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Snaptax Publication 1544 - Main Content Table of Contents Why Report These Payments? Who Must File Form 8300?What Payments Must Be Reported? What Is Cash? Taxpayer Identification Number (TIN) What Is a Related Transaction? What About Suspicious Transactions? When, Where, and What To File Examples Penalties How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Snaptax Why Report These Payments? Drug dealers and smugglers often use large cash payments to “launder” money from illegal activities. Snaptax Laundering means converting “dirty” or illegally-gained money to “clean” money. Snaptax The government can often trace this laundered money through the payments you report. Snaptax Laws passed by Congress require you to report these payments. Snaptax Your compliance with these laws provides valuable information that can stop those who evade taxes and those who profit from the drug trade and other criminal activities. Snaptax The USA PATRIOT Act of 2001 increased the scope of these laws to help trace funds used for terrorism. Snaptax Who Must File Form 8300? Generally, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file Form 8300. Snaptax For example, you may have to file Form 8300 if you are a dealer in jewelry, furniture, boats, aircraft, or automobiles; a pawnbroker; an attorney; a real estate broker; an insurance company; or a travel agency. Snaptax Special rules for clerks of federal or state courts are discussed later under Bail received by court clerks. Snaptax However, you do not have to file Form 8300 if the transaction is not related to your trade or business. Snaptax For example, if you own a jewelry store and sell your personal automobile for more than $10,000 in cash, you would not submit a Form 8300 for that transaction. Snaptax Transaction defined. Snaptax    A “transaction” occurs when: Goods, services, or property are sold; Property is rented; Cash is exchanged for other cash; A contribution is made to a trust or escrow account; A loan is made or repaid; or Cash is converted to a negotiable instrument, such as a check or a bond. Snaptax Person defined. Snaptax   A “person” includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate. Snaptax   Exempt organizations, including employee plans, are also “persons. Snaptax ” However, exempt organizations do not have to file Form 8300 for a more-than-$10,000 charitable cash contribution they receive since it is not received in the course of a trade or business. Snaptax Foreign transactions. Snaptax   You do not have to file Form 8300 if the entire transaction (including the receipt of cash) takes place outside of: The 50 states, The District of Columbia, Puerto Rico, or A possession or territory of the United States. Snaptax However, you must file Form 8300 if any part of the transaction (including the receipt of cash) occurs in Puerto Rico or a possession or territory of the United States and you are subject to the Internal Revenue Code. Snaptax Bail received by court clerks. Snaptax   Any clerk of a federal or state court who receives more than $10,000 in cash as bail for an individual charged with any of the following criminal offenses must file Form 8300: Any federal offense involving a controlled substance, Racketeering, Money laundering, and Any state offense substantially similar to (1), (2), or (3) above. Snaptax For more information about the rules that apply to court clerks, see Section 1. Snaptax 6050I-2 of the Income Tax Regulations. Snaptax What Payments Must Be Reported? You must file Form 8300 to report cash paid to you if it is: Over $10,000, Received as: One lump sum of over $10,000, Installment payments that cause the total cash received within 1 year of the initial payment to total more than $10,000, or Other previously unreportable payments that cause the total cash received within a 12-month period to total more than $10,000, Received in the course of your trade or business, Received from the same buyer (or agent), and Received in a single transaction or in related transactions (defined later). Snaptax What Is Cash? Cash is: The coins and currency of the United States (and any other country), and A cashier's check, bank draft, traveler's check, or money order you receive, if it has a face amount of $10,000 or less and you receive it in: A designated reporting transaction (defined later), or Any transaction in which you know the payer is trying to avoid the reporting of the transaction on Form 8300. Snaptax Cash may include a cashier's check even if it is called a “treasurer's check” or “bank check. Snaptax ” Cash does not include a check drawn on an individual's personal account. Snaptax A cashier's check, bank draft, traveler's check, or money order with a face amount of more than $10,000 is not treated as cash. Snaptax These items are not defined as cash and you do not have to file Form 8300 when you receive them because, if they were bought with currency, the bank or other financial institution that issued them must file a report on FinCEN Form 104. Snaptax Example 1. Snaptax You are a coin dealer. Snaptax Bob Green buys gold coins from you for $13,200. Snaptax He pays for them with $6,200 in U. Snaptax S. Snaptax currency and a cashier's check having a face amount of $7,000. Snaptax The cashier's check is treated as cash. Snaptax You have received more than $10,000 cash and must file Form 8300 for this transaction. Snaptax Example 2. Snaptax You are a retail jeweler. Snaptax Mary North buys an item of jewelry from you for $12,000. Snaptax She pays for it with a personal check payable to you in the amount of $9,600 and traveler's checks totaling $2,400. Snaptax Because the personal check is not treated as cash, you have not received more than $10,000 cash in the transaction. Snaptax You do not have to file Form 8300. Snaptax Example 3. Snaptax You are a boat dealer. Snaptax Emily Jones buys a boat from you for $16,500. Snaptax She pays for it with a cashier's check payable to you in the amount of $16,500. Snaptax The cashier's check is not treated as cash because its face amount is more than $10,000. Snaptax You do not have to file Form 8300 for this transaction. Snaptax Designated Reporting Transaction A designated reporting transaction is the retail sale of any of the following: A consumer durable, such as an automobile or boat. Snaptax A consumer durable is property, other than land or buildings, that: Is suitable for personal use, Can reasonably be expected to last at least 1 year under ordinary use, Has a sales price of more than $10,000, and Can be seen or touched (tangible property). Snaptax For example, a $20,000 car is a consumer durable, but a $20,000 dump truck or factory machine is not. Snaptax The car is a consumer durable even if you sell it to a buyer who will use it in a business. Snaptax A collectible (for example, a work of art, rug, antique, metal, gem, stamp, or coin). Snaptax Travel or entertainment, if the total sales price of all items sold for the same trip or entertainment event in one transaction (or related transactions) is more than $10,000. Snaptax To figure the total sales price of all items sold for a trip or entertainment event, you include the sales price of items such as airfare, hotel rooms, and admission tickets. Snaptax Example. Snaptax You are a travel agent. Snaptax Ed Johnson asks you to charter a passenger airplane to take a group to a sports event in another city. Snaptax He also asks you to book hotel rooms and admission tickets for the group. Snaptax In payment, he gives you two money orders, each for $6,000. Snaptax You have received more than $10,000 cash in this designated reporting transaction. Snaptax You must file Form 8300. Snaptax Retail sale. Snaptax   The term “retail sale” means any sale made in the course of a trade or business that consists mainly of making sales to ultimate consumers. Snaptax   Thus, if your business consists mainly of making sales to ultimate consumers, all sales you make in the course of that business are retail sales. Snaptax This includes any sales of items that will be resold. Snaptax Broker or intermediary. Snaptax   A designated reporting transaction includes the retail sale of items (1), (2), or (3) of the preceding list, even if the funds are received by a broker or other intermediary, rather than directly by the seller. Snaptax Exceptions to Definition of Cash A cashier's check, bank draft, traveler's check, or money order you received in a designated reporting transaction is not treated as cash if one of the following exceptions applies. Snaptax Exception for certain bank loans. Snaptax   A cashier's check, bank draft, traveler's check, or money order is not treated as cash if it is the proceeds from a bank loan. Snaptax As proof that it is from a bank loan, you may rely on