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Tax Forms For Students

Tax forms for students Depreciation Table of Contents Introduction Special Depreciation AllowanceQualified Property Election Not To Claim the Allowance Rules for Returns Filed Before June 1, 2002 Passenger Automobiles New York Liberty Zone BenefitsSpecial Liberty Zone Depreciation Allowance Increased Section 179 Deduction Liberty Zone Leasehold Improvement Property If you depreciate business property that you acquired and placed in service after September 10, 2001, new law contains provisions that may affect your depreciation deduction for that property. Tax forms for students Publication 946, How To Depreciate Property, contains information on depreciation. Tax forms for students However, Publication 946 does not contain the new provisions because it was printed before the law was enacted. Tax forms for students The new provisions are in the Supplement to Publication 946, which is reprinted below. Tax forms for students Supplement to Publication 946 How To Depreciate Property   Introduction After Publication 946 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Tax forms for students The new law made several changes in the tax rules explained in the publication. Tax forms for students Some of the changes apply to property placed in service during 2001. Tax forms for students This supplemental publication describes those changes and explains what you should do if you are affected by them. Tax forms for students The situations and examples in Publication 946 do not reflect any of the changes made by the Job Creation and Worker Assistance Act of 2002. Tax forms for students The new law contains the following provisions. Tax forms for students 30% depreciation deductions (special depreciation allowance and special New York Liberty Zone (Liberty Zone) depreciation allowance) for the year qualified property is placed in service after September 10, 2001. Tax forms for students An increased dollar limit on the section 179 deduction for qualified Liberty Zone property purchased after September 10, 2001. Tax forms for students A shorter recovery period for qualified Liberty Zone leasehold improvement property placed in service after September 10, 2001. Tax forms for students An increase in the maximum depreciation deduction for 2001 for a qualified passenger automobile placed in service after September 10, 2001. Tax forms for students If you believe you qualify for an increased deduction under any of these new rules, you must file the revised 2001 Form 4562 (dated March 2002) for 2001 calendar or fiscal years and 2000 fiscal years ending after September 10, 2001. Tax forms for students If you have already filed a tax return, this supplemental publication explains how to claim these benefits and how to elect not to claim the special depreciation allowance or special Liberty Zone depreciation allowance. Tax forms for students See Table 2 at the end of the supplement for an overview of the rules that apply if you filed your return before June 1, 2002. Tax forms for students Special Depreciation Allowance You can take a special depreciation allowance for qualified property you place in service after September 10, 2001. Tax forms for students The allowance is an additional deduction of 30% of the property's depreciable basis. Tax forms for students To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Tax forms for students See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Tax forms for students The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Tax forms for students There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Tax forms for students In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Tax forms for students Example 1. Tax forms for students On November 1, 2001, you bought and placed in service in your business qualified property that cost $100,000. Tax forms for students You did not elect to claim a section 179 deduction. Tax forms for students You can deduct 30% of the cost ($30,000) as a special depreciation allowance for 2001. Tax forms for students You use the remaining $70,000 of cost to figure your regular depreciation deduction for 2001 and later years. Tax forms for students Example 2. Tax forms for students The facts are the same as in Example 1, except that you choose to deduct $24,000 of the property's cost as a section 179 deduction. Tax forms for students You use the remaining $76,000 of cost to figure your special depreciation allowance of $22,800 ($76,000 × 30%). Tax forms for students You use the remaining $53,200 of cost to figure your regular depreciation deduction for 2001 and later years. Tax forms for students Qualified Property To qualify for the special depreciation allowance, your property must meet the following requirements. Tax forms for students It is new property of one of the following types. Tax forms for students Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. Tax forms for students See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Tax forms for students Water utility property. Tax forms for students See 25-year property on page 22 in Publication 946. Tax forms for students Computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Tax forms for students (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Tax forms for students ) Qualified leasehold improvement property (defined later). Tax forms for students It meets the following tests (explained later under Tests To Be Met). Tax forms for students Acquisition date test. Tax forms for students Placed in service date test. Tax forms for students Original use test. Tax forms for students It is not excepted property (explained later under Excepted Property). Tax forms for students Qualified leasehold improvement property. Tax forms for students    Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met. Tax forms for students The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building. Tax forms for students That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. Tax forms for students The improvement is placed in service more than 3 years after the date the building was first placed in service. Tax forms for students   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. Tax forms for students The enlargement of the building. Tax forms for students Any elevator or escalator. Tax forms for students Any structural component benefiting a common area. Tax forms for students The internal structural framework of the building. Tax forms for students   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. Tax forms for students However, a binding commitment between related persons is not treated as a lease. Tax forms for students Related persons. Tax forms for students   For this purpose, the following are related persons. Tax forms for students Members of an affiliated group. Tax forms for students The persons listed in items (1) through (9) under Related persons on page 8 of Publication 946 (except that “80% or more” should be substituted for “more than 10%” each place it appears). Tax forms for students An executor and a beneficiary of the same estate. Tax forms for students Tests To Be Met To qualify for the special depreciation allowance, the property must meet all of the following tests. Tax forms for students Acquisition date test. Tax forms for students    Generally, you must have acquired the property either: After September 10, 2001, and before September 11, 2004, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or Pursuant to a written binding contract entered into after September 10, 2001, and before September 11, 2004. Tax forms for students   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004. Tax forms for students Placed in service date test. Tax forms for students   Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. Tax forms for students   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Tax forms for students Original use test. Tax forms for students   The original use of the property must have begun with you after September 10, 2001. Tax forms for students “Original use” means the first use to which the property is put, whether or not by you. Tax forms for students Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. Tax forms for students Excepted Property The following property does not qualify for the special depreciation allowance. Tax forms for students Property used by any person before September 11, 2001. Tax forms for students Property required to be depreciated using ADS. Tax forms for students This includes listed property used 50% or less in a qualified business use. Tax forms for students Qualified New York Liberty Zone leasehold improvement property (defined next). Tax forms for students Qualified New York Liberty Zone leasehold improvement property. Tax forms for students   This is any qualified leasehold improvement property (as defined earlier) if all of the following requirements are met. Tax forms for students The improvement is to a building located in the New York Liberty Zone (defined later under New York Liberty Zone Benefits). Tax forms for students The improvement is placed in service after September 10, 2001, and before January 1, 2007. Tax forms for students No written binding contract for the improvement was in effect before September 11, 2001. Tax forms for students Election Not To Claim the Allowance You can elect not to claim the special depreciation allowance for qualified property. Tax forms for students If you make this election for any property, it applies to all property in the same property class placed in service during the year. Tax forms for students To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Tax forms for students When to make election. Tax forms for students   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Tax forms for students   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Tax forms for students Attach the election statement to the amended return. Tax forms for students At the top of the election statement, write “Filed pursuant to section 301. Tax forms for students 9100–2. Tax forms for students ” Revoking an election. Tax forms for students   Once you elect not to deduct the special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Tax forms for students A request to revoke the election is subject to a user fee. Tax forms for students Rules for Returns Filed Before June 1, 2002 The following rules apply if you placed qualified property in service after September 10, 2001, and filed your return before June 1, 2002. Tax forms for