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Turbotax 2011 Tax Preparation

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Turbotax 2011 Tax Preparation

Turbotax 2011 tax preparation 9. Turbotax 2011 tax preparation   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. Turbotax 2011 tax preparation Depletion unit. Turbotax 2011 tax preparation Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. Turbotax 2011 tax preparation The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Turbotax 2011 tax preparation There are two ways of figuring depletion: cost depletion and percentage depletion. Turbotax 2011 tax preparation For mineral property, you generally must use the method that gives you the larger deduction. Turbotax 2011 tax preparation For standing timber, you must use cost depletion. Turbotax 2011 tax preparation Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. Turbotax 2011 tax preparation More than one person can have an economic interest in the same mineral deposit or timber. Turbotax 2011 tax preparation In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Turbotax 2011 tax preparation You have an economic interest if both the following apply. Turbotax 2011 tax preparation You have acquired by investment any interest in mineral deposits or standing timber. Turbotax 2011 tax preparation You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. Turbotax 2011 tax preparation A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. Turbotax 2011 tax preparation A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Turbotax 2011 tax preparation Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. Turbotax 2011 tax preparation Basis adjustment for depletion. Turbotax 2011 tax preparation   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. Turbotax 2011 tax preparation Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). Turbotax 2011 tax preparation For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. Turbotax 2011 tax preparation You can treat two or more separate interests as one property or as separate properties. Turbotax 2011 tax preparation See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. Turbotax 2011 tax preparation There are two ways of figuring depletion on mineral property. Turbotax 2011 tax preparation Cost depletion. Turbotax 2011 tax preparation Percentage depletion. Turbotax 2011 tax preparation Generally, you must use the method that gives you the larger deduction. Turbotax 2011 tax preparation However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. Turbotax 2011 tax preparation See Oil and Gas Wells , later. Turbotax 2011 tax preparation Cost Depletion To figure cost depletion you must first determine the following. Turbotax 2011 tax preparation The property's basis for depletion. Turbotax 2011 tax preparation The total recoverable units of mineral in the property's natural deposit. Turbotax 2011 tax preparation The number of units of mineral sold during the tax year. Turbotax 2011 tax preparation Basis for depletion. Turbotax 2011 tax preparation   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. Turbotax 2011 tax preparation Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. Turbotax 2011 tax preparation The residual value of land and improvements at the end of operations. Turbotax 2011 tax preparation The cost or value of land acquired for purposes other than mineral production. Turbotax 2011 tax preparation Adjusted basis. Turbotax 2011 tax preparation   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. Turbotax 2011 tax preparation Your adjusted basis can never be less than zero. Turbotax 2011 tax preparation See Publication 551, Basis of Assets, for more information on adjusted basis. Turbotax 2011 tax preparation Total recoverable units. Turbotax 2011 tax preparation   The total recoverable units is the sum of the following. Turbotax 2011 tax preparation The number of units of mineral remaining at the end of the year (including units recovered but not sold). Turbotax 2011 tax preparation The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). Turbotax 2011 tax preparation   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. Turbotax 2011 tax preparation You must include ores and minerals that are developed, in sight, blocked out, or assured. Turbotax 2011 tax preparation You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. Turbotax 2011 tax preparation But see Elective safe harbor for owners of oil and gas property , later. Turbotax 2011 tax preparation Number of units sold. Turbotax 2011 tax preparation   You determine the number of units sold during the tax year based on your method of accounting. Turbotax 2011 tax preparation Use the following table to make this determination. Turbotax 2011 tax preparation    IF you  use . Turbotax 2011 tax preparation . Turbotax 2011 tax preparation . Turbotax 2011 tax preparation THEN the units sold during the year are . Turbotax 2011 tax preparation . Turbotax 2011 tax preparation . Turbotax 2011 tax preparation The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). Turbotax 2011 tax preparation An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. Turbotax 2011 tax preparation   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. Turbotax 2011 tax preparation Figuring the cost depletion deduction. Turbotax 2011 tax preparation   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. Turbotax 2011 tax preparation Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Turbotax 2011 tax preparation Rate per unit. Turbotax 2011 tax preparation 2 Multiply the rate per unit by units sold during the tax year. Turbotax 2011 tax preparation Cost depletion deduction. Turbotax 2011 tax preparation You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Turbotax 2011 tax preparation Elective safe harbor for owners of oil and gas property. Turbotax 2011 tax preparation   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. Turbotax 2011 tax preparation If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). Turbotax 2011 tax preparation For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. Turbotax 2011 tax preparation irs. Turbotax 2011 tax preparation gov/pub/irs-irbs/irb04-10. Turbotax 2011 tax preparation pdf. Turbotax 2011 tax preparation   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. Turbotax 2011 tax preparation The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. Turbotax 2011 tax preparation The election, if made, is effective for the tax year in which it is made and all later years. Turbotax 2011 tax preparation It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Turbotax 2011 tax preparation Once revoked, it cannot be re-elected for the next 5 years. Turbotax 2011 tax preparation Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. Turbotax 2011 tax preparation The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . Turbotax 2011 tax preparation Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . Turbotax 2011 tax preparation Gross income. Turbotax 2011 tax preparation   When figuring percentage depletion, subtract from your gross income from the property the following amounts. Turbotax 2011 tax preparation Any rents or royalties you paid or incurred for the property. Turbotax 2011 tax preparation The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. Turbotax 2011 tax preparation A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. Turbotax 2011 tax preparation   Use the following fraction to figure the part of the bonus you must subtract. Turbotax 2011 tax preparation No. Turbotax 2011 tax preparation of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. Turbotax 2011 tax preparation For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. Turbotax 2011 tax preparation Taxable income limit. Turbotax 2011 tax preparation   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. Turbotax 2011 tax preparation   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. Turbotax 2011 tax preparation These deductible items include, but are not limited to, the following. Turbotax 2011 tax preparation Operating expenses. Turbotax 2011 tax preparation Certain selling expenses. Turbotax 2011 tax preparation Administrative and financial overhead. Turbotax 2011 tax preparation Depreciation. Turbotax 2011 tax preparation Intangible drilling and development costs. Turbotax 2011 tax preparation Exploration and development expenditures. Turbotax 2011 tax preparation Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. Turbotax 2011 tax preparation Losses sustained. Turbotax 2011 tax preparation   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. Turbotax 2011 tax preparation Do not deduct any net operating loss deduction from the gross income from the property. Turbotax 2011 tax preparation Corporations do not deduct charitable contributions from the gross income from the property. Turbotax 2011 tax preparation If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. Turbotax 2011 tax preparation See section 1. Turbotax 2011 tax preparation 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. Turbotax 2011 tax preparation Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. Turbotax 2011 tax preparation You are either an independent producer or a royalty owner. Turbotax 2011 tax preparation The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. Turbotax 2011 tax preparation If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. Turbotax 2011 tax preparation For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. Turbotax 2011 tax preparation Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. Turbotax 2011 tax preparation However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. Turbotax 2011 tax preparation For information on figuring the deduction, see Figuring percentage depletion , later. Turbotax 2011 tax preparation Refiners who cannot claim percentage depletion. Turbotax 2011 tax preparation   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. Turbotax 2011 tax preparation The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. Turbotax 2011 tax preparation Related person. Turbotax 2011 tax preparation   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. Turbotax 2011 tax preparation For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. Turbotax 2011 tax preparation A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. Turbotax 2011 tax preparation For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. Turbotax 2011 tax preparation The value of the outstanding stock of a corporation. Turbotax 2011 tax preparation The interest in the profits or capital of a partnership. Turbotax 2011 tax preparation The beneficial interests in an estate or trust. Turbotax 2011 tax