a copy of the loan document, a written statement or lien instruction from the bank, or similar proof. Snaptax Example. Snaptax You are a car dealer. Snaptax Mandy White buys a new car from you for $11,500. Snaptax She pays you with $2,000 of U. Snaptax S. Snaptax currency and a cashier's check for $9,500 payable to you and her. Snaptax You can tell that the cashier's check is the proceeds of a bank loan because it includes instructions to you to have a lien put on the car as security for the loan. Snaptax For this reason, the cashier's check is not treated as cash. Snaptax You do not have to file Form 8300 for the transaction. Snaptax Exception for certain installment sales. Snaptax   A cashier's check, bank draft, traveler's check, or money order is not treated as cash if it is received in payment on a promissory note or an installment sales contract (including a lease that is considered a sale for federal tax purposes). Snaptax However, this exception applies only if: You use similar notes or contracts in other sales to ultimate consumers in the ordinary course of your trade or business, and The total payments for the sale that you receive on or before the 60th day after the sale are 50% or less of the purchase price. Snaptax Exception for certain down payment plans. Snaptax   A cashier's check, bank draft, traveler's check, or money order is not treated as cash if you received it in payment for a consumer durable or collectible, and all three of the following statements are true. Snaptax You receive it under a payment plan requiring: One or more down payments, and Payment of the rest of the purchase price by the date of sale. Snaptax You receive it more than 60 days before the date of sale. Snaptax You use payment plans with the same or substantially similar terms when selling to ultimate consumers in the ordinary course of your trade or business. Snaptax Exception for travel and entertainment. Snaptax   A cashier's check, bank draft, traveler's check, or money order received for travel or entertainment is not treated as cash if all three of the following statements are true. Snaptax You receive it under a payment plan requiring: One or more down payments, and Payment of the rest of the purchase price by the earliest date that any travel or entertainment item (such as airfare) is furnished for the trip or entertainment event. Snaptax You receive it more than 60 days before the date on which the final payment is due. Snaptax You use payment plans with the same or substantially similar terms when selling to ultimate consumers in the ordinary course of your trade or business. Snaptax Taxpayer Identification Number (TIN) You must furnish the correct TIN of the person or persons from whom you receive the cash. Snaptax If the transaction is conducted on the behalf of another person or persons, you must furnish the TIN of that person or persons. Snaptax If you do not know a person's TIN, you have to ask for it. Snaptax You may be subject to penalties for an incorrect or missing TIN. Snaptax There are three types of TINs. Snaptax The TIN for an individual, including a sole proprietor, is the individual's social security number (SSN). Snaptax The TIN for a nonresident alien individual who needs a TIN but is not eligible to get an SSN is an IRS individual taxpayer identification number (ITIN). Snaptax An ITIN has nine digits, similar to an SSN. Snaptax The TIN for other persons, including corporations, partnerships, and estates, is the employer identification number (EIN). Snaptax Exception. Snaptax   You are not required to provide the TIN of a person who is a nonresident alien individual or a foreign organization if that person or foreign organization: Does not have income effectively connected with the conduct of a U. Snaptax S. Snaptax trade or business; Does not have an office or place of business, or a fiscal or paying agent in the United States; Does not file a federal tax return; Does not furnish a withholding certificate described in §1. Snaptax 1441-1(e)(2) or (3) or 1. Snaptax 1441-5(c)(2)(iv) or (3)(iii) to the extent required under 1. Snaptax 1441-1(e)(4)(vii); Does not have to furnish a TIN on any return, statement, or other document as required by the income tax regulations under section 897 or 1445; or In the case of a nonresident alien individual, the individual has not chosen to file a joint federal income tax return with a spouse who is a U. Snaptax S. Snaptax citizen or resident. Snaptax What Is a Related Transaction? Any transactions between a buyer (or an agent of the buyer) and a seller that occur within a 24-hour period are related transactions. Snaptax If you receive over $10,000 in cash during two or more transactions with one buyer in a 24-hour period, you must treat the transactions as one transaction and report the payments on Form 8300. Snaptax For example, if you sell two products for $6,000 each to the same customer in 1 day and the customer pays you in cash, these are related transactions. Snaptax Because they total $12,000 (more than $10,000), you must file Form 8300. Snaptax More than 24 hours between transactions. Snaptax   Transactions are related even if they are more than 24 hours apart if you know, or have reason to know, that each is one of a series of connected transactions. Snaptax   For example, you are a travel agent. Snaptax A client pays you $8,000 in cash for a trip. Snaptax Two days later, the same client pays you $3,000 more in cash to include another person on the trip. Snaptax These are related transactions, and you must file Form 8300 to report them. Snaptax What About Suspicious Transactions? If you receive $10,000 or less in cash, you may voluntarily file Form 8300 if the transaction appears to be suspicious. Snaptax A transaction is suspicious if it appears that a person is trying to cause you not to file Form 8300 or is trying to cause you to file a false or incomplete Form 8300, or if there is a sign of possible illegal activity. Snaptax If you are suspicious, you are encouraged to call the local IRS Criminal Investigation Division as soon as possible. Snaptax Or, you can call the FinCEN Financial Institution Hotline toll free at 1-866-556-3974. Snaptax When, Where, and What To File The amount you receive and when you receive it determine when you must file. Snaptax Generally, you must file Form 8300 within 15 days after receiving a payment. Snaptax If the Form 8300 due date (the 15th or last day you can timely file the form) falls on a Saturday, Sunday, or legal holiday, it is delayed until the next day that is not a Saturday, Sunday, or legal holiday. Snaptax More than one payment. Snaptax   In some transactions, the buyer may arrange to pay you in cash installment payments. Snaptax If the first payment is more than $10,000, you must file Form 8300 within 15 days. Snaptax If the first payment is not more than $10,000, you must add the first payment and any later payments made within 1 year of the first payment. Snaptax When the total cash payments are more than $10,000, you must file Form 8300 within 15 days. Snaptax   After you file Form 8300, you must start a new count of cash payments received from that buyer. Snaptax If you receive more than $10,000 in additional cash payments from that buyer within a 12-month period, you must file another Form 8300. Snaptax You must file the form within 15 days of the payment that causes the additional payments to total more than $10,000. Snaptax   If you are already required to file Form 8300 and you receive additional payments within the 15 days before you must file, you can report all the payments on one form. Snaptax Example. Snaptax On January 10, you receive a cash payment of $11,000. Snaptax You receive additional cash payments on the same transaction of $4,000 on February 15, $5,000 on March 20, and $6,000 on May 12. Snaptax By January 25, you must file a Form 8300 for the $11,000 payment. Snaptax By May 27, you must file an additional Form 8300 for the additional payments that total $15,000. Snaptax Amending a Report?   