students The rules apply to returns for the following years. Tax forms for students 2000 fiscal years that end after September 10, 2001. Tax forms for students 2001 calendar and fiscal years. Tax forms for students Claiming the allowance. Tax forms for students   If you did not claim the allowance on your return and did not make the election not to claim the allowance, you can do either of the following to claim the allowance. Tax forms for students File an amended return by the due date (not including extensions) of your return for the year following the year the property was placed in service. Tax forms for students Write “Filed Pursuant to Rev. Tax forms for students Proc. Tax forms for students 2002–33” at the top of the amended return. Tax forms for students File Form 3115, Application for Change in Accounting Method, with your return for the year following the year the property was placed in service. Tax forms for students Your return must be filed by the due date (including extensions). Tax forms for students Write “Automatic Change Filed Under Rev. Tax forms for students Proc. Tax forms for students 2002–33” on the appropriate line of Form 3115. Tax forms for students You must also file a copy (with signature) of the completed Form 3115 with the IRS National Office no later than when you file the original with your return. Tax forms for students For more information about filing Form 3115, including the address to send it to, see Revenue Procedure 2002–9, Revenue Procedure 2002–19, and Revenue Procedure 2002–33. Tax forms for students Example 1. Tax forms for students You are an individual and you use the calendar year. Tax forms for students You placed qualified property in service for your business in December 2001. Tax forms for students You filed your 2001 income tax return before April 15, 2002. Tax forms for students You did not claim the special depreciation allowance for the property and did not make the election not to claim the allowance. Tax forms for students You can claim the special allowance by filing an amended 2001 return by April 15, 2003, with “Filed Pursuant to Rev. Tax forms for students Proc. Tax forms for students 2002–33” at the top of the amended return. Tax forms for students You must file an amended return by April 15, 2003, even if you get an extension of time to file your 2002 tax return. Tax forms for students Example 2. Tax forms for students The facts concerning your 2001 return are the same as in Example 1. Tax forms for students In addition, you got an automatic 4-month extension of time (to August 15, 2003) to file your 2002 return. Tax forms for students You can claim the special allowance by filing a Form 3115 (with “Filed Pursuant to Rev. Tax forms for students Proc. Tax forms for students 2002–33” on the appropriate line) with your 2002 return by August 15, 2003. Tax forms for students You must also file a copy of this Form 3115 with the IRS National Office no later than when you file your 2002 return. Tax forms for students Electing not to claim the allowance. Tax forms for students   Generally, you have elected not to claim the special depreciation allowance for a class of property if you: Filed your return timely (including extensions) for the year you placed qualified property in service and indicated on a statement with the return that you are not claiming the allowance, or Filed your return timely and filed an amended return within 6 months of the due date of the original return (not including extensions) and indicated on a statement with the amended return that you are not claiming the allowance. Tax forms for students The statement must indicate that you are not deducting the special depreciation allowance and the class of property to which the election applies. Tax forms for students The statement can be either attached to or written on the return. Tax forms for students You can, for example, write “not deducting 30%” on Form 4562. Tax forms for students Deemed election. Tax forms for students   If you have not followed either of the procedures described above to elect not to claim the allowance, you may still be treated as making the election. Tax forms for students You will be treated as making the election if you meet both of the following conditions. Tax forms for students You filed your return for the year you placed the property in service and claimed depreciation, but not the special allowance, for any class of property. Tax forms for students You do not file an amended return or a Form 3115 within the time prescribed for claiming the special allowance. Tax forms for students See Claiming the allowance, earlier. Tax forms for students Passenger Automobiles The limit on your depreciation deduction (including any section 179 deduction) for any passenger automobile that is qualified property (defined earlier) placed in service after September 10, 2001, and for which you claim the special depreciation allowance is increased. Tax forms for students Generally, the limit is increased from $3,060 to $7,660. Tax forms for students However, if the automobile is a qualified electric car, the limit is increased from $9,280 to $23,080 ($22,980 if placed in service in 2002). Tax forms for students Table 1 shows the maximum deduction amounts for 2001. Tax forms for students Table 1. Tax forms for students Maximum Deduction for 2001 Qualified Vehicle Placed in Service Before Sept. Tax forms for students 11 Placed in Service After Sept. Tax forms for students 10 Passenger automobile $3,060 $7,660 Electric car 9,280 23,080 1 1$22,980 if you place an electric car in service in 2002. Tax forms for students Election not to claim the allowance. Tax forms for students   The increased maximum depreciation deduction does not apply if you elected not to claim the special depreciation allowance as explained earlier under Election Not To Claim the Allowance and Rules for Returns Filed Before June 1, 2002. Tax forms for students New York Liberty Zone Benefits Several benefits are available for property you place in service in the New York Liberty Zone (Liberty Zone). Tax forms for students They include a special depreciation allowance for the year you place the property in service, an increased section 179 deduction, and the classification of certain leasehold improvement property as 5-year property. Tax forms for students Area defined. Tax forms for students   The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York. Tax forms for students Special Liberty Zone Depreciation Allowance You can take a special depreciation allowance for qualified Liberty Zone property you place in service after September 10, 2001. Tax forms for students The allowance is an additional deduction of 30% of the property's depreciable basis. Tax forms for students To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Tax forms for students See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Tax forms for students The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Tax forms for students There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Tax forms for students In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Tax forms for students You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Tax forms for students Qualified property is eligible for only one special depreciation allowance. Tax forms for students Example 1. Tax forms for students On November 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $200,000. Tax forms for students You did not elect to claim a section 179 deduction. Tax forms for students You can deduct 30% of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001. Tax forms for students You use the remaining $140,000 of cost to figure your regular depreciation deduction for 2001 and later years. Tax forms for students Example 2. Tax forms for students The facts are the same as in Example 1, except that you choose to deduct $59,000 of the property's cost as a section 179 deduction. Tax forms for students (See Increased Section 179 Deduction, later, for information concerning how this section 179 deduction amount is figured). Tax forms for students You use the remaining $141,000 of cost to figure your special Liberty Zone depreciation allowance of $42,300 ($141,000 × 30%). Tax forms for students You use the remaining $98,700 of cost to figure your regular depreciation deduction for 2001 and later years. Tax forms for students Qualified Liberty Zone Property For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after September 10, 2001, property qualifies for the special Liberty Zone depreciation allowance if it meets the following requirements. Tax forms for students It is one of the following types of property. Tax forms for students Used property depreciated under MACRS with a recovery period of 20 years or less. Tax forms for students See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Tax forms for students Used water utility property. Tax forms for students See 25-year property on page 22 in Publication 946. Tax forms for students Used computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Tax forms for students (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Tax forms for students ) Certain nonresidential real property and residential rental property (defined later). Tax forms for students It meets the following tests (explained later under Tests to be met). Tax forms for students Acquisition date test. Tax forms for students Placed in service date test. Tax forms for students Substantial use test. Tax forms for students Original use test. Tax forms for students It is not excepted property (explained later under Excepted property). Tax forms for students Nonresidential real property and residential rental property. Tax forms for students   This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. Tax forms for students Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned. Tax forms for students   For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. Tax forms for students Otherwise, the property is considered damaged real property. Tax forms for students For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance. Tax forms for students Tests to be met. Tax forms for students   To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests. Tax forms for students Acquisition date test. Tax forms for students   You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. Tax forms for students   For information on the acquisition of property by purchase, see Property Acquired by Purchase on page 15 of Publication 946. Tax forms for students   