preparation Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. Turbotax 2011 tax preparation Retailers who cannot claim percentage depletion. Turbotax 2011 tax preparation   You cannot claim percentage depletion if both the following apply. Turbotax 2011 tax preparation You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. Turbotax 2011 tax preparation Through a retail outlet operated by you or a related person. Turbotax 2011 tax preparation To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. Turbotax 2011 tax preparation To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. Turbotax 2011 tax preparation The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. Turbotax 2011 tax preparation   For the purpose of determining if this rule applies, do not count the following. Turbotax 2011 tax preparation Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. Turbotax 2011 tax preparation Bulk sales of aviation fuels to the Department of Defense. Turbotax 2011 tax preparation Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. Turbotax 2011 tax preparation Related person. Turbotax 2011 tax preparation   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. Turbotax 2011 tax preparation Sales through a related person. Turbotax 2011 tax preparation   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. Turbotax 2011 tax preparation   You are not considered to be selling through a related person who is a retailer if all the following apply. Turbotax 2011 tax preparation You do not have a significant ownership interest in the retailer. Turbotax 2011 tax preparation You sell your production to persons who are not related to either you or the retailer. Turbotax 2011 tax preparation The retailer does not buy oil or natural gas from your customers or persons related to your customers. Turbotax 2011 tax preparation There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. Turbotax 2011 tax preparation Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. Turbotax 2011 tax preparation Transferees who cannot claim percentage depletion. Turbotax 2011 tax preparation   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. Turbotax 2011 tax preparation For a definition of the term “transfer,” see section 1. Turbotax 2011 tax preparation 613A-7(n) of the regulations. Turbotax 2011 tax preparation For a definition of the term “interest in proven oil or gas property,” see section 1. Turbotax 2011 tax preparation 613A-7(p) of the regulations. Turbotax 2011 tax preparation Figuring percentage depletion. Turbotax 2011 tax preparation   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. Turbotax 2011 tax preparation If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. Turbotax 2011 tax preparation If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. Turbotax 2011 tax preparation   In addition, there is a limit on the percentage depletion deduction. Turbotax 2011 tax preparation See Taxable income limit , later. Turbotax 2011 tax preparation Average daily production. Turbotax 2011 tax preparation   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. Turbotax 2011 tax preparation Partial interest. Turbotax 2011 tax preparation   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. Turbotax 2011 tax preparation   You have a partial interest in the production from a property if you have a net profits interest in the property. Turbotax 2011 tax preparation To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. Turbotax 2011 tax preparation To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. Turbotax 2011 tax preparation Then multiply the total production from the property by your percentage participation to figure your share of the production. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. Turbotax 2011 tax preparation During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Turbotax 2011 tax preparation Javier had expenses of $90,000 attributable to the property. Turbotax 2011 tax preparation The property generated a net profit of $110,000 ($200,000 − $90,000). Turbotax 2011 tax preparation Pablo received income of $22,000 ($110,000 × . Turbotax 2011 tax preparation 20) for his net profits interest. Turbotax 2011 tax preparation Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). Turbotax 2011 tax preparation Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). Turbotax 2011 tax preparation Depletable oil or natural gas quantity. Turbotax 2011 tax preparation   Generally, your depletable oil quantity is 1,000 barrels. Turbotax 2011 tax preparation Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. Turbotax 2011 tax preparation If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You have both oil and natural gas production. Turbotax 2011 tax preparation To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. Turbotax 2011 tax preparation Your depletable natural gas quantity is 2. Turbotax 2011 tax preparation 16 million cubic feet of gas (360 × 6000). Turbotax 2011 tax preparation You must reduce your depletable oil quantity to 640 barrels (1000 − 360). Turbotax 2011 tax preparation If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. Turbotax 2011 tax preparation Also, see Notice 2012-50, available at www. Turbotax 2011 tax preparation irs. Turbotax 2011 tax preparation gov/irb/2012–31_IRB/index. Turbotax 2011 tax preparation html. Turbotax 2011 tax preparation Business entities and family members. Turbotax 2011 tax preparation   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. Turbotax 2011 tax preparation Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). Turbotax 2011 tax preparation You and your spouse and minor children. Turbotax 2011 tax preparation A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. Turbotax 2011 tax preparation Controlled group of corporations. Turbotax 2011 tax preparation   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. Turbotax 2011 tax preparation They share the depletable quantity. Turbotax 2011 tax preparation A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. Turbotax 2011 tax preparation ” Gross income from the property. Turbotax 2011 tax preparation   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. Turbotax 2011 tax preparation If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. Turbotax 2011 tax preparation   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. Turbotax 2011 tax preparation   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. Turbotax 2011 tax preparation Average daily production exceeds depletable quantities. Turbotax 2011 tax preparation   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. Turbotax 2011 tax preparation Figure your average daily production of oil or natural gas for the year. Turbotax 2011 tax preparation Figure your depletable oil or natural gas quantity for the year. Turbotax 2011 tax preparation Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. Turbotax 2011 tax preparation Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). Turbotax 2011 tax preparation This is your depletion allowance for that property for the year. Turbotax 2011 tax preparation Taxable income limit. Turbotax 2011 tax preparation   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. Turbotax 2011 tax preparation 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. Turbotax 2011 tax preparation For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. Turbotax 2011 tax preparation 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. Turbotax 2011 tax preparation You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Turbotax 2011 tax preparation Add it to your depletion allowance (before applying any limits) for the following year. Turbotax 2011 tax preparation Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. Turbotax 2011 tax preparation (However, see Electing large partnerships must figure depletion allowance , later. Turbotax 2011 tax preparation ) Each partner or shareholder must decide whether to use cost or percentage depletion. Turbotax 2011 tax preparation If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. Turbotax 2011 tax preparation Partner's or shareholder's adjusted basis. Turbotax 2011 tax preparation   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. Turbotax 2011 tax preparation The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. Turbotax 2011 tax preparation   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. Turbotax 2011 tax preparation However, in some cases, it is figured according to the partner's interest in partnership income. Turbotax 2011 tax preparation   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. Turbotax 2011 tax preparation Recordkeeping. Turbotax 2011 tax preparation Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. Turbotax 2011 tax preparation The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. Turbotax 2011 tax preparation The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. Turbotax 2011 tax preparation Reporting the deduction. Turbotax 2011 tax preparation   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). Turbotax 2011 tax preparation Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). Turbotax 2011 tax preparation The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. Turbotax 2011 tax preparation The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. Turbotax 2011 tax preparation Form 6198, At-Risk Limitations. Turbotax 2011 tax preparation Form 8582, Passive Activity Loss Limitations. Turbotax 2011 tax preparation Electing large partnerships must figure depletion allowance. Turbotax 2011 tax preparation   An electing large partnership, rather than each partner, generally must figure the depletion allowance. Turbotax 2011 tax preparation The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. Turbotax 2011 tax preparation Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. Turbotax 2011 tax preparation   An electing large partnership is one that meets both the following requirements. Turbotax 2011 tax preparation The partnership had 100 or more partners in the preceding year. Turbotax 2011 tax preparation The partnership chooses to be an electing large partnership. Turbotax 2011 tax preparation Disqualified persons. Turbotax 2011 tax preparation   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. Turbotax 2011 tax preparation Disqualified persons must figure it themselves, as explained earlier. Turbotax 2011 tax preparation   All the following are disqualified persons. Turbotax 2011 tax preparation Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Turbotax 2011 tax preparation Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Turbotax 2011 tax preparation Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. Turbotax 2011 tax preparation Average