If you are amending a report, check box 1a at the top of Form 8300. Snaptax Complete the form in its entirety (Parts I-IV) and include the amended information. Snaptax Do not attach a copy of the original report. Snaptax Where to file. Snaptax   Mail the form to the address given in the Form 8300 instructions. Snaptax Required statement to buyer. Snaptax   You must give a written or electronic statement to each person named on any Form 8300 you must file. Snaptax You can give the statement electronically only if the recipient agrees to receive it in that format. Snaptax The statement must show the name and address of your business, the name and phone number of a contact person, and the total amount of reportable cash you received from the person during the year. Snaptax It must state that you are also reporting this information to the IRS. Snaptax   You must send this statement to the buyer by January 31 of the year after the year in which you received the cash that caused you to file the form. Snaptax    You must keep a copy of every Form 8300 you file for 5 years. Snaptax Examples Example 1. Snaptax Pat Brown is the sales manager for Small Town Cars. Snaptax On January 6, 2009, Jane Smith buys a new car from Pat and pays $18,000 in cash. Snaptax Pat asks for identification from Jane to get the necessary information to complete Form 8300. Snaptax A filled-in form is shown in this publication. Snaptax Pat must mail the form to the address shown in the form's instructions by January 21, 2009. Snaptax He must also send a statement to Jane by January 31, 2010. Snaptax Example 2. Snaptax Using the same facts given in Example 1, suppose Jane had arranged to make cash payments of $6,000 each on January 6, February 6, and March 6. Snaptax Pat would have to file a Form 8300 by February 26 (17 days after receiving total cash payments within 1 year over $10,000 because February 21, 2009, is a Saturday). Snaptax Pat would not have to report the remaining $6,000 cash payment because it is not more than $10,000. Snaptax However, he could report it if he felt it was a suspicious transaction. Snaptax Penalties There are civil penalties for failure to: File a correct Form 8300 by the date it is due, and Provide the required statement to those named in the Form 8300. Snaptax If you intentionally disregard the requirement to file a correct Form 8300 by the date it is due, the penalty is the greater of: $25,000, or The amount of cash you received and were required to report (up to $100,000). Snaptax There are criminal penalties for: Willful failure to file Form 8300, Willfully filing a false or fraudulent Form 8300, Stopping or trying to stop Form 8300 from being filed, and Setting up, helping to set up, or trying to set up a transaction in a way that would make it seem unnecessary to file Form 8300. Snaptax If you willfully fail to file Form 8300, you can be fined up to $250,000 for individuals ($500,000 for corporations) or sentenced to up to 5 years in prison, or both. Snaptax These dollar amounts are based on Section 3571 of Title 18 of the U. Snaptax S. Snaptax Code. Snaptax The penalties for failure to file may also apply to any person (including a payer) who attempts to interfere with or prevent the seller (or business) from filing a correct Form 8300. Snaptax This includes any attempt to structure the transaction in a way that would make it seem unnecessary to file Form 8300. Snaptax Structuring means breaking up a large cash transaction into small cash transactions. Snaptax 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 in several ways. Snaptax By selecting the method that is best for you, you will have quick and easy access to tax help. Snaptax Free help with your return. Snaptax   Free help in preparing your return is available nationwide from IRS-certified volunteers. Snaptax The Volunteer Income Tax Assistance (VITA) program is designed to help low-moderate income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Snaptax Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Snaptax To find the nearest VITA or TCE site, visit IRS. Snaptax gov or call 1-800-906-9887 or 1-800-829-1040. Snaptax   As part of the TCE program, AARP offers the Tax-Aide counseling program. Snaptax To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website at www. Snaptax aarp. Snaptax org/money/taxaide. Snaptax   For more information on these programs, go to IRS. Snaptax gov and enter keyword “VITA” in the upper right-hand corner. Snaptax Internet. Snaptax You can access the IRS website at IRS. Snaptax gov 24 hours a day, 7 days a week to: Check the status of your 2011 refund. Snaptax Go to IRS. Snaptax gov and click on Where's My Refund. Snaptax Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Snaptax If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Snaptax Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Snaptax E-file your return. Snaptax Find out about commercial tax preparation and e-file services available free to eligible taxpayers. Snaptax Download forms, including talking tax forms, instructions, and publications. Snaptax Order IRS products online. Snaptax Research your tax questions online. Snaptax Search publications online by topic or keyword. Snaptax Use the online Internal Revenue Code, regulations, or other official guidance. Snaptax View Internal Revenue Bulletins (IRBs) published in the last few years. Snaptax Figure your withholding allowances using the withholding calculator online at  www. Snaptax irs. Snaptax gov/individuals. Snaptax Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) Assistant available online at  www. Snaptax irs. Snaptax gov/individuals. Snaptax Sign up to receive local and national tax news by email. Snaptax Get information on starting and operating a small business. Snaptax Phone. Snaptax Many services are available by phone. Snaptax   Ordering forms, instructions, and publications. Snaptax Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions. Snaptax You should receive your order within 10 days. Snaptax Asking tax questions. Snaptax Call the IRS with your tax questions at 1-800-829-1040. Snaptax Solving problems. Snaptax You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. Snaptax An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Snaptax Call your local Taxpayer Assistance Center for an appointment. Snaptax To find the number, go to www. Snaptax irs. Snaptax gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Snaptax TTY/TDD equipment. Snaptax If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. Snaptax TeleTax topics. Snaptax Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. Snaptax Refund information. Snaptax You can check the status of your refund on the new IRS phone app. Snaptax Download the free IRS2Go app by visiting the iTunes app store or the Android Marketplace. Snaptax IRS2Go is a new way to provide you with information and tools. Snaptax To check the status of your refund by phone, call 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Snaptax Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Snaptax If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Snaptax Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Snaptax If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back. Snaptax Other refund information. Snaptax To check the status of a prior-year refund or amended return refund, call 1-800-829-1040. Snaptax Evaluating the quality of our telephone services. Snaptax To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. Snaptax One method is for a second IRS representative to listen in on or record random telephone calls. Snaptax Another is to ask some callers to complete a short survey at the end of the call. Snaptax Walk-in. Snaptax Many products and services are available on a walk-in basis. Snaptax   Products. Snaptax You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Snaptax Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Snaptax Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. Snaptax Services. Snaptax You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. Snaptax An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. Snaptax If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. Snaptax No appointment is necessary—just walk in. Snaptax If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. Snaptax A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. Snaptax If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. Snaptax All other issues will be handled without an appointment. Snaptax To find the number of your local office, go to www. Snaptax irs. Snaptax gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Snaptax Mail. Snaptax You can send your order for forms, instructions, and publications to the address below. Snaptax You should receive a response within 10 days after your request is received. Snaptax  Internal Revenue Service 1201 N. Snaptax Mitsubishi Motorway Bloomington, IL 61705-6613 Taxpayer Advocate Service. Snaptax   The Taxpayer Advocate Service (TAS) is your voice at the IRS. Snaptax Our job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights. Snaptax We offer free help to guide you through the often-confusing process of resolving tax problems that you haven’t been able to solve on your own. Snaptax Remember, the worst thing you can do is nothing at all. Snaptax   TAS can help if you can’t resolve your problem with the IRS and: Your problem is causing financial difficulties for you, your family, or your business. Snaptax You face (or your business is facing) an immediate threat of adverse action. Snaptax