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001. Tax forms for students Placed in service date test. Tax forms for students   Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property). Tax forms for students   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Tax forms for students Substantial use test. Tax forms for students   Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone. Tax forms for students Original use test. Tax forms for students   The original use of the property in the Liberty Zone must have begun with you after September 10, 2001. Tax forms for students   Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Tax forms for students Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. Tax forms for students Excepted property. Tax forms for students   The following property does not qualify for the special Liberty Zone depreciation allowance. Tax forms for students Property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Tax forms for students Property required to be depreciated using ADS. Tax forms for students This includes listed property used 50% or less in a qualified business use. Tax forms for students Qualified New York Liberty Zone leasehold improvement property (defined earlier in Excepted Property under Special Depreciation Allowance). Tax forms for students Example. Tax forms for students In December 2001, you bought and placed in service in your business in the Liberty Zone the following property. Tax forms for students New office furniture with a MACRS recovery period of 7 years. Tax forms for students A used computer with a MACRS recovery period of 5 years. Tax forms for students The computer had not previously been used within the Liberty Zone. Tax forms for students Because the office furniture is new property, it qualifies for the special depreciation allowance, but not the special Liberty Zone depreciation allowance. Tax forms for students Because the computer is used property that had not previously been used in the Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance, but not the special depreciation allowance. Tax forms for students Election Not To Claim the Liberty Zone Allowance You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. Tax forms for students If you make this election for any property, it applies to all property in the same property class placed in service during the year. Tax forms for students To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Tax forms for students When to make the election. Tax forms for students   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Tax forms for students   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Tax forms for students Attach the election statement to the amended return. Tax forms for students At the top of the election statement, write “Filed pursuant to section 301. Tax forms for students 9100–2. Tax forms for students ” Revoking an election. Tax forms for students   Once you elect not to deduct the special Liberty Zone depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Tax forms for students A request to revoke the election is subject to a user fee. Tax forms for students Returns filed before June 1, 2002. Tax forms for students   The rules that apply to the special depreciation allowance discussed earlier in Rules for Returns Filed Before June 1, 2002 under Special Depreciation Allowance also apply to the special Liberty Zone depreciation allowance. Tax forms for students Increased Section 179 Deduction Under section 179 of the Internal Revenue Code, you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Tax forms for students For tax years beginning in 2000, that limit was $20,000. Tax forms for students For tax years beginning in 2001 and 2002, that limit is generally $24,000. Tax forms for students If the cost of qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of the cost over $200,000. Tax forms for students Increased Dollar Limit The dollar limit on the section 179 deduction is increased for certain property placed in service in the Liberty Zone. Tax forms for students The increase is the smaller of the following amounts. Tax forms for students $35,000. Tax forms for students The cost of section 179 property that is qualified Liberty Zone property placed in service during the year. Tax forms for students If you use the revised 2001 Form 4562 (dated March 2002) for a tax year beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before adding the additional amount for qualified property. Tax forms for students Qualified property. Tax forms for students   To qualify for the increased section 179 deduction, your property must be section 179 property that is either: Qualified Liberty Zone property, or Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance. Tax forms for students Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone Depreciation Allowance. Tax forms for students Property eligible for the special depreciation allowance is explained earlier in Qualified Property under Special Depreciation Allowance. Tax forms for students For information on the requirements that must be met for property to qualify for the section 179 deduction, see What Property Qualifies? on page 14 of Publication 946. Tax forms for students Example 1. Tax forms for students In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $25,000. Tax forms for students Because this cost is less than $35,000, the dollar limit on the section 179 deduction is increased by $25,000 to $49,000 ($24,000 + $25,000). Tax forms for students Example 2. Tax forms for students In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $75,000. Tax forms for students Because $35,000 is less than the cost of the property you place in service, the dollar limit on the section 179 deduction you can claim is increased by $35,000 to $59,000 ($24,000 + $35,000). Tax forms for students Reduced Dollar Limit Generally, you must reduce the dollar limit for a year by the cost of qualifying section 179 property placed in service in the year that is more than $200,000. Tax forms for students However, if the cost of your Liberty Zone property exceeds $200,000, you take into account only 50% (instead of 100%) of the cost of qualified property placed in service in a year. Tax forms for students Example. Tax forms for students In 2002, you place in service in your business, which is in the Liberty Zone, qualified property costing $460,000. Tax forms for students Your increased dollar limit is $59,000 ($35,000 + $24,000). Tax forms for students Because 50% of the cost of the property you place in service ($230,000) is $30,000 more than $200,000, you must reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000). Tax forms for students Recapture Rules Rules similar to those explained on page 20 of Publication 946 under When Must You Recapture the Deduction? apply with respect to any qualified property you stop using in the Liberty Zone. Tax forms for students Returns Filed Before June 1, 2002 If you filed a return before June 1, 2002, and did not deduct the increased section 179 amount for qualified property placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by the due date (not including extensions) of the return for the year after the year the property was placed in service. Tax forms for students This rule applies to returns for the following years. Tax forms for students 2000 fiscal years that end after September 10, 2001. Tax forms for students 2001 calendar and fiscal years. Tax forms for students On the amended return, write “Filed Pursuant to Rev. Tax forms for students Proc. Tax forms for students 2002–33. Tax forms for students ” Liberty Zone Leasehold Improvement Property Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance) is 5-year property. Tax forms for students This means that it is depreciated over a recovery period of 5 years. Tax forms for students For information about recovery periods, see Which Recovery Period Applies? on page 23 of Publication 946. Tax forms for students The straight-line method must be used with respect to qualified Liberty Zone leasehold improvement property. Tax forms for students Under ADS, the recovery period for qualified Liberty Zone leasehold improvement property is 9 years. Tax forms for students Returns Filed Before June 1, 2002 If you filed either of the following returns before June 1, 2002, and did not depreciate qualified Liberty Zone leasehold improvement property placed in service during the tax year as 5-year property using the straight line method, you should file an amended return before you file your return for the year after the year the property was placed in service. Tax forms for students Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001). Tax forms for students Your 2001 calendar or fiscal year return. Tax forms for students On the amended return, write “Filed Pursuant to Rev. Tax forms for students Proc. Tax forms for students 2002–33. Tax forms for students ” Table 2. Tax forms for students Rules for Returns Filed Before June 1, 2002 Note:This chart highlights the rules for returns affected by the Job Creation and Worker Assistance Act of 2002 that were filed before June 1, 2002, without accounting for any of the new benefits under the law. Tax forms for students See the text for definitions and examples. Tax forms for students Do not rely on this chart alone. Tax forms for students IF you want to. Tax forms for students . Tax forms for students . Tax forms for students THEN you. Tax forms for students . Tax forms for students . Tax forms for students BY. Tax forms for students . Tax forms for students . Tax forms for students claim the special depreciation allowance or special Liberty Zone depreciation allowance • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service, or • must file Form 3115, Application for Change in Accounting Method, with your return for the year after the year the property was placed in service • the due date (including extensions) of your return for the year after the year the property was placed in service, and • must file a copy of your completed Form 3115 with the IRS National Office • the date you file the original Form 3115 with your return for the year after the year the property was placed in service. Tax forms for students elect not to claim the special depreciation allowance or the special Liberty Zone depreciation allowance 1 • must have filed your return timely for the year the property was placed in service, and   • must file an amended return stating you are not claiming the allowance • the date that is 6 months after the due date of the original return (not including extensions). Tax forms for students deduct the increased section 179 amount • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service. Tax forms for students use a 5-year recovery period for depreciating qualified Liberty Zone leasehold improvement property • should file an amended return • the date you file your return for the year after the year the property was placed in service. Tax forms for students 1See also Deemed election under Rules for Returns Filed Before June 1, 2002, earlier. 