daily production is discussed earlier. Turbotax 2011 tax preparation Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. Turbotax 2011 tax preparation Natural gas sold under a fixed contract. Turbotax 2011 tax preparation   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. Turbotax 2011 tax preparation This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. Turbotax 2011 tax preparation The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Turbotax 2011 tax preparation Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. Turbotax 2011 tax preparation Natural gas from geopressured brine. Turbotax 2011 tax preparation   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. Turbotax 2011 tax preparation This is natural gas that is both the following. Turbotax 2011 tax preparation Produced from a well you began to drill after September 1978 and before 1984. Turbotax 2011 tax preparation Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. Turbotax 2011 tax preparation Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. Turbotax 2011 tax preparation Mines and other natural deposits. Turbotax 2011 tax preparation   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. Turbotax 2011 tax preparation   The following is a list of the percentage depletion rates for the more common minerals. Turbotax 2011 tax preparation DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. Turbotax 2011 tax preparation Corporate deduction for iron ore and coal. Turbotax 2011 tax preparation   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Turbotax 2011 tax preparation Gross income from the property. Turbotax 2011 tax preparation   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Turbotax 2011 tax preparation Mining includes all the following. Turbotax 2011 tax preparation Extracting ores or minerals from the ground. Turbotax 2011 tax preparation Applying certain treatment processes described later. Turbotax 2011 tax preparation Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. Turbotax 2011 tax preparation Excise tax. Turbotax 2011 tax preparation   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. Turbotax 2011 tax preparation Extraction. Turbotax 2011 tax preparation   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. Turbotax 2011 tax preparation This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. Turbotax 2011 tax preparation Treatment processes. Turbotax 2011 tax preparation   The processes included as mining depend on the ore or mineral mined. Turbotax 2011 tax preparation To qualify as mining, the treatment processes must be applied by the mine owner or operator. Turbotax 2011 tax preparation For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. Turbotax 2011 tax preparation Transportation of more than 50 miles. Turbotax 2011 tax preparation   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. Turbotax 2011 tax preparation    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. Turbotax 2011 tax preparation Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. Turbotax 2011 tax preparation For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. Turbotax 2011 tax preparation irs. Turbotax 2011 tax preparation gov/irb/2013-01_IRB/ar11. Turbotax 2011 tax preparation html. Turbotax 2011 tax preparation Disposal of coal or iron ore. Turbotax 2011 tax preparation   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. Turbotax 2011 tax preparation You disposed of it after holding it for more than 1 year. Turbotax 2011 tax preparation You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Turbotax 2011 tax preparation Treat any gain on the disposition as a capital gain. Turbotax 2011 tax preparation Disposal to related person. Turbotax 2011 tax preparation   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. Turbotax 2011 tax preparation A related person (as listed in chapter 2 of Publication 544). Turbotax 2011 tax preparation A person owned or controlled by the same interests that own or control you. Turbotax 2011 tax preparation Geothermal deposits. Turbotax 2011 tax preparation   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. Turbotax 2011 tax preparation A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. Turbotax 2011 tax preparation For percentage depletion purposes, a geothermal deposit is not considered a gas well. Turbotax 2011 tax preparation   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. Turbotax 2011 tax preparation See Gross income from the property , earlier, under Oil and Gas Wells. Turbotax 2011 tax preparation Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. Turbotax 2011 tax preparation Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Turbotax 2011 tax preparation A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Turbotax 2011 tax preparation Bonuses and advanced royalties. Turbotax 2011 tax preparation   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. Turbotax 2011 tax preparation If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. Turbotax 2011 tax preparation Figuring cost depletion. Turbotax 2011 tax preparation   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. Turbotax 2011 tax preparation To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. Turbotax 2011 tax preparation Figuring percentage depletion. Turbotax 2011 tax preparation   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . Turbotax 2011 tax preparation Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. Turbotax 2011 tax preparation However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. Turbotax 2011 tax preparation Ending the lease. Turbotax 2011 tax preparation   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. Turbotax 2011 tax preparation Do this for the year the lease ends or is abandoned. Turbotax 2011 tax preparation Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. Turbotax 2011 tax preparation   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. Turbotax 2011 tax preparation Include this amount in income for the year the lease ends. Turbotax 2011 tax preparation Increase your adjusted basis in the property by the amount you include in income. Turbotax 2011 tax preparation Delay rentals. Turbotax 2011 tax preparation   These are payments for deferring development of the property. Turbotax 2011 tax preparation Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. Turbotax 2011 tax preparation These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Turbotax 2011 tax preparation Timber You can figure timber depletion only by the cost method. Turbotax 2011 tax preparation Percentage depletion does not apply to timber. Turbotax 2011 tax preparation Base your depletion on your cost or other basis in the timber. Turbotax 2011 tax preparation Your cost does not include the cost of land or any amounts recoverable through depreciation. Turbotax 2011 tax preparation Depletion takes place when you cut standing timber. Turbotax 2011 tax preparation You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. Turbotax 2011 tax preparation Figuring cost depletion. Turbotax 2011 tax preparation   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Turbotax 2011 tax preparation Timber units. Turbotax 2011 tax preparation   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. Turbotax 2011 tax preparation You measure the timber using board feet, log scale, cords, or other units. Turbotax 2011 tax preparation If you later determine that you have more or less units of timber, you must adjust the original estimate. Turbotax 2011 tax preparation   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. Turbotax 2011 tax preparation Depletion unit. Turbotax 2011 tax preparation   You figure your depletion unit each year by taking the following steps. Turbotax 2011 tax preparation Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Turbotax 2011 tax preparation Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. Turbotax 2011 tax preparation Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. Turbotax 2011 tax preparation Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. Turbotax 2011 tax preparation Divide the result of (2) by the result of (3). Turbotax 2011 tax preparation This is your depletion unit. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You bought a timber tract for $160,000 and the land was worth as much as the timber. Turbotax 2011 tax preparation Your basis for the timber is $80,000. Turbotax 2011 tax preparation Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). Turbotax 2011 tax preparation If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). Turbotax 2011 tax preparation When to claim depletion. Turbotax 2011 tax preparation   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). Turbotax 2011 tax preparation Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. Turbotax 2011 tax preparation The inventory is your basis for determining gain or loss in the tax year you sell the timber products. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. Turbotax 2011 tax preparation You would deduct $20,000 of the $40,000 depletion that year. Turbotax 2011 tax preparation You would add the remaining $20,000 depletion to your closing inventory of timber products. Turbotax 2011 tax preparation Electing to treat the cutting of timber as a sale or exchange. Turbotax 2011 tax preparation   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. Turbotax 2011 tax preparation You must make the election on your income tax return for the tax year to which it applies. Turbotax 2011 tax preparation If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. Turbotax 2011 tax preparation You generally report the gain as long-term capital gain. Turbotax 2011 tax preparation The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. Turbotax 2011 tax preparation For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Turbotax 2011 tax preparation   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. Turbotax 2011 tax preparation The prior election (and revocation) is disregarded for purposes of making a subsequent election. Turbotax 2011 tax preparation See Form T (Timber), Forest Activities Schedule, for more information. Turbotax 2011 tax preparation Form T. Turbotax 2011 tax preparation   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. Turbotax 2011 tax preparation Prev  Up  Next   Home   More Online Publications
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Tips for Leasing a Car

When you lease, you pay to drive someone else's vehicle. Monthly lease payments may be lower than loan payments, but at the end of the lease you have no ownership or equity in the car. To get the best deal, follow the advice below in addition to the general suggestions for buying a car.