You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised. Snaptax   If you qualify for our help, we’ll do everything we can to get your problem resolved. Snaptax You will be assigned to one advocate who will be with you at every turn. Snaptax We have offices in every state, the District of Columbia, and Puerto Rico. Snaptax Although TAS is independent within the IRS, our advocates know how to work with the IRS to get your problems resolved. Snaptax And our services are always free. Snaptax   As a taxpayer, you have rights that the IRS must abide by in its dealings with you. Snaptax Our tax toolkit at www. Snaptax TaxpayerAdvocate. Snaptax irs. Snaptax gov can help you understand these rights. Snaptax   If you think TAS might be able to help you, call your local advocate, whose number is in your phone book and on our website at www. Snaptax irs. Snaptax gov/advocate. Snaptax You can also call our toll-free number at 1-877-777-4778. Snaptax   TAS also handles large-scale or systemic problems that affect many taxpayers. Snaptax If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www. Snaptax irs. Snaptax gov/advocate. Snaptax Low Income Taxpayer Clinics (LITCs). Snaptax   Low Income Taxpayer Clinics (LITCs) are independent from the IRS. Snaptax Some clinics serve individuals whose income is below a certain level and who need to resolve a tax problem. Snaptax These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee. Snaptax Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language. Snaptax For more information and to find a clinic near you, see the LITC page on www. Snaptax irs. Snaptax gov/advocate or IRS Publication 4134, Low Income Taxpayer Clinic List. Snaptax This publication is also available by calling 1-800-829-3676 or at your local IRS office. Snaptax Free tax services. Snaptax   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Snaptax Learn about free tax information from the IRS, including publications, services, and education and assistance programs. Snaptax The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. Snaptax The majority of the information and services listed in this publication are available to you free of charge. Snaptax If there is a fee associated with a resource or service, it is listed in the publication. Snaptax   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. Snaptax DVD for tax products. Snaptax You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. Snaptax Prior-year forms, instructions, and publications. Snaptax Tax Map: an electronic research tool and finding aid. Snaptax Tax law frequently asked questions. Snaptax Tax Topics from the IRS telephone response system. Snaptax Internal Revenue Code—Title 26 of the U. Snaptax S. Snaptax Code. Snaptax Links to other Internet based Tax Research Materials. Snaptax Fill-in, print, and save features for most tax forms. Snaptax Internal Revenue Bulletins. Snaptax Toll-free and email technical support. Snaptax Two releases during the year. Snaptax  – The first release will ship the beginning of January. Snaptax  – The final release will ship the beginning of March. Snaptax Purchase the DVD from National Technical Information Service (NTIS) at www. Snaptax irs. Snaptax gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee). Snaptax This image is too large to be displayed in the current screen. Snaptax Please click the link to view the image. Snaptax Fill-in Form 8300 Prev  Up  Next   Home   More Online Publications
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Snaptax 1. Snaptax   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. Snaptax Amount realized on a recourse debt. Snaptax 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. Snaptax S. Snaptax Individual Income Tax Return 1040X Amended U. Snaptax S. Snaptax 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. Snaptax However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Snaptax See chapter 5 for information about getting publications and forms. Snaptax Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Snaptax An exchange is a transfer of property for other property or services. Snaptax The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Snaptax Sale or lease. Snaptax    Some agreements that seem to be leases may really be conditional sales contracts. Snaptax The intention of the parties to the agreement can help you distinguish between a sale and a lease. Snaptax   There is no test or group of tests to prove what the parties intended when they made the agreement. Snaptax You should consider each agreement based on its own facts and circumstances. Snaptax For more information, see chapter 3 in Publication 535, Business Expenses. Snaptax Cancellation of a lease. Snaptax    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Snaptax 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. Snaptax Copyright. Snaptax    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. Snaptax 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. Snaptax Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Snaptax   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. Snaptax For more information, see Section 1231 Gains and Losses in chapter 3. Snaptax Easement. Snaptax   The amount received for granting an easement is subtracted from the basis of the property. Snaptax 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. Snaptax 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. Snaptax   Any amount received that is more than the basis to be reduced is a taxable gain. Snaptax The transaction is reported as a sale of property. Snaptax   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. Snaptax 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. Snaptax   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. Snaptax 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. Snaptax See Gain or Loss From Condemnations, later. Snaptax Property transferred to satisfy debt. Snaptax   A transfer of property to satisfy a debt is an exchange. Snaptax Note's maturity date extended. Snaptax   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Snaptax Also, it is not considered a closed and completed transaction that would result in a gain or loss. Snaptax 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. Snaptax Each case must be determined by its own facts. Snaptax For more information, see Regulations section 1. Snaptax 1001-3. Snaptax Transfer on death. Snaptax   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. Snaptax No taxable gain or deductible loss results from the transfer. Snaptax Bankruptcy. Snaptax   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Snaptax Consequently, the transfer generally does not result in gain or loss. Snaptax For more information, see Publication 908, Bankruptcy Tax Guide. Snaptax Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Snaptax A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Snaptax A loss is the adjusted basis of the property that is more than the amount you realize. Snaptax   Table 1-1. Snaptax How To Figure Whether You Have a Gain or Loss IF your. Snaptax . Snaptax . Snaptax THEN you have a. Snaptax . Snaptax . Snaptax Adjusted basis is more than the amount realized, Loss. Snaptax Amount realized is more than the adjusted basis, Gain. Snaptax Basis. Snaptax   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Snaptax The basis of property you buy is usually its cost. Snaptax 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. Snaptax See Basis Other Than Cost in Publication 551, Basis of Assets. Snaptax 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. Snaptax See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Snaptax Adjusted basis. Snaptax   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Snaptax Increases include costs of any improvements having a useful life of more than 1 year. Snaptax Decreases include depreciation and casualty losses. Snaptax For more details and additional examples, see Adjusted Basis in Publication 551. Snaptax Amount realized. Snaptax   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. Snaptax 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. Snaptax Fair market value. Snaptax   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. Snaptax If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Snaptax If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Snaptax Example. Snaptax You used a building in your business that cost you $70,000. Snaptax You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Snaptax You sold the building for $100,000 plus property having an FMV of $20,000. Snaptax The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Snaptax The selling expenses were $4,000. Snaptax Your gain on the sale is figured as follows. Snaptax 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. Snaptax   