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Tax forms for students 8. Tax forms for students   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Tax forms for students Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Tax forms for students Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Tax forms for students Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Tax forms for students Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Tax forms for students This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Tax forms for students A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Tax forms for students An exchange is a transfer of property for other property or services. Tax forms for students Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Tax forms for students If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Tax forms for students If the adjusted basis of the property is more than the amount you realize, you will have a loss. Tax forms for students Basis and adjusted basis. Tax forms for students   The basis of property you buy is usually its cost. Tax forms for students The adjusted basis of property is basis plus certain additions and minus certain deductions. Tax forms for students See chapter 6 for more information about basis and adjusted basis. Tax forms for students Amount realized. Tax forms for students   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Tax forms for students The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Tax forms for students   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Tax forms for students Amount recognized. Tax forms for students   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Tax forms for students A recognized gain is a gain you must include in gross income and report on your income tax return. Tax forms for students A recognized loss is a loss you deduct from gross income. Tax forms for students However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Tax forms for students See Like-Kind Exchanges next. Tax forms for students Also, a loss from the disposition of property held for personal use is not deductible. Tax forms for students Like-Kind Exchanges Certain exchanges of property are not taxable. Tax forms for students This means any gain from the exchange is not recognized, and any loss cannot be deducted. Tax forms for students Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Tax forms for students The exchange of property for the same kind of property is the most common type of nontaxable exchange. Tax forms for students To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Tax forms for students Qualifying property. Tax forms for students Like-kind property. Tax forms for students These two requirements are discussed later. Tax forms for students Multiple-party transactions. Tax forms for students   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Tax forms for students Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Tax forms for students Receipt of title from third party. Tax forms for students   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Tax forms for students Basis of property received. Tax forms for students   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Tax forms for students See chapter 6 for more information. Tax forms for students Money paid. Tax forms for students   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Tax forms for students The basis of the property received is the basis of the property given up, increased by the money paid. Tax forms for students Example. Tax forms for students You traded an old tractor with an adjusted basis of $15,000 for a new one. Tax forms for students The new tractor costs $300,000. Tax forms for students You were allowed $80,000 for the old tractor and paid $220,000 cash. Tax forms for students You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Tax forms for students If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Tax forms for students In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Tax forms for students Reporting the exchange. Tax forms for students   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Tax forms for students The Instructions for Form 8824 explain how to report the details of the exchange. Tax forms for students   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Tax forms for students You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Tax forms for students See chapter 9 for more information. Tax forms for students Qualifying property. Tax forms for students   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Tax forms for students Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Tax forms for students Nonqualifying property. Tax forms for students   The rules for like-kind exchanges do not apply to exchanges of the following property. Tax forms for students Property you use for personal purposes, such as your home and family car. Tax forms for students Stock in trade or other property held primarily for sale, such as crops and produce. Tax forms for students Stocks, bonds, or notes. Tax forms for students However, see Qualifying property above. Tax forms for students Other securities or evidences of indebtedness, such as accounts receivable. Tax forms for students Partnership interests. Tax forms for students However, you may have a nontaxable exchange under other rules. Tax forms for students See Other Nontaxable Exchanges in chapter 1 of Publication 544. Tax forms for students Like-kind property. Tax forms for students   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Tax forms for students Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Tax forms for students Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Tax forms for students For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Tax forms for students   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Tax forms for students An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Tax forms for students The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Tax forms for students For example, the exchange of a bull for a cow is not a like-kind exchange. Tax forms for students An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Tax forms for students    Note. Tax forms for students Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Tax forms for students Personal property. Tax forms for students   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Tax forms for students Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Tax forms for students Property classified in any General Asset Class may not be classified within a Product Class. Tax forms for students Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Tax forms for students General Asset Classes. Tax forms for students   General Asset Classes describe the types of property frequently used in many businesses. Tax forms for students They include, but are not limited to, the following property. Tax forms for students Office furniture, fixtures, and equipment (asset class 00. Tax forms for students 11). Tax forms for students Information systems, such as computers and peripheral equipment (asset class 00. Tax forms for students 12). Tax forms for students Data handling equipment except computers (asset class 00. Tax forms for students 13). Tax forms for students Automobiles and taxis (asset class 00. Tax forms for students 22). Tax forms for students Light general purpose trucks (asset class 00. Tax forms for students 241). Tax forms for students Heavy general purpose trucks (asset class 00. Tax forms for students 242). Tax forms for students Tractor units for use over-the-road (asset class 00. Tax forms for students 26). Tax forms for students Trailers and trailer-mounted containers (asset class 00. Tax forms for students 27). Tax forms for students Industrial steam and electric generation and/or distribution systems (asset class 00. Tax forms for students 4). Tax forms for students Product Classes. Tax forms for students   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Tax forms for students The latest version of the manual can be accessed at www. Tax forms for students census. Tax forms for students gov/eos/www/naics/. Tax forms for students Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Tax forms for students ntis. Tax forms for students gov/products/naics. Tax forms for students aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Tax forms for students A CD-ROM version with search and retrieval software is also available from NTIS. Tax forms for students    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Tax forms for students Partially nontaxable exchange. Tax forms for students   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Tax forms for students You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Tax forms for students A loss is not deductible. Tax forms for students Example 1. Tax forms for students You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Tax forms for students You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Tax forms for students However, only $10,000, the cash received, is recognized (included in income). Tax forms for students Example 2. Tax forms for students Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Tax forms for students Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Tax forms for students Example 3. Tax forms for students Assume in Example 1 that the FMV of the land you received was only $15,000. Tax forms for students Your $5,000 loss is not recognized. Tax forms for students Unlike property given up. Tax forms for students   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Tax forms for students The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Tax forms for students Like-kind exchanges between related persons. Tax forms for students   Special rules apply to like-kind exchanges between related persons. Tax forms for students These rules affect both direct and indirect exchanges. Tax forms for students Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Tax forms for students The gain or loss on the original exchange must be recognized as of the date of the later disposition. Tax forms for students The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Tax forms for students Related persons. Tax forms for students   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Tax forms for students ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Tax forms for students   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Tax forms for students Example. Tax forms for students You used a grey pickup truck in your farming business. Tax forms for students Your sister used a red pickup truck in her landscaping business. Tax forms for students In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Tax forms for students At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Tax forms for students The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Tax forms for students You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Tax forms for students Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Tax forms for students However, because this was a like-kind exchange, you recognized no gain. Tax forms for students Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Tax forms for students She recognized gain only to the extent of the money she received, $200. Tax forms for students Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Tax forms for students In 2013, you sold the red pickup truck to a third party for $7,000. Tax forms for students Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Tax forms for students On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Tax forms for students You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Tax forms for students In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Tax forms for students Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Tax forms for students Exceptions to the rules for related persons. Tax forms for students   The following property dispositions are excluded from these rules. Tax forms for students Dispositions due to the death of either related person. Tax forms for students Involuntary conversions. Tax forms for students Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Tax forms for students Multiple property exchanges. Tax forms for students   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Tax forms for students However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Tax forms for students Transfer and receive properties in two or more exchange groups. Tax forms for students Transfer or receive more than one property within a single exchange group. Tax forms for students   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Tax forms for students Deferred exchange. Tax forms for students   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Tax forms for students A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Tax forms for students The property you receive is replacement property. Tax forms for students The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Tax forms for students In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Tax forms for students   For more information see Deferred Exchanges in chapter 1 of Publication 544. Tax forms for students Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Tax forms for students This rule does not apply if the recipient is a nonresident alien. Tax forms for students Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Tax forms for students Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Tax forms for students The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Tax forms for students This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Tax forms for students This rule applies for determining loss as well as gain. Tax forms for students Any gain recognized on a transfer in trust increases the basis. Tax forms for students For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Tax forms for students Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Tax forms for students You may also have a capital gain if your section 1231 transactions result in a net gain. Tax forms for students See Section 1231 Gains and Losses in  chapter 9. Tax forms for students To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Tax forms for students Your net capital gains may be taxed at a lower tax rate than ordinary income. Tax forms for students See Capital Gains Tax Rates , later. Tax forms for students Your deduction for a net capital loss may be limited. Tax forms for students See Treatment of Capital Losses , later. Tax forms for students Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Tax forms for students The following items are examples of capital assets. Tax forms for students A home owned and occupied by you and your family. Tax forms for students Household furnishings. Tax forms for students A car used for pleasure. Tax forms for students If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Tax forms for students Stocks and bonds. Tax forms for students However, there are special rules for gains on qualified small business stock. Tax forms for students For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Tax forms for students Personal-use property. Tax forms for students   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Tax forms for students Loss from the sale or exchange of personal-use property is not deductible. Tax forms for students You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Tax forms for students For information on casualties and thefts, see chapter 11. Tax forms for students Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Tax forms for students The time you own an asset before disposing of it is the holding period. Tax forms for students If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Tax forms for students Report it in Part I of Schedule D (Form 1040). Tax forms for students If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Tax forms for students Report it in Part II of Schedule D (Form 1040). Tax forms for students Holding period. Tax forms for students   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Tax forms for students The day you disposed of the property is part of your holding period. Tax forms for students Example. Tax forms for students If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Tax forms for students If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Tax forms for students Inherited property. Tax forms for students   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Tax forms for students This rule does not apply to livestock used in a farm business. Tax forms for students See Holding period under Livestock , later. Tax forms for students Nonbusiness bad debt. Tax forms for students   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Tax forms for students See chapter 4 of Publication 550. Tax forms for students Nontaxable exchange. Tax forms for students   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Tax forms for students That is, it begins on the same day as your holding period for the old property. Tax forms for students Gift. Tax forms for students   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Tax forms for students Real property. Tax forms for students   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Tax forms for students   However, taking possession of real property under an option agreement is not enough to start the holding period. Tax forms for students The holding period cannot start until there is an actual contract of sale. Tax forms for students The holding period of the seller cannot end before that time. Tax forms for students Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Tax forms for students Net short-term capital gain or loss. Tax forms for students   Combine your short-term capital gains and losses. Tax forms for students Do this by adding all of your short-term capital gains. Tax forms for students Then add all of your short-term capital losses. Tax forms for students Subtract the lesser total from the greater. Tax forms for students The difference is your net short-term capital gain or loss. Tax forms for students Net long-term capital gain or loss. Tax forms for students   Follow the same steps to combine your long-term capital gains and losses. Tax forms for students The result is your net long-term capital gain or loss. Tax forms for students Net gain. Tax forms for students   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Tax forms for students However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Tax forms for students See Capital Gains Tax Rates , later. Tax forms for students Net loss. Tax forms for students   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Tax forms for students But there are limits on how much loss you can deduct and when you can deduct it. Tax forms for students See Treatment of Capital Losses next. Tax forms for students Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Tax forms for students For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Tax forms for students If your other income is low, you may not be able to use the full $3,000. Tax forms for students The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Tax forms for students Capital loss carryover. Tax forms for students   Generally, you have a capital loss carryover if either of the following situations applies to you. Tax forms for students Your net loss on Schedule D (Form 1040), is more than the yearly limit. Tax forms for students Your taxable income without your deduction for exemptions is less than zero. Tax forms for students If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Tax forms for students    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Tax forms for students Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Tax forms for students These lower rates are called the maximum capital gains rates. Tax forms for students The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Tax forms for students See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Tax forms for students Also see Publication 550. Tax forms for students Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Tax forms for students A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Tax forms for students Property held for sale in the ordinary course of your farm business. Tax forms for students   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Tax forms for students Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Tax forms for students The