  • To help you compare leasing versus owning, the Consumer Leasing Act requires leasing companies to give you information on monthly payments and other charges. Check out Leaseguide.com, and Leasecompare.com for online information on leases including current lease deals.
  • Consider using an independent agent rather than the dealer. You might find a better deal. Most financial institutions that offer auto financing also offer leasing options.
  • Ask for details on wear and tear standards. Dings that you regard as normal wear and tear could be billed as significant damage at the end of your lease.
  • Find out how many miles you can drive in a year. Most leases allow 12,000 to 15,000 miles a year. Expect a charge of 10 to 25 cents for each additional mile.
  • Check the manufacturer's warranty. It should cover the entire lease term and the number of miles you are likely to drive.
  • Ask the dealer what happens if you give up the car before the end of your lease. There may be extra fees for doing so.
  • Ask what happens if the car is involved in an accident.
  • Get all the terms in writing. Everything included with the car should be listed on the lease to avoid being charged for "missing" equipment later.

The Federal Reserve Board of Governors offers a consumer guide to auto leasing.

Financing

Most car buyers today need some form of financing to purchase a new vehicle. Many use direct lending, that is, a loan from a finance company, bank, or credit union. In direct lending, a buyer agrees to pay the amount financed, plus an agreed-upon finance charge, over a specified period. Once a buyer and a vehicle dealership enter into a contract to purchase a vehicle, the buyer uses the loan proceeds from the direct lender to pay the dealership for the vehicle. Another common form is dealership financing, which offers convenience, financing options, and sometimes special, manufacturer-sponsored, low-rate deals. Before you make a financing decision, it's important to do your research:

  • Decide in advance how much you can afford to spend and stick to your limit.
  • Get a copy of your credit report and correct any errors before applying for a loan.
  • Check buying guides to identify price ranges and best available deals.

Credit and Sublease Brokers

Con artists often prey on people who have bad credit and who cannot get car loans. "Credit brokers" promise to get a loan for you in exchange for a high fee. In many cases, the "broker" takes the fee and disappears. "Sublease brokers" charge a fee to arrange for you to "sublease" or "take over" someone else's car lease or loan. Such deals usually violate the original loan or lease agreement. Your car can be repossessed even if you've made all of your payments. You also might have trouble insuring your car.

The Turbotax 2011 Tax Preparation

Turbotax 2011 tax preparation Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Turbotax 2011 tax preparation Cost Basis The basis of property you buy is usually its cost. Turbotax 2011 tax preparation The cost is the amount you pay in cash, debt obligations, other property, or services. Turbotax 2011 tax preparation Your cost also includes amounts you pay for the following items. Turbotax 2011 tax preparation Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if assumed for the seller). Turbotax 2011 tax preparation  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. Turbotax 2011 tax preparation Loans with low or no interest. Turbotax 2011 tax preparation   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. Turbotax 2011 tax preparation You generally have unstated interest if your interest rate is less than the applicable federal rate. Turbotax 2011 tax preparation For more information, see Unstated Interest and Original Issue Discount in Publication 537. Turbotax 2011 tax preparation Purchase of a business. Turbotax 2011 tax preparation   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. Turbotax 2011 tax preparation Allocate the price among the various assets, including any section 197 intangibles. Turbotax 2011 tax preparation See Allocating the Basis, later. Turbotax 2011 tax preparation Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Turbotax 2011 tax preparation If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. Turbotax 2011 tax preparation You must adjust the basis of stocks for certain events that occur after purchase. Turbotax 2011 tax preparation See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. Turbotax 2011 tax preparation Identifying stock or bonds sold. Turbotax 2011 tax preparation   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. Turbotax 2011 tax preparation If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Turbotax 2011 tax preparation For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Turbotax 2011 tax preparation Mutual fund shares. Turbotax 2011 tax preparation   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. Turbotax 2011 tax preparation For more information, see Publication 550. Turbotax 2011 tax preparation Real Property Real property, also called real estate, is land and generally anything built on or attached to it. Turbotax 2011 tax preparation If you buy real property, certain fees and other expenses become part of your cost basis in the property. Turbotax 2011 tax preparation Real estate taxes. Turbotax 2011 tax preparation   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Turbotax 2011 tax preparation You cannot deduct them as taxes. Turbotax 2011 tax preparation   If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Turbotax 2011 tax preparation Do not include that amount in the basis of the property. Turbotax 2011 tax preparation If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Turbotax 2011 tax preparation Settlement costs. Turbotax 2011 tax preparation   Your basis includes the settlement fees and closing costs for buying property. Turbotax 2011 tax preparation You cannot include in your basis the fees and costs for getting a loan on property. Turbotax 2011 tax preparation A fee for buying property is a cost that must be paid even if you bought the property for cash. Turbotax 2011 tax preparation   The following items are some of the settlement fees or closing costs you can include in the basis of your property. Turbotax 2011 tax preparation Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Turbotax 2011 tax preparation   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Turbotax 2011 tax preparation   The following items are some settlement fees and closing costs you cannot include in the basis of the property. Turbotax 2011 tax preparation Casualty insurance premiums. Turbotax 2011 tax preparation Rent for occupancy of the property before closing. Turbotax 2011 tax preparation Charges for utilities or other services related to occupancy of the property before closing. Turbotax 2011 tax preparation Charges connected with getting a loan. Turbotax 2011 tax preparation The following are examples of these charges. Turbotax 2011 tax preparation Points (discount points, loan origination fees). Turbotax 2011 tax preparation Mortgage insurance premiums. Turbotax 2011 tax preparation Loan assumption fees. Turbotax 2011 tax preparation Cost of a credit report. Turbotax 2011 tax preparation Fees for an appraisal required by a lender. Turbotax 2011 tax preparation Fees for refinancing a mortgage. Turbotax 2011 tax preparation If these costs relate to business property, items (1) through (3) are deductible as business expenses. Turbotax 2011 tax preparation Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. Turbotax 2011 tax preparation Points. Turbotax 2011 tax preparation   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Turbotax 2011 tax preparation Generally, you deduct the points over the term of the loan. Turbotax 2011 tax preparation For more information on how to deduct points, see Points in chapter 4 of Publication 535. Turbotax 2011 tax preparation Points on home mortgage. Turbotax 2011 tax preparation   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. Turbotax 2011 tax preparation If certain requirements are met, you can deduct the points in full for the year in which they are paid. Turbotax 2011 tax preparation Reduce the basis of your home by any seller-paid points. Turbotax 2011 tax preparation For more information, see Points in Publication 936, Home Mortgage Interest Deduction. Turbotax 2011 tax preparation Assumption of mortgage. Turbotax 2011 tax preparation   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. Turbotax 2011 tax preparation Constructing assets. Turbotax 2011 tax preparation   If you build property or have assets built for you, your expenses for this construction are part of your basis. Turbotax 2011 tax preparation Some of these expenses include the following costs. Turbotax 2011 tax preparation Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Turbotax 2011 tax preparation In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. Turbotax 2011 tax preparation You must include them in the asset's basis. Turbotax 2011 tax preparation Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. Turbotax 2011 tax preparation    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Turbotax 2011 tax preparation Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. Turbotax 2011 tax preparation If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. Turbotax 2011 tax preparation In certain circumstances, you may be subject to the uniform capitalization rules, next. Turbotax 2011 tax preparation Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. Turbotax 2011 tax preparation Activities subject to the rules. Turbotax 2011 tax preparation   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. Turbotax 2011 tax preparation Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. Turbotax 2011 tax preparation However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. Turbotax 2011 tax preparation   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. Turbotax 2011 tax preparation Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. Turbotax 2011 tax preparation Tangible personal property includes films, sound recordings, video tapes, books, or similar property. Turbotax 2011 tax preparation    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. Turbotax 2011 tax preparation To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. Turbotax 2011 tax preparation You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Turbotax 2011 tax preparation   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. Turbotax 2011 tax preparation The nondeductible part of the cost is not subject to the uniform capitalization rules. Turbotax 2011 tax preparation More information. Turbotax 2011 tax preparation   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. Turbotax 2011 tax preparation Exceptions. Turbotax 2011 tax preparation   The following are not subject to the uniform capitalization rules. Turbotax 2011 tax preparation Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. Turbotax 2011 tax preparation For other exceptions to the uniform capitalization rules, see section 1. Turbotax 2011 tax preparation 263A-1(b) of the regulations. Turbotax 2011 tax preparation   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. Turbotax 2011 tax preparation Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. Turbotax 2011 tax preparation The basis of an intangible asset is usually the cost to buy or create it. Turbotax 2011 tax preparation If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. Turbotax 2011 tax preparation The basis of certain intangibles can be amortized. Turbotax 2011 tax preparation See chapter 8 of Publication 535 for information on the amortization of these costs. Turbotax 2011 tax preparation Patents. Turbotax 2011 tax preparation   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. Turbotax 2011 tax preparation If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. Turbotax 2011 tax preparation The value of the inventor's time spent on an invention is not part of the basis. Turbotax 2011 tax preparation Copyrights. Turbotax 2011 tax preparation   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. Turbotax 2011 tax preparation Do not include the value of your time as the author, or any other person's time you did not pay for. Turbotax 2011 tax preparation Franchises, trademarks, and trade names. Turbotax 2011 tax preparation   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. Turbotax 2011 tax preparation Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. Turbotax 2011 tax preparation You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Turbotax 2011 tax preparation See Trade or Business Acquired below. Turbotax 2011 tax preparation Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. Turbotax 2011 tax preparation If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Turbotax 2011 tax preparation However, see Trade or Business Acquired, next. Turbotax 2011 tax preparation Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Turbotax 2011 tax preparation Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Turbotax 2011 tax preparation Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. Turbotax 2011 tax preparation Certificates of deposit, U. Turbotax 2011 tax preparation S. Turbotax 2011 tax preparation Government securities, foreign currency, and actively traded personal property, including stock and securities. Turbotax 2011 tax preparation Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. Turbotax 2011 tax preparation Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. Turbotax 2011 tax preparation All other assets except section 197 intangibles, goodwill, and going concern value. Turbotax 2011 tax preparation Section 197 intangibles except goodwill and going concern value. Turbotax 2011 tax preparation Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Turbotax 2011 tax preparation Agreement. Turbotax 2011 tax preparation   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. Turbotax 2011 tax preparation This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Turbotax 2011 tax preparation Reporting requirement. Turbotax 2011 tax preparation   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Turbotax 2011 tax preparation Use Form 8594 to provide this information. Turbotax 2011 tax preparation The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Turbotax 2011 tax preparation More information. Turbotax 2011 tax preparation   See Sale of a Business in chapter 2 of Publication 544 for more information. Turbotax 2011 tax preparation Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. Turbotax 2011 tax preparation Figure the basis of each asset by multiplying the lump sum by a fraction. Turbotax 2011 tax preparation The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Turbotax 2011 tax preparation If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. Turbotax 2011 tax preparation Demolition of building. Turbotax 2011 tax preparation   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. Turbotax 2011 tax preparation Do not claim the costs as a current deduction. Turbotax 2011 tax preparation Modification of building. Turbotax 2011 tax preparation   A modification of a building will not be treated as a demolition if the following conditions are satisfied. Turbotax 2011 tax preparation 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. Turbotax 2011 tax preparation   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. Turbotax 2011 tax preparation   If these conditions are met, add the costs of the modifications to the basis of the building. Turbotax 2011 tax preparation Subdivided lots. Turbotax 2011 tax preparation   If you buy a tract of land and subdivide it, you must determine the basis of each lot. Turbotax 2011 tax preparation This is necessary because you must figure the gain or loss on the sale of each individual lot. Turbotax 2011 tax preparation As a result, you do not recover your entire cost in the tract until you have sold all of the lots. Turbotax 2011 tax preparation   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. Turbotax 2011 tax preparation The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. Turbotax 2011 tax preparation Future improvement costs. Turbotax 2011 tax preparation   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. Turbotax 2011 tax preparation See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. Turbotax 2011 tax preparation Use of erroneous cost basis. Turbotax 2011 tax preparation   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. Turbotax 2011 tax preparation Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You bought a tract of land to which you assigned a cost of $15,000. Turbotax 2011 tax preparation You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. Turbotax 2011 tax preparation You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. Turbotax 2011 tax preparation Several years later you determine that your original basis in the tract was $22,500 and not $15,000. Turbotax 2011 tax preparation You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. Turbotax 2011 tax preparation You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). Turbotax 2011 tax preparation You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. Turbotax 2011 tax preparation Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. Turbotax 2011 tax preparation The result of these adjustments to the basis is the adjusted basis. Turbotax 2011 tax preparation Increases to Basis Increase the basis of any property by all items properly added to a capital account. Turbotax 2011 tax preparation These include the cost of any improvements having a useful life of more than 1 year. Turbotax 2011 tax preparation Rehabilitation expenses also increase basis. Turbotax 2011 tax preparation However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. Turbotax 2011 tax preparation If you have to recapture any of the credit, increase your basis by the recaptured amount. Turbotax 2011 tax preparation If you make additions or improvements to business property, keep separate accounts for them. Turbotax 2011 tax preparation Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. Turbotax 2011 tax preparation For more information, see Publication 946. Turbotax 2011 tax preparation The following items increase the basis of property. Turbotax 2011 tax preparation The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. Turbotax 2011 tax preparation Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Turbotax 2011 tax preparation Do not deduct them as taxes. Turbotax 2011 tax preparation However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. Turbotax 2011 tax preparation Add the assessment to your property's basis. Turbotax 2011 tax preparation In this example, the assessment is a depreciable asset. Turbotax 2011 tax preparation Deducting vs. Turbotax 2011 tax preparation Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. Turbotax 2011 tax preparation For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. Turbotax 2011 tax preparation However, you can choose either to deduct or to capitalize certain other costs. Turbotax 2011 tax preparation If you capitalize these costs, include them in your basis. Turbotax 2011 tax preparation If you deduct them, do not include them in your basis. Turbotax 2011 tax preparation See Uniform Capitalization Rules earlier. Turbotax 2011 tax preparation The costs you can choose to deduct or to capitalize include the following. Turbotax 2011 tax preparation Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. Turbotax 2011 tax preparation If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Turbotax 2011 tax preparation For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. Turbotax 2011 tax preparation Table 1. Turbotax 2011 tax preparation Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. Turbotax 2011 tax preparation Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. Turbotax 2011 tax preparation Some of these items are discussed next. Turbotax 2011 tax preparation Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. Turbotax 2011 tax preparation You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. Turbotax 2011 tax preparation To make this determination, compare the repaired property to the property before the casualty. Turbotax 2011 tax preparation For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. Turbotax 2011 tax preparation Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. Turbotax 2011 tax preparation It reduces the basis of the affected part of the property. Turbotax 2011 tax preparation If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Turbotax 2011 tax preparation Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. Turbotax 2011 tax preparation For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. Turbotax 2011 tax preparation Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. Turbotax 2011 tax preparation This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. Turbotax 2011 tax preparation If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. Turbotax 2011 tax preparation Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Turbotax 2011 tax preparation For more information about the section 179 deduction, see Publication 946. Turbotax 2011 tax preparation Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. Turbotax 2011 tax preparation Reduce the basis of the property for which you received the subsidy by the excluded amount. Turbotax 2011 tax preparation For more information on this subsidy, see Publication 525. Turbotax 2011 tax preparation Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Turbotax 2011 tax preparation If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Turbotax 2011 tax preparation If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Turbotax 2011 tax preparation Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. Turbotax 2011 tax preparation If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. Turbotax 2011 tax preparation In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. Turbotax 2011 tax preparation For information on figuring depreciation, see Publication 946. Turbotax 2011 tax preparation If you are claiming depreciation on a business vehicle, see Publication 463. Turbotax 2011 tax preparation If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. Turbotax 2011 tax preparation Include the excess depreciation in your gross income and add it to your basis in the property. Turbotax 2011 tax preparation For information on the computation of excess depreciation, see chapter 4 in Publication 463. Turbotax 2011 tax preparation Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Turbotax 2011 tax preparation A debt includes any indebtedness for which you are liable or which attaches to property you hold. Turbotax 2011 tax preparation You can exclude canceled debt from income in the following situations. Turbotax 2011 tax preparation Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). Turbotax 2011 tax preparation If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Turbotax 2011 tax preparation However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. Turbotax 2011 tax preparation For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. Turbotax 2011 tax preparation For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. Turbotax 2011 tax preparation For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. Turbotax 2011 tax preparation Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. Turbotax 2011 tax preparation For more information on the rules for the sale of a home, see Publication 523. Turbotax 2011 tax preparation Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. Turbotax 2011 tax preparation This also applies to amounts you received under an employer's adoption assistance program and excluded from income. Turbotax 2011 tax preparation For more information Form 8839, Qualified Adoption Expenses. Turbotax 2011 tax preparation Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. Turbotax 2011 tax preparation You must reduce your basis in that property by the credit claimed. Turbotax 2011 tax preparation For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. Turbotax 2011 tax preparation Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. Turbotax 2011 tax preparation You also paid commissions of $2,000 and title search and legal fees of $600. Turbotax 2011 tax preparation You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. Turbotax 2011 tax preparation Immediately you spent $20,000 in remodeling the building before you placed it in service. Turbotax 2011 tax preparation You were allowed depreciation of $14,526 for the years 2005 through 2009. Turbotax 2011 tax preparation In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. Turbotax 2011 tax preparation You claimed a deduction for this loss. Turbotax 2011 tax preparation You spent $5,500 to repair the damages and extend the useful life of the building. Turbotax 2011 tax preparation The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. Turbotax 2011 tax preparation It is not affected by any of the above adjustments. Turbotax 2011 tax preparation Basis Other Than Cost There are many times when you cannot use cost as basis. Turbotax 2011 tax preparation In these cases, the fair market value or the adjusted basis of property may be used. Turbotax 2011 tax preparation Adjusted basis is discussed earlier. Turbotax 2011 tax preparation Fair market value (FMV). Turbotax 2011 tax preparation   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Turbotax 2011 tax preparation Sales of similar property on or about the same date may be helpful in figuring the property's FMV. Turbotax 2011 tax preparation Property Received for Services If you receive property for services, include the property's FMV in income. Turbotax 2011 tax preparation The amount you include in income becomes your basis. Turbotax 2011 tax preparation If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Turbotax 2011 tax preparation Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. Turbotax 2011 tax preparation If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Turbotax 2011 tax preparation Your basis in the property is its FMV (your purchase price plus the amount you include in income). Turbotax 2011 tax preparation If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. Turbotax 2011 tax preparation However, your basis in the property is still its FMV. Turbotax 2011 tax preparation See Employee Discounts in Publication 15-B. Turbotax 2011 tax preparation Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. Turbotax 2011 tax preparation Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. Turbotax 2011 tax preparation There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. Turbotax 2011 tax preparation When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. Turbotax 2011 tax preparation The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. Turbotax 2011 tax preparation You do not report any income until you have completed the 5 years of service that satisfy the condition. Turbotax 2011 tax preparation Fair market value. Turbotax 2011 tax preparation   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You received stock from your employer for services you performed. Turbotax 2011 tax preparation If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. Turbotax 2011 tax preparation At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. Turbotax 2011 tax preparation This is a restriction that by its terms will never end and you must consider it when you figure the FMV. Turbotax 2011 tax preparation Election. Turbotax 2011 tax preparation   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. Turbotax 2011 tax preparation If you make this choice, the substantially vested rules do not apply. Turbotax 2011 tax preparation Your basis is the amount you paid plus the amount you included in income. Turbotax 2011 tax preparation   See the discussion of Restricted Property in Publication 525 for more information. Turbotax 2011 tax preparation Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Turbotax 2011 tax preparation A taxable gain or deductible loss is also known as a recognized gain or loss. Turbotax 2011 tax preparation If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. Turbotax 2011 tax preparation A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. Turbotax 2011 tax preparation You must report a taxable gain of $3,000 for the land. Turbotax 2011 tax preparation The tractor has a basis of $6,000. Turbotax 2011 tax preparation Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. Turbotax 2011 tax preparation Similar or related property. Turbotax 2011 tax preparation   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. Turbotax 2011 tax preparation However, make the following adjustments. Turbotax 2011 tax preparation Decrease the basis by the following. Turbotax 2011 tax preparation Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. Turbotax 2011 tax preparation Increase the basis by the following. Turbotax 2011 tax preparation Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. Turbotax 2011 tax preparation Money or property not similar or related. Turbotax 2011 tax preparation   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation The state condemned your property. Turbotax 2011 tax preparation The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. Turbotax 2011 tax preparation You realized a gain of $5,000 ($31,000 − $26,000). Turbotax 2011 tax preparation You bought replacement property similar in use to the converted property for $29,000. Turbotax 2011 tax preparation You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Turbotax 2011 tax preparation Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Turbotax 2011 tax preparation The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. Turbotax 2011 tax preparation   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. Turbotax 2011 tax preparation Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. Turbotax 2011 tax preparation More information. Turbotax 2011 tax preparation   For more information about condemnations, see Involuntary Conversions in Publication 544. Turbotax 2011 tax preparation For more information about casualty and theft losses, see Publication 547. Turbotax 2011 tax preparation Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Turbotax 2011 tax preparation If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Turbotax 2011 tax preparation A nontaxable gain or loss is also known as an unrecognized gain or loss. Turbotax 2011 tax preparation Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Turbotax 2011 tax preparation To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Turbotax 2011 tax preparation There must also be an exchange of like-kind property. Turbotax 2011 tax preparation For more information, see Like-Kind Exchanges in Publication 544. Turbotax 2011 tax preparation The basis of the property you receive is the same as the basis of the property you gave up. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. Turbotax 2011 tax preparation Your basis in the new property is the same as the basis of the old ($50,000). Turbotax 2011 tax preparation Exchange expenses. Turbotax 2011 tax preparation   Exchange expenses are generally the closing costs you pay. Turbotax 2011 tax preparation They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. Turbotax 2011 tax preparation Add them to the basis of the like-kind property received. Turbotax 2011 tax preparation Property plus cash. Turbotax 2011 tax preparation   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. Turbotax 2011 tax preparation Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). Turbotax 2011 tax preparation Special rules for related persons. Turbotax 2011 tax preparation   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Turbotax 2011 tax preparation Each person must report any gain or loss not recognized on the original exchange. Turbotax 2011 tax preparation Each person reports it on the tax return filed for the year in which the later disposition occurs. Turbotax 2011 tax preparation If this rule applies, the basis of the property received in the original exchange will be its fair market value. Turbotax 2011 tax preparation   These rules generally do not apply to the following kinds of property dispositions. Turbotax 2011 tax preparation Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. Turbotax 2011 tax preparation Related persons. Turbotax 2011 tax preparation   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. Turbotax 2011 tax preparation   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. Turbotax 2011 tax preparation ), see Nondeductible Loss in chapter 2 of Publication 544. Turbotax 2011 tax preparation Exchange of business property. Turbotax 2011 tax preparation   Exchanging the assets of one business for the assets of another business is a multiple property exchange. Turbotax 2011 tax preparation For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Turbotax 2011 tax preparation Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. Turbotax 2011 tax preparation The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. Turbotax 2011 tax preparation Decrease the basis by the following amounts. Turbotax 2011 tax preparation Any money you receive, and Any loss you recognize on the exchange. Turbotax 2011 tax preparation Increase the basis by the following amounts. Turbotax 2011 tax preparation Any additional costs you incur, and Any gain you recognize on the exchange. Turbotax 2011 tax preparation If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. Turbotax 2011 tax preparation You realized a gain of $200 ($6,200 − $6,000). Turbotax 2011 tax preparation This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). Turbotax 2011 tax preparation You include all the gain in income (recognized gain) because the gain is less than the cash received. Turbotax 2011 tax preparation Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. Turbotax 2011 tax preparation   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Turbotax 2011 tax preparation The rest is the basis of the like property. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You had an adjusted basis of $15,000 in real estate you held for investment. Turbotax 2011 tax preparation You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. Turbotax 2011 tax preparation The truck is unlike property. Turbotax 2011 tax preparation You realized a gain of $1,500 ($16,500 − $15,000). Turbotax 2011 tax preparation This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). Turbotax 2011 tax preparation You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Turbotax 2011 tax preparation Your basis in the properties you received is figured as follows. Turbotax 2011 tax preparation Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). Turbotax 2011 tax preparation This is the truck's FMV. Turbotax 2011 tax preparation The rest ($12,500) is the basis of the real estate. Turbotax 2011 tax preparation Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You are a salesperson and you use one of your cars 100% for business. Turbotax 2011 tax preparation You have used this car in your sales activities for 2 years and have depreciated it. Turbotax 2011 tax preparation Your adjusted basis in the car is $22,600 and its FMV is $23,100. Turbotax 2011 tax preparation You are interested in a new car, which sells for $28,000. Turbotax 2011 tax preparation If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). Turbotax 2011 tax preparation However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. Turbotax 2011 tax preparation Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). Turbotax 2011 tax preparation Your basis for depreciating the new car is $27,500, the same as if you traded the old car. Turbotax 2011 tax preparation Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. Turbotax 2011 tax preparation The first is an exchange of like-kind property. Turbotax 2011 tax preparation The second is personal-use property on which gain is recognized and loss is not recognized. Turbotax 2011 tax preparation First, figure your adjusted basis in the property as if you transferred two separate properties. Turbotax 2011 tax preparation Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. Turbotax 2011 tax preparation Deduct the depreciation you took or could have taken from the adjusted basis of the business part. Turbotax 2011 tax preparation Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. Turbotax 2011 tax preparation The business part of the property is permitted to be exchanged tax free. Turbotax 2011 tax preparation However, you must recognize any gain from the exchange of the nonbusiness part. Turbotax 2011 tax preparation You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. Turbotax 2011 tax preparation The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. Turbotax 2011 tax preparation If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. Turbotax 2011 tax preparation For more information, see Publication 523. Turbotax 2011 tax preparation Trade of car used partly in business. Turbotax 2011 tax preparation   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. Turbotax 2011 tax preparation   For information on figuring your basis for depreciation, see Publication 463. Turbotax 2011 tax preparation Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. Turbotax 2011 tax preparation However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. Turbotax 2011 tax preparation This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Turbotax 2011 tax preparation If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. Turbotax 2011 tax preparation Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Turbotax 2011 tax preparation For more information on these bonds, see Publication 550. Turbotax 2011 tax preparation At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. Turbotax 2011 tax preparation For more information, see Publication 504, Divorced or Separated Individuals. Turbotax 2011 tax preparation Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Turbotax 2011 tax preparation FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Turbotax 2011 tax preparation Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Turbotax 2011 tax preparation Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). Turbotax 2011 tax preparation If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation You received an acre of land as a gift. Turbotax 2011 tax preparation At the time of the gift, the land had an FMV of $8,000. Turbotax 2011 tax preparation The donor's adjusted basis was $10,000. Turbotax 2011 tax preparation After you received the land, no events occurred to increase or decrease your basis. Turbotax 2011 tax preparation If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. Turbotax 2011 tax preparation If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. Turbotax 2011 tax preparation If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Turbotax 2011 tax preparation For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. Turbotax 2011 tax preparation If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. Turbotax 2011 tax preparation Business property. Turbotax 2011 tax preparation   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Turbotax 2011 tax preparation FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Turbotax 2011 tax preparation Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Turbotax 2011 tax preparation Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. Turbotax 2011 tax preparation See Adjusted Basis earlier. Turbotax 2011 tax preparation Gift received before 1977. Turbotax 2011 tax preparation   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. Turbotax 2011 tax preparation However, do not increase your basis above the FMV of the gift at the time it was given to you. Turbotax 2011 tax preparation Example 1. Turbotax 2011 tax preparation You were given a house in 1976 with an FMV of $21,000. Turbotax 2011 tax preparation The donor's adjusted basis was $20,000. Turbotax 2011 tax preparation The donor paid a gift tax of $500. Turbotax 2011 tax preparation Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. Turbotax 2011 tax preparation Example 2. Turbotax 2011 tax preparation If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. Turbotax 2011 tax preparation This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. Turbotax 2011 tax preparation Gift received after 1976. Turbotax 2011 tax preparation   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. Turbotax 2011 tax preparation Figure the increase by multiplying the gift tax paid by a fraction. Turbotax 2011 tax preparation The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Turbotax 2011 tax preparation   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. Turbotax 2011 tax preparation The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Turbotax 2011 tax preparation For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation In 2010, you received a gift of property from your mother that had an FMV of $50,000. Turbotax 2011 tax preparation Her adjusted basis was $20,000. Turbotax 2011 tax preparation The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). Turbotax 2011 tax preparation She paid a gift tax of $9,000. Turbotax 2011 tax preparation Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . Turbotax 2011 tax preparation 