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Snaptax Recognized gains must be included in gross income. Snaptax Recognized losses are deductible from gross income. Snaptax However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Snaptax See Nontaxable Exchanges, later. Snaptax 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. Snaptax Interest in property. Snaptax   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. Snaptax 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. Snaptax Your basis in the property is disregarded. Snaptax This rule does not apply if all interests in the property are disposed of at the same time. Snaptax Example 1. Snaptax Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Snaptax You decide to sell your life interest in the farm. Snaptax The entire amount you receive is a recognized gain. Snaptax Your basis in the farm is disregarded. Snaptax Example 2. Snaptax The facts are the same as in Example 1, except that your brother joins you in selling the farm. Snaptax The entire interest in the property is sold, so your basis in the farm is not disregarded. Snaptax Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Snaptax Canceling a sale of real property. Snaptax   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. Snaptax If the buyer returns the property in the year of sale, no gain or loss is recognized. Snaptax 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. Snaptax 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. Snaptax When the property is returned in a later year, you acquire a new basis in the property. Snaptax That basis is equal to the amount you pay to the buyer. Snaptax 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. Snaptax You have a gain if the amount realized is more than your adjusted basis in the property. Snaptax However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Snaptax Bargain sales to charity. Snaptax   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Snaptax 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. Snaptax The adjusted basis of the part sold is figured as follows. Snaptax 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. Snaptax This allocation rule does not apply if a charitable contribution deduction is not allowable. Snaptax   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Snaptax Example. Snaptax 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. Snaptax Your adjusted basis in the property is $4,000. Snaptax Your gain on the sale is $1,200, figured as follows. Snaptax 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. Snaptax You must subtract depreciation you took or could have taken from the basis of the business or rental part. Snaptax However, see the special rule below for a home used partly for business or rental. Snaptax You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Snaptax 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. Snaptax Any gain on the personal part of the property is a capital gain. Snaptax You cannot deduct a loss on the personal part. Snaptax Home used partly for business or rental. Snaptax    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. Snaptax See Property Used Partly for Business or Rental, in Publication 523. Snaptax 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. Snaptax 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. Snaptax 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. Snaptax Figure the loss you can deduct as follows. Snaptax Use the lesser of the property's adjusted basis or fair market value at the time of the change. Snaptax Add to (1) the cost of any improvements and other increases to basis since the change. Snaptax Subtract from (2) depreciation and any other decreases to basis since the change. Snaptax Subtract the amount you realized on the sale from the result in (3). Snaptax If the amount you realized is more than the result in (3), treat this result as zero. Snaptax The result in (4) is the loss you can deduct. Snaptax Example. Snaptax You changed your main home to rental property 5 years ago. Snaptax At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Snaptax This year, you sold the property for $55,000. Snaptax You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Snaptax 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. Snaptax 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. Snaptax   If you have a gain on the sale, you generally must recognize the full amount of the gain. Snaptax You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Snaptax   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. Snaptax However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Snaptax   For more information, see Business Use or Rental of Home in Publication 523. Snaptax In addition, special rules apply if the home sold was acquired in a like-kind exchange. Snaptax See Special Situations in Publication 523. Snaptax Also see Like-Kind Exchanges, later. Snaptax Abandonments The abandonment of property is a disposition of property. Snaptax 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. Snaptax Generally, abandonment is not treated as a sale or exchange of the property. Snaptax If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Snaptax If your adjusted basis is more than the amount you realize (if any), then you have a loss. Snaptax Loss from abandonment of business or investment property is deductible as a loss. Snaptax A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Snaptax This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Snaptax If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Snaptax The abandonment loss is deducted in the tax year in which the loss is sustained. Snaptax If the abandoned property is secured by debt, special rules apply. Snaptax 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). Snaptax For more information, including examples, see chapter 3 of Publication 4681. Snaptax You cannot deduct any loss from abandonment of your home or other property held for personal use only. Snaptax Cancellation of debt. Snaptax   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. Snaptax This income is separate from any loss realized from abandonment of the property. Snaptax   You must report this income on your tax return unless one of the following applies. Snaptax The cancellation is intended as a gift. Snaptax The debt is qualified farm debt. Snaptax The debt is qualified real property business debt. Snaptax You are insolvent or bankrupt. Snaptax The debt is qualified principal residence indebtedness. Snaptax File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Snaptax For more information, including other exceptions and exclusion, see Publication 4681. Snaptax Forms 1099-A and 1099-C. Snaptax   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. Snaptax 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. Snaptax 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. Snaptax For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Snaptax 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. Snaptax The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Snaptax This is true even if you voluntarily return the property to the lender. Snaptax You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Snaptax Buyer's (borrower's) gain or loss. Snaptax   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. Snaptax The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Snaptax See Gain or Loss From Sales and Exchanges, earlier. Snaptax You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Snaptax Amount realized on a nonrecourse debt. Snaptax   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. Snaptax The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Snaptax Example 1. Snaptax Chris bought a new car for $15,000. Snaptax He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Snaptax Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Snaptax The credit company repossessed the car because he stopped making loan payments. Snaptax The balance due after taking into account the payments Chris made was $10,000. Snaptax The fair market value of the car when repossessed was $9,000. Snaptax The amount Chris realized on the repossession is $10,000. Snaptax 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. Snaptax Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Snaptax He has a $5,000 nondeductible loss. Snaptax Example 2. Snaptax Abena paid $200,000 for her home. Snaptax She paid $15,000 down and borrowed the remaining $185,000 from a bank. Snaptax Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Snaptax The bank foreclosed on the loan because Abena stopped making payments. Snaptax 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. Snaptax The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Snaptax