treatment of this property is discussed in chapter 3. Tax forms for students Land and depreciable properties. Tax forms for students   Land and depreciable property you use in farming are not capital assets. Tax forms for students Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Tax forms for students However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Tax forms for students The sales of these business assets are reported on Form 4797. Tax forms for students See chapter 9 for more information. Tax forms for students Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Tax forms for students Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Tax forms for students A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Tax forms for students The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Tax forms for students A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Tax forms for students Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Tax forms for students Hedging transactions. Tax forms for students Transactions that are not hedging transactions. Tax forms for students Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Tax forms for students There is a limit on the amount of capital losses you can deduct each year. Tax forms for students Hedging transactions are not subject to the mark-to-market rules. Tax forms for students If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Tax forms for students They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Tax forms for students The gain or loss on the termination of these hedges is generally ordinary gain or loss. Tax forms for students Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Tax forms for students Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Tax forms for students Examples include fuel and feed. Tax forms for students If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Tax forms for students Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Tax forms for students It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Tax forms for students Retain the identification of each hedging transaction with your books and records. Tax forms for students Also, identify the item(s) or aggregate risk that is being hedged in your records. Tax forms for students Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Tax forms for students For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Tax forms for students Accounting methods for hedging transactions. Tax forms for students   The accounting method you use for a hedging transaction must clearly reflect income. Tax forms for students This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Tax forms for students There are requirements and limits on the method you can use for certain hedging transactions. Tax forms for students See Regulations section 1. Tax forms for students 446-4(e) for those requirements and limits. Tax forms for students   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Tax forms for students Cash method. Tax forms for students Farm-price method. Tax forms for students Unit-livestock-price method. Tax forms for students   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Tax forms for students   Your books and records must describe the accounting method used for each type of hedging transaction. Tax forms for students They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Tax forms for students You must make the additional identification no more than 35 days after entering into the hedging transaction. Tax forms for students Example of a hedging transaction. Tax forms for students   You file your income tax returns on the cash method. Tax forms for students On July 2 you anticipate a yield of 50,000 bushels of corn this year. Tax forms for students The December futures price is $5. Tax forms for students 75 a bushel, but there are indications that by harvest time the price will drop. Tax forms for students To protect yourself against a drop in the price, you enter into the following hedging transaction. Tax forms for students You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Tax forms for students 75 a bushel. Tax forms for students   The price did not drop as anticipated but rose to $6 a bushel. Tax forms for students In November, you sell your crop at a local elevator for $6 a bushel. Tax forms for students You also close out your futures position by buying ten December contracts for $6 a bushel. Tax forms for students You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Tax forms for students   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Tax forms for students Your loss on the hedge is 25 cents a bushel. Tax forms for students In effect, the net selling price of your corn is $5. Tax forms for students 75 a bushel. Tax forms for students   Report the results of your futures transactions and your sale of corn separately on Schedule F. Tax forms for students See the instructions for the 2013 Schedule F (Form 1040). Tax forms for students   The loss on your futures transactions is $13,900, figured as follows. Tax forms for students July 2 - Sold December corn futures (50,000 bu. Tax forms for students @$5. Tax forms for students 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Tax forms for students @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Tax forms for students   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Tax forms for students × $6). Tax forms for students Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Tax forms for students   Assume you were right and the price went down 25 cents a bushel. Tax forms for students In effect, you would still net $5. Tax forms for students 75 a bushel, figured as follows. Tax forms for students Sold cash corn, per bushel $5. Tax forms for students 50 Gain on hedge, per bushel . Tax forms for students 25 Net price, per bushel $5. Tax forms for students 75       The gain on your futures transactions would have been $11,100, figured as follows. Tax forms for students July 2 - Sold December corn futures (50,000 bu. Tax forms for students @$5. Tax forms for students 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Tax forms for students @$5. Tax forms for students 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Tax forms for students   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Tax forms for students Livestock This part discusses the sale or exchange of livestock used in your farm business. Tax forms for students Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Tax forms for students However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Tax forms for students See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Tax forms for students The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Tax forms for students The sale of this livestock is reported on Schedule F. Tax forms for students See chapter 3. Tax forms for students Also, special rules apply to sales or exchanges caused by weather-related conditions. Tax forms for students See chapter 3. Tax forms for students Holding period. Tax forms for students   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Tax forms for students Livestock. Tax forms for students   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Tax forms for students Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Tax forms for students Livestock used in farm business. Tax forms for students   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Tax forms for students The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Tax forms for students An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Tax forms for students However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Tax forms for students Example 1. Tax forms for students You discover an animal that you intend to use for breeding purposes is sterile. Tax forms for students You dispose of it within a reasonable time. Tax forms for students This animal was held for breeding purposes. Tax forms for students Example 2. Tax forms for students You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Tax forms for students These young animals were held for breeding or dairy purposes. Tax forms for students Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Tax forms for students See Sales Caused by Weather-Related Conditions in chapter 3. Tax forms for students Example 3. Tax forms for students You are in the business of raising hogs for slaughter. Tax forms for students Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Tax forms for students You sell the brood sows after obtaining the litter. Tax forms for students Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Tax forms for students Example 4. Tax forms for students You are in the business of raising registered cattle for sale to others for use as breeding cattle. Tax forms for students The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Tax forms for students Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Tax forms for students Such use does not demonstrate that you are holding the cattle for breeding purposes. Tax forms for students However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Tax forms for students The same applies to hog and sheep breeders. Tax forms for students Example 5. Tax forms for students You breed, raise, and train horses for racing purposes. Tax forms for students Every year you cull horses from your racing stable. Tax forms for students In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Tax forms for students These horses are all considered held for sporting purposes. Tax forms for students Figuring gain or loss on the cash method. Tax forms for students   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Tax forms for students Raised livestock. Tax forms for students   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Tax forms for students Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Tax forms for students The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Tax forms for students However, see Uniform Capitalization Rules in chapter 6. Tax forms for students Purchased livestock. Tax forms for students   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Tax forms for students Example. Tax forms for students A farmer sold a breeding cow on January 8, 2013, for $1,250. Tax forms for students Expenses of the sale were $125. Tax forms for students The cow was bought July 2, 2009, for $1,300. Tax forms for students Depreciation (not less than the amount allowable) was $867. Tax forms for students Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Tax forms for students Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Tax forms for students Any loss on the disposition of such property is treated as a long-term capital loss. Tax forms for students Converted wetland. Tax forms for students   This is generally land that was drained or filled to make the production of agricultural commodities possible. Tax forms for students It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Tax forms for students   A wetland (before conversion) is land that meets all the following conditions. Tax forms for students It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Tax forms for students It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Tax forms for students It supports, under normal circumstances, mostly plants that grow in saturated soil. Tax forms for students Highly erodible cropland. Tax forms for students   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Tax forms for students Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Tax forms for students Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Tax forms for students Successor. Tax forms for students   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Tax forms for students Timber Standing timber you held as investment property is a capital asset. Tax forms for students Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Tax forms for students If you held the timber primarily for sale to customers, it is not a capital asset. Tax forms for students Gain or loss on its sale is ordinary business income or loss. Tax forms for students It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Tax forms for students See the Instructions for Schedule F (Form 1040). Tax forms for students Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Tax forms for students Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Tax forms for students , are ordinary farm income and expenses reported on Schedule F. Tax forms for students Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Tax forms for students Timber considered cut. Tax forms for students   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Tax forms for students This is true whether the timber is cut under contract or whether you cut it yourself. Tax forms for students Christmas trees. Tax forms for students   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Tax forms for students They qualify for both rules discussed below. Tax forms for students Election to treat cutting as a sale or exchange. Tax forms for students   Under the general rule, the cutting of timber results in no gain or loss. Tax forms for students It is not until a sale or exchange occurs that gain or loss is realized. Tax forms for students But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Tax forms for students Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Tax forms for students Any later sale results in ordinary business income or loss. Tax forms for students See the example below. Tax forms for students   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Tax forms for students Making the election. Tax forms for students   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Tax forms for students You do not have to make the election in the first year you cut the timber. Tax forms for students You can make it in any year to which the election would apply. Tax forms for students If the timber is partnership property, the election is made on the partnership return. Tax forms for students This election cannot be made on an amended return. Tax forms for students   Once you have made the election, it remains in effect for all later years unless you revoke it. Tax forms for students Election under section 631(a) may be revoked. Tax forms for students   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Tax forms for students The prior election (and revocation) is disregarded for purposes of making a subsequent election. Tax forms for students See Form T (Timber), Forest Activities Schedule, for more information. Tax forms for students Gain or loss. Tax forms for students   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Tax forms for students   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Tax forms for students Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Tax forms for students 611-3. Tax forms for students   Depletion of timber is discussed in chapter 7. Tax forms for students Example. Tax forms for students   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Tax forms for students It had an adjusted basis for depletion of $40 per MBF. Tax forms for students You are a calendar year taxpayer. Tax forms for students On January 1, 2013, the timber had a FMV of $350 per MBF. Tax forms for students It was cut in April for sale. Tax forms for students On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Tax forms for students You report the difference between the FMV and your adjusted basis for depletion as a gain. Tax forms for students This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Tax forms for students You figure your gain as follows. Tax forms for students FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Tax forms for students Outright sales of timber. Tax forms for students   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Tax forms for students However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Tax forms for students Cutting contract. Tax forms for students   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Tax forms for students You are the owner of the timber. Tax forms for students You held the timber longer than 1 year before its disposal. Tax forms for students You kept an economic interest in the timber. Tax forms for students   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Tax forms for students   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Tax forms for students Include this amount on Form 4797 along with your other section 1231 gains or losses. Tax forms for students Date of disposal. Tax forms for students   The date of disposal is the date the timber is cut. Tax forms for students However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Tax forms for students   This election applies only to figure the holding period of the timber. Tax forms for students It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Tax forms for students   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Tax forms for students The statement must identify the advance payments subject to the election and the contract under which they were made. Tax forms for students   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Tax forms for students Attach the statement to the amended return and write “Filed pursuant to section 301. Tax forms for students 9100-2” at the top of the statement. Tax forms for students File the amended return at the same address the original return was filed. Tax forms for students Owner. Tax forms for students   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Tax forms for students You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Tax forms for students Tree stumps. Tax forms for students   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Tax forms for students Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Tax forms for students However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Tax forms for students Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Tax forms for students   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Tax forms for students Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Tax forms for students If you have a gain from the sale, you may be allowed to exclude the gain on your home. Tax forms for students For more information, see Publication 523, Selling Your Home. Tax forms for students The gain on the sale of your business property is taxable. Tax forms for students A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Tax forms for students Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Tax forms for students See chapter 9. Tax forms for students Losses from personal-use property, other than casualty or theft losses, are not deductible. Tax forms for students If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Tax forms for students See chapter 10 for information about installment sales. Tax forms for students When you sell your farm, the gain or loss on each asset is figured separately. Tax forms for students The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Tax forms for students Each of the assets sold must be classified as one of the following. Tax forms for students Capital asset held 1 year or less. Tax forms for students Capital asset held longer than 1 year. Tax forms for students Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Tax forms for students Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Tax forms for students Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Tax forms for students Allocation of consideration paid for a farm. Tax forms for students   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Tax forms for students The residual method is required only if the group of assets sold constitutes a trade or business. Tax forms for students This method determines gain or loss from the transfer of each asset. Tax forms for students It also determines the buyer's basis in the business assets. Tax forms for students For more information, see Sale of a Business in chapter 2 of Publication 544. Tax forms for students Property used in farm operation. Tax forms for students   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Tax forms for students Recognized gains and losses on business property must be reported on your return for the year of the sale. Tax forms for students If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Tax forms for students Example. Tax forms for students You sell your farm, including your main home, which you have owned since December 2001. Tax forms for students You realize gain on the sale as follows. Tax forms for students   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Tax forms for students All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Tax forms for students Treat the balance as section 1231 gain. Tax forms for students The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Tax forms for students Partial sale. Tax forms for students   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Tax forms for students You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Tax forms for students For a detailed discussion on installment sales, see Publication 544. Tax forms for students Adjusted basis of the part sold. Tax forms for students   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Tax forms for students , on the part sold. Tax forms for students If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Tax forms for students Example. Tax forms for students You bought a 600-acre farm for $700,000. Tax forms for students The farm included land and buildings. Tax forms for students The purchase contract designated $600,000 of the purchase price to the land. Tax forms for students You later sold 60 acres of land on which you had installed a fence. Tax forms for students Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Tax forms for students Use this amount to determine your gain or loss on the sale of the 60 acres. Tax forms for students Assessed values for local property taxes. Tax forms for students   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Tax forms for students Example. Tax forms for students Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Tax forms for students However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Tax forms for students The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Tax forms for students Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Tax forms for students The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Tax forms for students Sale of your home. Tax forms for students   Your home is a capital asset and not property used in the trade or business of farming. Tax forms for students If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Tax forms for students Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Tax forms for students   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Tax forms for students For more information on basis, see chapter 6. Tax forms for students More information. Tax forms for students   For more information on selling your home, see Publication 523. Tax forms for students Gain from condemnation. Tax forms for students   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Tax forms for students However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Tax forms for students Foreclosure or Repossession 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. Tax forms for students The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Tax forms for students This is true even if you voluntarily return the property to the lender. Tax forms for students You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Tax forms for students Buyer's (borrower's) gain or loss. Tax forms for students   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. Tax forms for students The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Tax forms for students See Determining Gain or Loss , earlier. Tax forms for students Worksheet 8-1. Tax forms for students Worksheet for Foreclosures andRepossessions Part 1. Tax forms for students Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Tax forms for students Complete this part only if you were personally liable for the debt. Tax forms for students Otherwise, go to Part 2. Tax forms for students   1. Tax forms for students 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. Tax forms for students Enter the Fair Market Value of the transferred property   3. Tax forms for students Ordinary income from cancellation of debt upon foreclosure or repossession. Tax forms for students * Subtract line 2 from line 1. Tax forms for students If zero or less, enter -0-   Part 2. Tax forms for students Figure your gain or loss from foreclosure or repossession. Tax forms for students   4. Tax forms for students If you completed Part 1, enter the smaller of line 1 or line 2. Tax forms for students If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Tax forms for students Enter any proceeds you received from the foreclosure sale   6. Tax forms for students Add lines 4 and 5   7. Tax forms for students Enter the adjusted basis of the transferred property   8. Tax forms for students Gain or loss from foreclosure or repossession. Tax forms for students Subtract line 7  from line 6   * The income may not be taxable. Tax forms for students See Cancellation of debt . Tax forms for students    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Tax forms for students Amount realized on a nonrecourse debt. Tax forms for students   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Tax forms for students The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Tax forms for students Example 1. Tax forms for students Ann paid $200,000 for land used in her farming business. Tax forms for students She paid $15,000 down and borrowed the remaining $185,000 from a bank. Tax forms for students Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Tax forms for students The bank foreclosed on the loan 2 years after Ann stopped making payments. Tax forms for students When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Tax forms for students The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Tax forms for students She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Tax forms for students She has a $20,000 deductible loss. Tax forms for students Example 2. Tax forms for students Assume the same facts as in Example 1 except the FMV of the land was $210,000. Tax forms for students The result is the same. Tax forms for students The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Tax forms for students Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Tax forms for students Amount realized on a recourse debt. Tax forms for students   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. Tax forms for students   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. Tax forms for students The amount realized does not include the canceled debt that is your income from cancellation of debt. Tax forms for students See Cancellation of debt , later. Tax forms for students Example 3. Tax forms for students Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Tax forms for students In this case, the amount she realizes is $170,000. Tax forms for students This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Tax forms for students Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Tax forms for students She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Tax forms for students She is also treated as receiving ordinary income from cancellation of debt. Tax forms for students That income is $10,000 ($180,000 − $170,000). Tax forms for students This is the part of the canceled debt not included in the amount realized. Tax forms for students She reports this as other income on Schedule F, line 8. Tax forms for students Seller's (lender's) gain or loss on repossession. Tax forms for students   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. Tax forms for students For more information, see Repossession in Publication 537, Installment Sales. Tax forms for students Cancellation of debt. Tax forms for students   If property that is repossessed or foreclosed upon 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 FMV of the property. Tax forms for students This income is separate from any gain or loss realized from the foreclosure or repossession. Tax forms for students Report the income from cancellation of a business debt on Schedule F, line 8. Tax forms for students Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Tax forms for students    You can use Worksheet 8-1 to figure your income from cancellation of debt. Tax forms for students   However, income from cancellation of debt is not taxed if any of the following apply. Tax forms for students The cancellation is intended as a gift. Tax forms for students The debt is qualified farm debt (see chapter 3). Tax forms for students The debt is qualified real property business debt (see chapter 5 of Publication 334). Tax forms for students You are insolvent or bankrupt (see  chapter 3). Tax forms for students The debt is qualified principal residence indebtedness (see chapter 3). Tax forms for students   Use Form 982 to report the income exclusion. Tax forms for students Abandonment The abandonment of property is a disposition of property. Tax forms for students 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. Tax forms for students Business or investment property. Tax forms for students   Loss from abandonment of business or investment property is deductible as a loss. Tax forms for students Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Tax forms for students If your adjusted basis is more than the amount you realize (if any), then you have a loss. Tax forms for students If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Tax forms for students This rule also applies to leasehold improvements the lessor made for the lessee. Tax forms for students However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Tax forms for students   If the abandoned property is secured by debt, special rules apply. Tax forms for students The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Tax forms for students For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Tax forms for students The abandonment loss is deducted in the tax year in which the loss is sustained. Tax forms for students Report the loss on Form 4797, Part II, line 10. Tax forms for students Personal-use property. Tax forms for students   You cannot deduct any loss from abandonment of your home or other property held for personal use. Tax forms for students Canceled debt. Tax forms for students   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Tax forms for students This income is separate from any loss realized from abandonment of the property. Tax forms for students Report income from cancellation of a debt related to a business or rental activity as business or rental income. Tax forms for students Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Tax forms for students   However, income from cancellation of debt is not taxed in certain circumstances. Tax forms for students See Cancellation of debt earlier under Foreclosure or Repossession . Tax forms for students Forms 1099-A and 1099-C. Tax forms for students   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Tax forms for students However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Tax forms for students The lender must file Form 1099-C and send you a copy if the canceled debt 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. Tax forms for students For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Tax forms for students Prev  Up  Next   Home   More Online Publications