. Instructions on how to fill out 1040ez Total liabilities immediately before the cancellation. Instructions on how to fill out 1040ez Add lines 1 through 14. Instructions on how to fill out 1040ez $ 768,000 Part II. Instructions on how to fill out 1040ez Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Instructions on how to fill out 1040ez Cash and bank account balances $ 15,000 17. Instructions on how to fill out 1040ez Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Instructions on how to fill out 1040ez Cars and other vehicles $ 10,000 19. Instructions on how to fill out 1040ez Computers $ 20. Instructions on how to fill out 1040ez Household goods and furnishings (for example, appliances, electronics, furniture, etc. Instructions on how to fill out 1040ez ) $ 17,000 21. Instructions on how to fill out 1040ez Tools $ 22. Instructions on how to fill out 1040ez Jewelry $ 23. Instructions on how to fill out 1040ez Clothing $ 24. Instructions on how to fill out 1040ez Books $ 25. Instructions on how to fill out 1040ez Stocks and bonds $ 26. Instructions on how to fill out 1040ez Investments in coins, stamps, paintings, or other collectibles $ 27. Instructions on how to fill out 1040ez Firearms, sports, photographic, and other hobby equipment $ 28. Instructions on how to fill out 1040ez Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Instructions on how to fill out 1040ez Interest in a pension plan $ 30. Instructions on how to fill out 1040ez Interest in education accounts $ 31. Instructions on how to fill out 1040ez Cash value of life insurance $ 32. Instructions on how to fill out 1040ez Security deposits with landlords, utilities, and others $ 33. Instructions on how to fill out 1040ez Interests in partnerships $ 34. Instructions on how to fill out 1040ez Value of investment in a business $ 35. Instructions on how to fill out 1040ez Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Instructions on how to fill out 1040ez Other assets not included above $ 37. Instructions on how to fill out 1040ez FMV of total assets immediately before the cancellation. Instructions on how to fill out 1040ez Add lines 16 through 36. Instructions on how to fill out 1040ez $ 42,000 Part III. Instructions on how to fill out 1040ez Insolvency 38. Instructions on how to fill out 1040ez Amount of Insolvency. Instructions on how to fill out 1040ez Subtract line 37 from line 15. Instructions on how to fill out 1040ez If zero or less, you are not insolvent. Instructions on how to fill out 1040ez $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Instructions on how to fill out 1040ez Please click the link to view the image. Instructions on how to fill out 1040ez Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications