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Irs Free Tax Filing

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Irs Free Tax Filing

Irs free tax filing Publication 597 - Main Content Table of Contents Application of Treaty Personal Services Pensions, Annuities, Social Security, and AlimonyRoth IRAs. Irs free tax filing Tax-deferred plans. Irs free tax filing Investment Income From Canadian Sources Other Income Charitable ContributionsQualified charities. Irs free tax filing Income Tax Credits Competent Authority Assistance How To Get Tax HelpText of Treaty U. Irs free tax filing S. Irs free tax filing Taxation Canadian Taxation Application of Treaty The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. Irs free tax filing That is, a person who is recognized as a resident of the United States who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. Irs free tax filing Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for applying the treaty in cases where a taxpayer is considered by both countries to be a resident. Irs free tax filing Saving clause. Irs free tax filing   In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U. Irs free tax filing S. Irs free tax filing citizens) or of the United States to tax its residents or citizens (including U. Irs free tax filing S. Irs free tax filing citizens who are residents of the foreign country). Irs free tax filing This provision is known as the “saving clause. Irs free tax filing ”   For example, an individual who is a U. Irs free tax filing S. Irs free tax filing citizen and a resident of Canada may have dividend income from a U. Irs free tax filing S. Irs free tax filing corporation. Irs free tax filing The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. Irs free tax filing Even though a resident of Canada, the individual is a U. Irs free tax filing S. Irs free tax filing citizen and the saving clause overrides the treaty article that limits the U. Irs free tax filing S. Irs free tax filing tax to 15%. Irs free tax filing    Exceptions to the saving clause can be found in Article XXIX, paragraph 3. Irs free tax filing Treaty-based position. Irs free tax filing   If you take the position that any U. Irs free tax filing S. Irs free tax filing tax is overruled or otherwise reduced by a U. Irs free tax filing S. Irs free tax filing treaty (a treaty-based position), you generally must disclose that position on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attach it to your return. Irs free tax filing Personal Services A U. Irs free tax filing S. Irs free tax filing citizen or resident who is temporarily present in Canada during the tax year is exempt from Canadian income taxes on pay for services performed, or remittances received from the United States, if the citizen or resident qualifies under one of the treaty exemption provisions set out below. Irs free tax filing Income from employment (Article XV). Irs free tax filing   Income U. Irs free tax filing S. Irs free tax filing residents receive for the performance of dependent personal services in Canada (except as public entertainers) is exempt from Canadian tax if it is not more than $10,000 in Canadian currency for the year. Irs free tax filing If it is more than $10,000 for the year, it is exempt only if: The residents are present in Canada for no more than 183 days in any 12-month period beginning or ending in the year concerned, and The income is not paid by, or on behalf of, a Canadian resident and is not borne by a permanent establishment in Canada. Irs free tax filing    Whether there is a permanent establishment in Canada is determined by the rules set forth in Article V. Irs free tax filing Example. Irs free tax filing You are a U. Irs free tax filing S. Irs free tax filing resident employed under an 8-month contract with a Canadian firm to install equipment in their Montreal plant. Irs free tax filing During the calendar year you were physically present in Canada for 179 days and were paid $16,500 (Canadian) for your services. Irs free tax filing Although you were in Canada for not more than 183 days during the year, your income is not exempt from Canadian income tax because it was paid by a Canadian resident and was more than $10,000 (Canadian) for the year. Irs free tax filing Pay received by a U. Irs free tax filing S. Irs free tax filing resident for work regularly done in more than one country as an employee on a ship, aircraft, motor vehicle, or train operated by a U. Irs free tax filing S. Irs free tax filing resident is exempt from Canadian tax. Irs free tax filing Income from self-employment (Article VII). Irs free tax filing   Income from services performed (other than those performed as an employee) are taxed in Canada if they are attributable to a permanent establishment in Canada. Irs free tax filing This income is treated as business profits, and deductions similar to those allowed under U. Irs free tax filing S. Irs free tax filing law are allowable. Irs free tax filing   If you carry on (or have carried on) business in both Canada and the United States, the business profits are attributable to each country based on the profits that the permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities. Irs free tax filing The business profits attributable to the permanent establishment include only those profits derived from assets used, risks assumed, and activities performed by the permanent establishment. Irs free tax filing   You may be considered to have a permanent establishment if you meet certain conditions. Irs free tax filing For more information, see Article V (Permanent Establishment) and Article VII (Business Profits). Irs free tax filing Public entertainers (Article XVI). Irs free tax filing   The provisions under income from employment or income from self-employment do not apply to public entertainers (such as theater, motion picture, radio, or television artistes, musicians, or athletes) from the United States who receive more than $15,000 in gross receipts in Canadian currency, including reimbursed expenses, from their entertainment activities in Canada during the calendar year. Irs free tax filing However, this provision for public entertainers does not apply (and the other provisions will apply) to athletes participating in team sports in leagues with regularly scheduled games in both the United States and Canada. Irs free tax filing Compensation paid by the U. Irs free tax filing S. Irs free tax filing Government (Article XIX). Irs free tax filing   Wages, salaries, and similar income (other than pensions) paid to a U. Irs free tax filing S. Irs free tax filing citizen by the United States or any of its agencies, instrumentalities, or political subdivisions for discharging governmental functions are exempt from Canadian income tax. Irs free tax filing   The exemption does not apply to pay for services performed in connection with any trade or business carried on for profit by the United States, or any of its agencies, instrumentalities, or political subdivisions. Irs free tax filing Students and apprentices (Article XX). Irs free tax filing   A full-time student, apprentice, or business trainee who is in Canada to study or acquire business experience is exempt from Canadian income tax on remittances received from any source outside Canada for maintenance, education, or training. Irs free tax filing The recipient must be or must have been a U. Irs free tax filing S. Irs free tax filing resident immediately before visiting Canada. Irs free tax filing   An apprentice or business trainee can claim this exemption only for a period of one year from the date the individual first arrived in Canada for the purpose of training. Irs free tax filing Pensions, Annuities, Social Security, and Alimony Under Article XVIII, pensions and annuities from Canadian sources paid to U. Irs free tax filing S. Irs free tax filing residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). Irs free tax filing Canadian pensions and annuities paid to U. Irs free tax filing S. Irs free tax filing residents may be taxed by the United States, but the amount of any pension included in income for U. Irs free tax filing S. Irs free tax filing tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. Irs free tax filing Pensions. Irs free tax filing   A pension includes any payment under a pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances, and payments under a sickness, accident, or disability plan. Irs free tax filing It includes pensions paid by private employers and the government for services rendered. Irs free tax filing   Pensions also include payments from individual retirement arrangements (IRAs) in the United States, registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) in Canada. Irs free tax filing   Pensions do not include social security benefits. Irs free tax filing Roth IRAs. Irs free tax filing   A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U. Irs free tax filing S. Irs free tax filing tax if paid to a U. Irs free tax filing S. Irs free tax filing resident. Irs free tax filing In addition, you may elect to defer any tax in Canada on income accrued within the Roth IRA but not distributed by the Roth IRA. Irs free tax filing However, you cannot defer tax on any accruals due to contributions made after you become a Canadian resident. Irs free tax filing Tax-deferred plans. Irs free tax filing   Generally, income that accrues in a Canadian RRSP or RRIF is subject to U. Irs free tax filing S. Irs free tax filing tax, even if it is not distributed. Irs free tax filing However, a U. Irs free tax filing S. Irs free tax filing citizen or resident can elect to defer U. Irs free tax filing S. Irs free tax filing tax on income from the plan until the income is distributed. Irs free tax filing Form 8891 is used to make the election. Irs free tax filing Annuities. Irs free tax filing    An annuity is a stated sum payable periodically at stated times, during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). Irs free tax filing Annuities do not include: Non-periodic payments, or An annuity the cost of which was deductible for tax purposes. Irs free tax filing Special rules. Irs free tax filing    Special rules apply to pensions and annuities with respect to: Short-term assignments, Cross-border commuters, and Individuals who participate in a Canadian qualifying plan. Irs free tax filing Generally, distributions in such cases are deemed to be earned in the country in which the plan is established, without regard to where the services were rendered. Irs free tax filing Social security benefits. Irs free tax filing   U. Irs free tax filing S. Irs free tax filing social security benefits paid to a resident of Canada are taxed in Canada as if they were benefits under the Canada Pension Plan, except that 15% of the amount of the benefit is exempt from Canadian tax. Irs free tax filing Alimony. Irs free tax filing   Alimony and similar amounts (including child support payments) from Canadian sources paid to U. Irs free tax filing S. Irs free tax filing residents are exempt from Canadian tax. Irs free tax filing For purposes of U. Irs free tax filing S. Irs free tax filing tax, these amounts are excluded from income to the same extent they would be excluded from income in Canada if the recipient was a Canadian resident. Irs free tax filing Investment Income From Canadian Sources The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital. Irs free tax filing Dividends (Article X). Irs free tax filing   For Canadian source dividends received by U. Irs free tax filing S. Irs free tax filing residents, the Canadian income tax generally may not be more than 15%. Irs free tax filing   A 5% rate applies to intercorporate dividends paid from a subsidiary to a parent corporation owning at least 10% of the subsidiary's voting stock. Irs free tax filing However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation. Irs free tax filing   These rates do not apply if the owner of the dividends carries on, or has carried on, a business in Canada through a permanent establishment and the holding on which the income is paid is effectively connected with that permanent establishment. Irs free tax filing Interest (Article XI). Irs free tax filing   Generally, Canadian source interest received by U. Irs free tax filing S. Irs free tax filing residents is exempt from Canadian income tax. Irs free tax filing   The exemption does not apply if the owner of the interest carries on, or has carried on, a business in Canada through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. Irs free tax filing Gains from the sale of property (Article XIII). Irs free tax filing   Generally, gains from the sale of personal property by a U. Irs free tax filing S. Irs free tax filing resident having no permanent establishment in Canada are exempt from Canadian income tax. Irs free tax filing However, the exemption from Canadian tax does not apply to gains realized by U. Irs free tax filing S. Irs free tax filing residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada. Irs free tax filing   If the property subject to Canadian tax is a capital asset and was owned by the U. Irs free tax filing S. Irs free tax filing resident on September 26, 1980, not as part of the business property of a permanent establishment in Canada, generally the taxable gain is limited to the appreciation after 1984. Irs free tax filing Royalties (Article XII). Irs free tax filing   The following are exempt from Canadian tax: Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television, which may be taxed at 10%), Payments for the use of, or the right to use, computer software, Payments for the use of, or the right to use, any patent or any information concerning industrial, commercial, or scientific experience (but not within a rental or franchise agreement), and Payments for broadcasting as agreed to in an exchange of notes between the countries. Irs free tax filing   This rate or exemption does not apply if the owner of the royalties carries on, or has carried on, a business in Canada through a permanent establishment and the right or property on which the income is paid is effectively connected with that permanent establishment. Irs free tax filing   This exemption (or lower rate) does not apply to royalties to explore for or to exploit mineral deposits, timber, and other natural resources. Irs free tax filing Other Income Generally, Canadian source income that is not specifically mentioned in the treaty, may be taxed by Canada. Irs free tax filing Gambling losses. Irs free tax filing   Canadian residents may deduct gambling losses in the U. Irs free tax filing S. Irs free tax filing against gambling winnings in the U. Irs free tax filing S. Irs free tax filing in the same manner as a U. Irs free tax filing S. Irs free tax filing resident. Irs free tax filing Charitable Contributions United States income tax return. Irs free tax filing   Under Article XXI, you may deduct contributions to certain qualified Canadian charitable organizations on your United States income tax return. Irs free tax filing Besides being subject to the overall limits applicable to all your charitable contributions under U. Irs free tax filing S. Irs free tax filing tax law, your charitable contributions to Canadian organizations (other than contributions to a college or university at which you or a member of your family is or was enrolled) are subject to the U. Irs free tax filing S. Irs free tax filing percentage limits on charitable contributions, applied to your Canadian source income. Irs free tax filing If your return does not include gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible. Irs free tax filing Example. Irs free tax filing You are a U. Irs free tax filing S. Irs free tax filing citizen living in Canada. Irs free tax filing You have both U. Irs free tax filing S. Irs free tax filing and Canadian source income. Irs free tax filing During your tax year, you contribute to Canadian organizations that would qualify as charitable organizations under U. Irs free tax filing S. Irs free tax filing tax law if they were U. Irs free tax filing S. Irs free tax filing organizations. Irs free tax filing To figure the maximum amount of the contribution to Canadian organizations that you can deduct on your U. Irs free tax filing S. Irs free tax filing income tax return, multiply your adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U. Irs free tax filing S. Irs free tax filing income tax law. Irs free tax filing Then include this amount on your return along with all your domestic charitable contributions, subject to the appropriate percentage limit required for contributions under U. Irs free tax filing S. Irs free tax filing income tax law. Irs free tax filing The appropriate percentage limit for U. Irs free tax filing S. Irs free tax filing tax purposes is applied to your total adjusted gross income from all sources. Irs free tax filing Qualified charities. Irs free tax filing   These Canadian organizations must meet the qualifications that a U. Irs free tax filing S. Irs free tax filing charitable organization must meet under U. Irs free tax filing S. Irs free tax filing tax law. Irs free tax filing Usually an organization will notify you if it qualifies. Irs free tax filing For further information on charitable contributions and the U. Irs free tax filing S. Irs free tax filing percentage limits, see Publication 526, Charitable Contributions. Irs free tax filing Canadian income tax return. Irs free tax filing   Under certain conditions, contributions to qualified U. Irs free tax filing S. Irs free tax filing charitable organizations may also be claimed on your Canadian income tax return if you are a Canadian resident. Irs free tax filing Income Tax Credits The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. Irs free tax filing In general, the United States and Canada both allow a credit against their income tax for the income tax paid to the other country on income from sources in that other country. Irs free tax filing For detailed discussions of the U. Irs free tax filing S. Irs free tax filing income tax treatment of tax paid to foreign countries, see Publication 514, Foreign Tax Credit for Individuals. Irs free tax filing See paragraphs (4) and (5) of Article XXIV for certain provisions that affect the computation of the credit allowed by the United States for Canadian income taxes paid by U. Irs free tax filing S. Irs free tax filing citizens residing in Canada. Irs free tax filing Competent Authority Assistance Under Article XXVI, a U. Irs free tax filing S. Irs free tax filing citizen or resident may request assistance from the U. Irs free tax filing S. Irs free tax filing competent authority when the actions of Canada, the United States, or both, potentially result in double taxation or taxation contrary to the treaty. Irs free tax filing The U. Irs free tax filing S. Irs free tax filing competent authority may then consult with the Canadian competent authority to determine if the double taxation or denial of treaty benefits in question can be avoided. Irs free tax filing If the competent authorities are not able to reach agreement in a case, binding arbitration proceedings may apply. Irs free tax filing It is important that your request for competent authority assistance be made as soon as you have been notified by either Canada or the United States of proposed adjustments that would result in denial of treaty benefits or in double taxation. Irs free tax filing This is so that implementation of any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Irs free tax filing For information that you should include with your request for competent authority assistance, see Revenue Procedure 2006-54, 2006-49 IRB 1035, available at www. Irs free tax filing irs. Irs free tax filing gov/irb/2006-49_IRB/ar13. Irs free tax filing html. Irs free tax filing The request should be addressed to:  Deputy Commissioner (International) Large Business and International Division Attn: Office of Tax Treaty  Internal Revenue Service 1111 Constitution Ave. Irs free tax filing , NW Routing: MA3-322A Washington, D. Irs free tax filing C. Irs free tax filing 20024 In addition to a timely request for assistance, you should take the following measures: File a timely protective claim for credit or refund of U. Irs free tax filing S. Irs free tax filing taxes on Form 1040X, Form 1120X, or amended Form 1041, whichever is appropriate. Irs free tax filing This will, among other things, give you the benefit of a foreign tax credit in case you do not qualify for the treaty benefit in question. Irs free tax filing For figuring this credit, attach either Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or Form 1118, Foreign Tax Credit — Corporations, as appropriate. Irs free tax filing Attach your protective claim to your request for competent authority assistance. Irs free tax filing Take appropriate action under Canadian procedures to avoid the lapse or termination of your right of appeal under Canadian income tax law. Irs free tax filing How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS and the Canada Revenue Agency in several ways. Irs free tax filing Text of Treaty You can get the text of the U. Irs free tax filing S. Irs free tax filing —Canada income tax treaty from: Superintendent of Documents U. Irs free tax filing S. Irs free tax filing Government Printing Office P. Irs free tax filing O. Irs free tax filing Box 371954 Pittsburgh, PA 15250-7954 The treaty can also be found on the Internet at IRS. Irs free tax filing gov. Irs free tax filing U. Irs free tax filing S. Irs free tax filing Taxation During the filing season, the IRS conducts a taxpayer assistance program in Canada. Irs free tax filing To find out if IRS personnel will be in your area, you should contact the consular office at the nearest U. Irs free tax filing S. Irs free tax filing Embassy or consulate. Irs free tax filing Mail. Irs free tax filing For answers to technical or account questions, you can write to:   Internal Revenue Service International Section Philadelphia, PA 19255-0525 Phone. Irs free tax filing You can call the IRS for help at (267) 941-1000 (not a toll-free call). Irs free tax filing Canadian Taxation You can get information on Canadian taxation from the Canada Revenue Agency. Irs free tax filing The International Tax Services Office can be contacted on 1-800-267-5177 (from anywhere in Canada and the U. Irs free tax filing S. Irs free tax filing ) or on the Internet at www. Irs free tax filing cra-arc. Irs free tax filing gc. Irs free tax filing ca. Irs free tax filing Prev  Up  Next   Home   More Online Publications
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New Tax Guide Helps People With Their 2013 Taxes

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IR-2013-102, Dec. 23, 2013

WASHINGTON — Taxpayers can get the most out of various tax benefits and get a jump on preparing their 2013 federal income tax returns by consulting a newly revised comprehensive tax guide now available on IRS.gov.

Publication 17, Your Federal Income Tax, features details on taking advantage of a wide range of tax-saving opportunities, such as the American Opportunity Tax Credit for parents and college students, and the Child Tax Credit and Earned Income Tax Credit for low- and moderate-income workers. It also features a rundown on tax changes for 2013 including information on revised tax rates and new limits on various tax benefits for some taxpayers.  This useful 292-page guide also provides thousands of interactive links to help taxpayers quickly get answers to their questions.

Publication 17 has been published annually by the IRS since the 1940s and has been available on the IRS web site since 1996. As in prior years, this publication is packed with basic tax-filing information and tips on what income to report and how to report it, figuring capital gains and losses, claiming dependents, choosing the standard deduction versus itemizing deductions, and using IRAs to save for retirement.

Besides Publication 17, IRS.gov offers many other helpful resources for those doing year-end tax planning. Many 2013 forms are already posted, and updated versions of other forms, instructions and publications are being posted almost every day. Forms already available include Form 1040 and short Forms 1040A and1040EZ.

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Page Last Reviewed or Updated: 23-Dec-2013

The Irs Free Tax Filing

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