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. Turbotax 2011 tax preparation See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Turbotax 2011 tax preparation If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. Turbotax 2011 tax preparation The FMV of the property at the date of the individual's death. Turbotax 2011 tax preparation The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. Turbotax 2011 tax preparation For information on the alternate valuation date, see the Instructions for Form 706. Turbotax 2011 tax preparation The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. Turbotax 2011 tax preparation This method is discussed later. Turbotax 2011 tax preparation The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Turbotax 2011 tax preparation For information on a qualified conservation easement, see the Instructions for Form 706. Turbotax 2011 tax preparation If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Turbotax 2011 tax preparation For more information, see the Instructions for Form 706. Turbotax 2011 tax preparation Appreciated property. Turbotax 2011 tax preparation   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Turbotax 2011 tax preparation Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. Turbotax 2011 tax preparation Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. Turbotax 2011 tax preparation Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Turbotax 2011 tax preparation When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Turbotax 2011 tax preparation For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. Turbotax 2011 tax preparation For example, you and your spouse owned community property that had a basis of $80,000. Turbotax 2011 tax preparation When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Turbotax 2011 tax preparation The FMV of the community interest was $100,000. Turbotax 2011 tax preparation The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Turbotax 2011 tax preparation The basis of the other half to your spouse's heirs is also $50,000. Turbotax 2011 tax preparation For more information on community property, see Publication 555, Community Property. Turbotax 2011 tax preparation Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. Turbotax 2011 tax preparation John furnished two-thirds of the purchase price and Jim furnished one-third. Turbotax 2011 tax preparation Depreciation deductions allowed before John's death were $12,000. Turbotax 2011 tax preparation Under local law, each had a half interest in the income from the property. Turbotax 2011 tax preparation At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. Turbotax 2011 tax preparation Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. Turbotax 2011 tax preparation This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. Turbotax 2011 tax preparation If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. Turbotax 2011 tax preparation Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. Turbotax 2011 tax preparation It does not matter how much each spouse contributed to the purchase price. Turbotax 2011 tax preparation Also, it does not matter which spouse dies first. Turbotax 2011 tax preparation A qualified joint interest is any interest in property held by husband and wife as either of the following. Turbotax 2011 tax preparation Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. Turbotax 2011 tax preparation Basis. Turbotax 2011 tax preparation   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. Turbotax 2011 tax preparation Decrease the cost by any deductions allowed to you for depreciation and depletion. Turbotax 2011 tax preparation Increase the reduced cost by your basis in the half you inherited. Turbotax 2011 tax preparation Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. Turbotax 2011 tax preparation If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. Turbotax 2011 tax preparation If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. Turbotax 2011 tax preparation Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Turbotax 2011 tax preparation Special-use valuation. Turbotax 2011 tax preparation   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. Turbotax 2011 tax preparation Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Turbotax 2011 tax preparation Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. Turbotax 2011 tax preparation Figure all FMVs without regard to the special-use valuation. Turbotax 2011 tax preparation   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Turbotax 2011 tax preparation This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. Turbotax 2011 tax preparation   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. Turbotax 2011 tax preparation If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Turbotax 2011 tax preparation The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. Turbotax 2011 tax preparation   You make the election by filing with Form 706-A a statement that does all of the following. Turbotax 2011 tax preparation Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. Turbotax 2011 tax preparation   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. Turbotax 2011 tax preparation Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Turbotax 2011 tax preparation An example of changing property held for personal use to business use would be renting out your former main home. Turbotax 2011 tax preparation Basis for depreciation. Turbotax 2011 tax preparation   The basis for depreciation is the lesser of the following amounts. Turbotax 2011 tax preparation The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. Turbotax 2011 tax preparation You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Turbotax 2011 tax preparation Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Turbotax 2011 tax preparation Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Turbotax 2011 tax preparation On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Turbotax 2011 tax preparation The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). Turbotax 2011 tax preparation Sale of property. Turbotax 2011 tax preparation   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. Turbotax 2011 tax preparation Gain. Turbotax 2011 tax preparation   The basis for figuring a gain is your adjusted basis when you sell the property. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Turbotax 2011 tax preparation Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Turbotax 2011 tax preparation Loss. Turbotax 2011 tax preparation   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Turbotax 2011 tax preparation Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. Turbotax 2011 tax preparation Example. Turbotax 2011 tax preparation Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Turbotax 2011 tax preparation In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. Turbotax 2011 tax preparation Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). Turbotax 2011 tax preparation How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. Turbotax 2011 tax preparation By selecting the method that is best for you, you will have quick and easy access to tax help. Turbotax 2011 tax preparation Contacting your Taxpayer Advocate. Turbotax 2011 tax preparation   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. Turbotax 2011 tax preparation We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. Turbotax 2011 tax preparation Here are seven things every taxpayer should know about TAS. Turbotax 2011 tax preparation TAS is your voice at the IRS. Turbotax 2011 tax preparation Our service is free, confidential, and tailored to meet your needs. Turbotax 2011 tax preparation You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. Turbotax 2011 tax preparation We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. Turbotax 2011 tax preparation This includes businesses as well as individuals. Turbotax 2011 tax preparation Our employees know the IRS and how to navigate it. Turbotax 2011 tax preparation If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. Turbotax 2011 tax preparation We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. Turbotax 2011 tax preparation You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. Turbotax 2011 tax preparation irs. Turbotax 2011 tax preparation gov/advocate. Turbotax 2011 tax preparation You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. Turbotax 2011 tax preparation You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. Turbotax 2011 tax preparation taxtoolkit. Turbotax 2011 tax preparation irs. Turbotax 2011 tax preparation gov. Turbotax 2011 tax preparation You can get updates on hot tax topics by visiting our YouTube channel at www. Turbotax 2011 tax preparation youtube. Turbotax 2011 tax preparation com/tasnta and our Facebook page at www. Turbotax 2011 tax preparation facebook. Turbotax 2011 tax preparation com/YourVoiceAtIRS, or by following our tweets at www. Turbotax 2011 tax preparation twitter. Turbotax 2011 tax preparation com/YourVoiceAtIRS. Turbotax 2011 tax preparation Low Income Taxpayer Clinics (LITCs). Turbotax 2011 tax preparation   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. Turbotax 2011 tax preparation LITCs are independent from the IRS. Turbotax 2011 tax preparation Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. Turbotax 2011 tax preparation If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. Turbotax 2011 tax preparation For more information, see Publication 4134, Low Income Taxpayer Clinic List. Turbotax 2011 tax preparation This publication is available at IRS. Turbotax 2011 tax preparation gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. Turbotax 2011 tax preparation Free tax services. Turbotax 2011 tax preparation   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Turbotax 2011 tax preparation Learn about free tax information from the IRS, including publications, services, and education and assistance programs. Turbotax 2011 tax preparation The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. Turbotax 2011 tax preparation The majority of the information and services listed in this publication are available to you free of charge. Turbotax 2011 tax preparation If there is a fee associated with a resource or service, it is listed in the publication. Turbotax 2011 tax preparation   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d