She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Snaptax She has a $5,000 realized gain. Snaptax Amount realized on a recourse debt. Snaptax   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. Snaptax 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. Snaptax The amount realized does not include the canceled debt that is your income from cancellation of debt. Snaptax See Cancellation of debt, below. Snaptax Seller's (lender's) gain or loss on repossession. Snaptax   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. Snaptax For more information, see Repossession in Publication 537. Snaptax    Table 1-2. Snaptax Worksheet for Foreclosures and Repossessions Part 1. Snaptax Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Snaptax Complete this part only  if you were personally liable for the debt. Snaptax Otherwise,  go to Part 2. Snaptax   1. Snaptax 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. Snaptax Enter the fair market value of the transferred property   3. Snaptax Ordinary income from cancellation of debt upon foreclosure or    repossession. Snaptax * Subtract line 2 from line 1. Snaptax   If less than zero, enter zero   Part 2. Snaptax Figure your gain or loss from foreclosure or repossession. Snaptax   4. Snaptax If you completed Part 1, enter the smaller of line 1 or line 2. Snaptax   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Snaptax Enter any proceeds you received from the foreclosure sale   6. Snaptax Add lines 4 and 5   7. Snaptax Enter the adjusted basis of the transferred property   8. Snaptax Gain or loss from foreclosure or repossession. Snaptax Subtract line 7  from line 6   * The income may not be taxable. Snaptax See Cancellation of debt. Snaptax Cancellation of debt. Snaptax   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. Snaptax This income is separate from any gain or loss realized from the foreclosure or repossession. Snaptax Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Snaptax    You can use Table 1-2 to figure your income from cancellation of debt. Snaptax   You must report this income on your tax return unless one of the following applies. Snaptax The cancellation is intended as a gift. Snaptax The debt is qualified farm debt. Snaptax The debt is qualified real property business debt. Snaptax You are insolvent or bankrupt. Snaptax The debt is qualified principal residence indebtedness. Snaptax File Form 982 to report the income exclusion. Snaptax Example 1. Snaptax 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). Snaptax In this case, the amount he realizes is $9,000. Snaptax This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Snaptax Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Snaptax He has a $6,000 nondeductible loss. Snaptax He also is treated as receiving ordinary income from cancellation of debt. Snaptax That income is $1,000 ($10,000 − $9,000). Snaptax This is the part of the canceled debt not included in the amount realized. Snaptax Example 2. Snaptax 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). Snaptax In this case, the amount she realizes is $170,000. Snaptax This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Snaptax Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Snaptax She has a $5,000 nondeductible loss. Snaptax She also is treated as receiving ordinary income from cancellation of debt. Snaptax (The debt is not exempt from tax as discussed under Cancellation of debt, above. Snaptax ) That income is $10,000 ($180,000 − $170,000). Snaptax This is the part of the canceled debt not included in the amount realized. Snaptax Forms 1099-A and 1099-C. Snaptax   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. Snaptax 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. Snaptax 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. Snaptax For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Snaptax 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. Snaptax Involuntary conversions are also called involuntary exchanges. Snaptax Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Snaptax You report the gain or deduct the loss on your tax return for the year you realize it. Snaptax 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. Snaptax However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Snaptax Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Snaptax Your basis for the new property is the same as your basis for the converted property. Snaptax This means that the gain is deferred until a taxable sale or exchange occurs. Snaptax 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. Snaptax This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Snaptax If you have a gain or loss from the destruction or theft of property, see Publication 547. Snaptax Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Snaptax 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. Snaptax The owner receives a condemnation award (money or property) in exchange for the property taken. Snaptax A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Snaptax Example. Snaptax A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Snaptax After the local government took action to condemn your property, you went to court to keep it. Snaptax But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Snaptax This is a condemnation of private property for public use. Snaptax Threat of condemnation. Snaptax   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. Snaptax You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Snaptax   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. Snaptax 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. Snaptax Reports of condemnation. Snaptax   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. Snaptax You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Snaptax 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. Snaptax Example. Snaptax Your property lies along public utility lines. Snaptax The utility company has the authority to condemn your property. Snaptax The company informs you that it intends to acquire your property by negotiation or condemnation. Snaptax A threat of condemnation exists when you receive the notice. Snaptax Related property voluntarily sold. Snaptax   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. Snaptax A substantial economic relationship exists if together the properties were one economic unit. Snaptax You also must show that the condemned property could not reasonably or adequately be replaced. Snaptax You can elect to postpone reporting the gain by buying replacement property. Snaptax See Postponement of Gain, later. Snaptax 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. Snaptax If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Snaptax You can postpone reporting gain from a condemnation if you buy replacement property. Snaptax 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. Snaptax See Postponement of Gain, later. Snaptax If your net condemnation award is less than your adjusted basis, you have a loss. Snaptax If your loss is from property you held for personal use, you cannot deduct it. Snaptax You must report any deductible loss in the tax year it happened. Snaptax You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Snaptax Main home condemned. Snaptax   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. Snaptax You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Snaptax For information on this exclusion, see Publication 523. Snaptax 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. Snaptax See Postponement of Gain, later. Snaptax Table 1-3. Snaptax Worksheet for Condemnations Part 1. Snaptax Gain from severance damages. Snaptax  If you did not receive severance damages, skip Part 1 and go to Part 2. Snaptax   1. Snaptax Enter gross severance damages received   2. Snaptax Enter your expenses in getting severance damages   3. Snaptax Subtract line 2 from line 1. Snaptax If less than zero, enter -0-   4. Snaptax Enter any special assessment on remaining property taken out of your award   5. Snaptax Net severance damages. Snaptax Subtract line 4 from line 3. Snaptax If less than zero, enter -0-   6. Snaptax Enter the adjusted basis of the remaining property   7. Snaptax Gain from severance damages. Snaptax Subtract line 6 from line 5. Snaptax If less than zero, enter -0-   8. Snaptax Refigured adjusted basis of the remaining property. Snaptax Subtract line 5 from line 6. Snaptax If less than zero, enter -0-   Part 2. Snaptax Gain or loss from condemnation award. Snaptax   9. Snaptax Enter the gross condemnation award received   10. Snaptax Enter your expenses in getting the condemnation award   11. Snaptax If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Snaptax If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Snaptax Otherwise, enter -0-   12. Snaptax Add lines 10 and 11   13. Snaptax Net condemnation award. Snaptax Subtract line 12 from line 9   14. Snaptax Enter the adjusted basis of the condemned property   15. Snaptax Gain from condemnation award. Snaptax If line 14 is more than line 13, enter -0-. Snaptax Otherwise, subtract line 14 from  line 13 and skip line 16   16. Snaptax Loss from condemnation award. Snaptax Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Snaptax )   Part 3. Snaptax Postponed gain from condemnation. Snaptax  (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. Snaptax )   17. Snaptax If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Snaptax Otherwise, enter -0-   18. Snaptax If line 15 is more than zero, enter the amount from line 13. Snaptax Otherwise, enter -0-   19. Snaptax Add lines 17 and 18. Snaptax If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Snaptax Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Snaptax Subtract line 20 from line 19. Snaptax If less than zero, enter -0-   22. Snaptax If you completed Part 1, add lines 7 and 15. Snaptax Otherwise, enter the amount from line 15. Snaptax If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Snaptax Recognized gain. Snaptax Enter the smaller of line 21 or line 22. Snaptax   24. Snaptax Postponed gain. Snaptax Subtract line 23 from line 22. Snaptax If less than zero, enter -0-   Condemnation award. Snaptax   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Snaptax The award is also the amount you are paid for the sale of your property under threat of condemnation. Snaptax Payment of your debts. Snaptax   Amounts taken out of the award to pay your debts are considered paid to you. Snaptax 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. Snaptax Example. Snaptax The state condemned your property for public use. Snaptax The award was set at $200,000. Snaptax The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Snaptax You are considered to have received the entire $200,000 as a condemnation award. Snaptax Interest on award. Snaptax   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Snaptax You must report the interest separately as ordinary income. Snaptax Payments to relocate. Snaptax   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. Snaptax Do not include them in your income. Snaptax Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Snaptax Net condemnation award. Snaptax   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. Snaptax 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. Snaptax This is discussed later under Special assessment taken out of award. Snaptax Severance damages. Snaptax    Severance damages are not part of the award paid for the property condemned. Snaptax 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. Snaptax   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. Snaptax 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. Snaptax   The contracting parties should agree on the specific amount of severance damages in writing. Snaptax If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Snaptax   You cannot make a completely new allocation of the total award after the transaction is completed. Snaptax However, you can show how much of the award both parties intended for severance damages. Snaptax The severance damages part of the award is determined from all the facts and circumstances. Snaptax Example. Snaptax You sold part of your property to the state under threat of condemnation. Snaptax The contract you and the condemning authority signed showed only the total purchase price. Snaptax It did not specify a fixed sum for severance damages. Snaptax However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Snaptax You may treat this part as severance damages. Snaptax Treatment of severance damages. Snaptax   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Snaptax Use them to reduce the basis of the remaining property. Snaptax 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. Snaptax   If your net severance damages are more than the basis of your retained property, you have a gain. Snaptax You may be able to postpone reporting the gain. Snaptax See Postponement of Gain, later. Snaptax    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. Snaptax Net severance damages. Snaptax   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Snaptax 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. Snaptax The balance is your net severance damages. Snaptax Expenses of obtaining a condemnation award and severance damages. Snaptax   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Snaptax Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Snaptax If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Snaptax Example. Snaptax You receive a condemnation award and severance damages. Snaptax One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Snaptax You had legal expenses for the entire condemnation proceeding. Snaptax You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Snaptax You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Snaptax Special assessment retained out of award. Snaptax   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. Snaptax An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Snaptax Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Snaptax   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Snaptax Example. Snaptax To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Snaptax You were awarded $5,000 for this and spent $300 to get the award. Snaptax Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Snaptax The city then paid you only $4,300. Snaptax Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Snaptax 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). Snaptax The net award would not change, even if you later paid the assessment from the amount you received. Snaptax Severance damages received. Snaptax   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. Snaptax Any balance of the special assessment is used to reduce the condemnation award. Snaptax Example. Snaptax You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Snaptax You spent $300 to obtain the severance damages. Snaptax A special assessment of $800 was retained out of the award. Snaptax The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Snaptax Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Snaptax Part business or rental. Snaptax   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. Snaptax Figure your gain or loss separately because gain or loss on each part may be treated differently. Snaptax   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. Snaptax Example. Snaptax You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Snaptax You rented half the building and lived in the other half. Snaptax You paid $25,000 for the building and spent an additional $1,000 for a new roof. Snaptax You claimed allowable depreciation of $4,600 on the rental half. Snaptax You spent $200 in legal expenses to obtain the condemnation award. Snaptax Figure your gain or loss as follows. Snaptax     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. Snaptax 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. Snaptax Your basis for the new property is the same as your basis for the old. Snaptax Money or unlike property received. Snaptax   You ordinarily must report the gain if you receive money or unlike property. Snaptax 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. Snaptax 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. Snaptax See Controlling interest in a corporation, later. Snaptax   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Snaptax 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. Snaptax   The basis of the replacement property is its cost, reduced by the postponed gain. Snaptax 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. Snaptax See Controlling interest in a corporation, later. Snaptax You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Snaptax Postponing gain on severance damages. Snaptax   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. Snaptax See Treatment of severance damages, earlier. Snaptax 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). Snaptax   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. Snaptax 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. Snaptax   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Snaptax Postponing gain on the sale of related property. Snaptax   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. Snaptax You must meet the requirements explained earlier under Related property voluntarily sold. Snaptax 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). Snaptax Buying replacement property from a related person. Snaptax   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Snaptax For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Snaptax   This rule applies to the following taxpayers. Snaptax C corporations. Snaptax Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Snaptax 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. Snaptax   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Snaptax If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Snaptax If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Snaptax Exception. Snaptax   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Snaptax Advance payment. Snaptax   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). Snaptax Replacement property. Snaptax   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Snaptax You do not have to use the actual funds from the condemnation award to acquire the replacement property. Snaptax Property you acquire by gift or inheritance does not qualify as replacement property. Snaptax Similar or related in service or use. Snaptax   Your replacement property must be similar or related in service or use to the property it replaces. Snaptax   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. Snaptax For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Snaptax Owner-user. Snaptax   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. Snaptax Example. Snaptax Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Snaptax Your replacement property is not similar or related in service or use to the condemned property. Snaptax To be similar or related in service or use, your replacement property must also be used by you as your home. Snaptax Owner-investor. Snaptax   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. Snaptax You decide this by determining all the following information. Snaptax Whether the properties are of similar service to you. Snaptax The nature of the business risks connected with the properties. Snaptax What the properties demand of you in the way of management, service, and relations to your tenants. Snaptax Example. Snaptax You owned land and a building you rented to a manufacturing company. Snaptax The building was condemned. Snaptax During the replacement period, you had a new building built on other land you already owned. Snaptax You rented out the new building for use as a wholesale grocery warehouse. Snaptax 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. Snaptax Your management activities. Snaptax The amount and kind of services you provide to your tenants. Snaptax The nature of your business risks connected with the properties. Snaptax Leasehold replaced with fee simple property. Snaptax   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. Snaptax   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. Snaptax A leasehold is property held under a lease, usually for a term of years. Snaptax Outdoor advertising display replaced with real property. Snaptax   You can elect to treat an outdoor advertising display as real property. Snaptax 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. Snaptax 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. Snaptax   You can make this election only if you did not claim a section 179 deduction for the display. Snaptax You cannot cancel this election unless you get the consent of the IRS. Snaptax   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. Snaptax Substituting replacement property. Snaptax   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Snaptax But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Snaptax Controlling interest in a corporation. Snaptax   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. Snaptax 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. Snaptax Basis adjustment to corporation's property. Snaptax   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Snaptax 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). Snaptax   Allocate this reduction to the following classes of property in the order shown below. Snaptax Property that is similar or related in service or use to the condemned property. Snaptax Depreciable property not reduced in (1). Snaptax All other property. Snaptax 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. Snaptax The reduced basis of any single property cannot be less than zero. Snaptax Main home replaced. Snaptax   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. Snaptax The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Snaptax   You must reduce the basis of your replacement property by the postponed gain. Snaptax 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. Snaptax Example. Snaptax City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Snaptax The city paid you a condemnation award of $400,000. Snaptax Your adjusted basis in the property was $80,000. Snaptax You realize a gain of $320,000 ($400,000 − $80,000). Snaptax You purchased a new home for $100,000. Snaptax You can exclude $250,000 of the realized gain from your gross income. Snaptax 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). Snaptax You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Snaptax The remaining $20,000 of realized gain is postponed. Snaptax Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Snaptax Replacement period. Snaptax   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Snaptax This is the replacement period. Snaptax   The replacement period for a condemnation begins on the earlier of the following dates. Snaptax The date on which you disposed of the condemned property. Snaptax The date on which the threat of condemnation began. Snaptax   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. Snaptax However, see the exceptions below. Snaptax Three-year replacement period for certain property. Snaptax   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. Snaptax 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. Snaptax Five-year replacement period for certain property. Snaptax   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. Snaptax 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. Snaptax 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. Snaptax 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. Snaptax Extended replacement period for taxpayers affected by other federally declared disasters. Snaptax    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. Snaptax For more information visit www. Snaptax irs. Snaptax gov/uac/Tax-Relief-in-Disaster-Situations. Snaptax Weather-related sales of livestock in an area eligible for federal assistance. Snaptax   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. Snaptax    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. Snaptax See Notice 2006-82. Snaptax You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Snaptax irs. Snaptax gov/irb/2006-39_IRB/ar13. Snaptax html. Snaptax    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. Snaptax 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. Snaptax You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Snaptax irs. Snaptax gov/irb/2013-45_IRB/ar04. Snaptax html. Snaptax The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Snaptax Determining when gain is realized. Snaptax   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Snaptax 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. Snaptax   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Snaptax 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. Snaptax   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Snaptax All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Snaptax All or part of the award is actually or constructively received. Snaptax 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. Snaptax Replacement property bought before the condemnation. Snaptax   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. Snaptax Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Snaptax Example. Snaptax On April 3, 2012, city authorities notified you that your property would be condemned. Snaptax On June 5, 2012, you acquired property to replace the property to be condemned. Snaptax You still had the new property when the city took possession of your old property on September 4, 2013. Snaptax You have made a replacement within the replacement period. Snaptax Extension. Snaptax   You can request an extension of the replacement period from the IRS director for your area. Snaptax You should apply before the end of the replacement period. Snaptax Your request should explain in detail why you need an extension. Snaptax The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Snaptax An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Snaptax   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Snaptax Extensions are usually limited to a period of 1 year or less. Snaptax The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Snaptax If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri