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Turbotax Free State File

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Turbotax Free State File

Turbotax free state file 2. Turbotax free state file   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. Turbotax free state file 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. Turbotax free state file Deduction may depend on your type of business. Turbotax free state file Exception for events that benefit charitable organizations. Turbotax free state file Food and beverages in skybox seats. Turbotax free state file What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. Turbotax free state file You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Turbotax free state file The rules and definitions are summarized in Table 2-1 . Turbotax free state file You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Turbotax free state file Directly-related test. Turbotax free state file Associated test. Turbotax free state file Both of these tests are explained later. Turbotax free state file An ordinary expense is one that is common and accepted in your trade or business. Turbotax free state file A necessary expense is one that is helpful and appropriate for your business. Turbotax free state file An expense does not have to be required to be considered necessary. Turbotax free state file The amount you can deduct for entertainment expenses may be limited. Turbotax free state file Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Turbotax free state file This limit is discussed later under 50% Limit. Turbotax free state file Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. Turbotax free state file Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Turbotax free state file Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. Turbotax free state file See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. Turbotax free state file You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. Turbotax free state file It is not necessary to devote more time to business than to entertainment. Turbotax free state file However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. Turbotax free state file Table 2-1. Turbotax free state file When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Turbotax free state file Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Turbotax free state file An ordinary expense is one that is common and accepted in your trade or business. Turbotax free state file A necessary expense is one that is helpful and appropriate. Turbotax free state file Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Turbotax free state file   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. Turbotax free state file Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Turbotax free state file You cannot deduct expenses that are lavish or extravagant under the circumstances. Turbotax free state file You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). Turbotax free state file You do not have to show that business income or other business benefit actually resulted from each entertainment expense. Turbotax free state file Clear business setting. Turbotax free state file   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. Turbotax free state file The following situations are examples of entertainment in a clear business setting. Turbotax free state file Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. Turbotax free state file Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). Turbotax free state file Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. Turbotax free state file An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. Turbotax free state file Expenses not considered directly related. Turbotax free state file   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. Turbotax free state file The following are examples of situations where there are substantial distractions. Turbotax free state file A meeting or discussion at a nightclub, theater, or sporting event. Turbotax free state file A meeting or discussion during what is essentially a social gathering, such as a cocktail party. Turbotax free state file A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. Turbotax free state file Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. Turbotax free state file To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). Turbotax free state file Associated with trade or business. Turbotax free state file   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. Turbotax free state file The purpose may be to get new business or to encourage the continuation of an existing business relationship. Turbotax free state file Substantial business discussion. Turbotax free state file   Whether a business discussion is substantial depends on the facts of each case. Turbotax free state file A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. Turbotax free state file   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. Turbotax free state file It is not necessary that you devote more time to business than to entertainment. Turbotax free state file You do not have to discuss business during the meal or entertainment. Turbotax free state file Meetings at conventions. Turbotax free state file   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. Turbotax free state file However, your reason for attending the convention or meeting must be to further your trade or business. Turbotax free state file The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. Turbotax free state file Directly before or after business discussion. Turbotax free state file   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. Turbotax free state file   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. Turbotax free state file Among the facts to consider are the place, date, and duration of the business discussion. Turbotax free state file If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. Turbotax free state file Example. Turbotax free state file A group of business associates comes from out of town to your place of business to hold a substantial business discussion. Turbotax free state file If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. Turbotax free state file The expense meets the associated test. Turbotax free state file 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Turbotax free state file (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. Turbotax free state file See Individuals subject to “hours of service” limits , later. Turbotax free state file ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Turbotax free state file Figure A summarizes the general rules explained in this section. Turbotax free state file The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. Turbotax free state file Included expenses. Turbotax free state file   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. Turbotax free state file However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. Turbotax free state file Figure A. Turbotax free state file Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Turbotax free state file See Exceptions to the 50% Limit . Turbotax free state file Please click here for the text description of the image. Turbotax free state file Figure A. Turbotax free state file Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. Turbotax free state file   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. Turbotax free state file   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Turbotax free state file It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. Turbotax free state file It also applies to the cost of meals included in deductible educational expenses. Turbotax free state file When to apply the 50% limit. Turbotax free state file   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Turbotax free state file You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. Turbotax free state file Example 1. Turbotax free state file You spend $200 for a business-related meal. Turbotax free state file If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Turbotax free state file Your deduction cannot be more than $45 (50% × $90). Turbotax free state file Example 2. Turbotax free state file You purchase two tickets to a concert and give them to a client. Turbotax free state file You purchased the tickets through a ticket agent. Turbotax free state file You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Turbotax free state file Your deduction cannot be more than $80 (50% × $160). Turbotax free state file Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Turbotax free state file Figure A can help you determine if the 50% limit applies to you. Turbotax free state file Expenses not subject to 50% limit. Turbotax free state file   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Turbotax free state file 1 - Employee's reimbursed expenses. Turbotax free state file   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Turbotax free state file Accountable plans are discussed in chapter 6. Turbotax free state file 2 - Self-employed. Turbotax free state file   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. Turbotax free state file You have these expenses as an independent contractor. Turbotax free state file Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. Turbotax free state file You provide adequate records of these expenses to your customer or client. Turbotax free state file (See chapter 5 . Turbotax free state file )   In this case, your client or customer is subject to the 50% limit on the expenses. Turbotax free state file Example. Turbotax free state file You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. Turbotax free state file You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. Turbotax free state file If the client can deduct the expenses, the client is subject to the 50% limit. Turbotax free state file If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. Turbotax free state file 3 - Advertising expenses. Turbotax free state file   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Turbotax free state file For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. Turbotax free state file 4 - Sale of meals or entertainment. Turbotax free state file   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. Turbotax free state file For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. Turbotax free state file 5 - Charitable sports event. Turbotax free state file   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. Turbotax free state file For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. Turbotax free state file Individuals subject to “hours of service” limits. Turbotax free state file   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Turbotax free state file The percentage is 80%. Turbotax free state file   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Turbotax free state file Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Turbotax free state file Interstate truck operators and bus drivers who are under Department of Transportation regulations. Turbotax free state file Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Turbotax free state file Certain merchant mariners who are under Coast Guard regulations. Turbotax free state file What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Turbotax free state file Entertainment. Turbotax free state file   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Turbotax free state file Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Turbotax free state file   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. Turbotax free state file A meal as a form of entertainment. Turbotax free state file   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. Turbotax free state file A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Turbotax free state file To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Turbotax free state file    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Turbotax free state file    Meals sold in the normal course of your business are not considered entertainment. Turbotax free state file Deduction may depend on your type of business. Turbotax free state file   Your kind of business may determine if a particular activity is considered entertainment. Turbotax free state file For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. Turbotax free state file This is because fashion shows are typical in your business. Turbotax free state file But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. Turbotax free state file Separating costs. Turbotax free state file   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. Turbotax free state file You must have a reasonable basis for making this allocation. Turbotax free state file For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Turbotax free state file Taking turns paying for meals or entertainment. Turbotax free state file   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. Turbotax free state file Lavish or extravagant expenses. Turbotax free state file   You cannot deduct expenses for entertainment that are lavish or extravagant. Turbotax free state file An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Turbotax free state file Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Turbotax free state file Allocating between business and nonbusiness. Turbotax free state file   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. Turbotax free state file You can deduct only the business part. Turbotax free state file If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. Turbotax free state file Example. Turbotax free state file You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Turbotax free state file Only 4/11 of the expense qualifies as a business entertainment expense. Turbotax free state file You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. Turbotax free state file Trade association meetings. Turbotax free state file   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. Turbotax free state file These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Turbotax free state file Entertainment tickets. Turbotax free state file   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Turbotax free state file For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. Turbotax free state file Exception for events that benefit charitable organizations. Turbotax free state file   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. Turbotax free state file You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. Turbotax free state file The event's main purpose is to benefit a qualified charitable organization. Turbotax free state file The entire net proceeds go to the charity. Turbotax free state file The event uses volunteers to perform substantially all the event's work. Turbotax free state file    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. Turbotax free state file Example 1. Turbotax free state file You purchase tickets to a golf tournament organized by the local volunteer fire company. Turbotax free state file All net proceeds will be used to buy new fire equipment. Turbotax free state file The volunteers will run the tournament. Turbotax free state file You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. Turbotax free state file Example 2. Turbotax free state file You purchase tickets to a college football game through a ticket broker. Turbotax free state file After having a business discussion, you take a client to the game. Turbotax free state file Net proceeds from the game go to colleges that qualify as charitable organizations. Turbotax free state file However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. Turbotax free state file Skyboxes and other private luxury boxes. Turbotax free state file   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. Turbotax free state file   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. Turbotax free state file For example, renting a skybox for a series of playoff games is considered renting it for more than one event. Turbotax free state file All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. Turbotax free state file   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. Turbotax free state file Example. Turbotax free state file You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. Turbotax free state file The cost of regular nonluxury box seats at each event is $30 a seat. Turbotax free state file You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Turbotax free state file Food and beverages in skybox seats. Turbotax free state file   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. Turbotax free state file The amounts separately stated for food and beverages must be reasonable. Turbotax free state file You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. Turbotax free state file What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Turbotax free state file Club dues and membership fees. Turbotax free state file   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Turbotax free state file This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. Turbotax free state file   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Turbotax free state file You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Turbotax free state file Entertainment facilities. Turbotax free state file   Generally, you cannot deduct any expense for the use of an entertainment facility. Turbotax free state file This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Turbotax free state file   An entertainment facility is any property you own, rent, or use for entertainment. Turbotax free state file Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Turbotax free state file Out-of-pocket expenses. Turbotax free state file   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. Turbotax free state file These are not expenses for the use of an entertainment facility. Turbotax free state file However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. Turbotax free state file Expenses for spouses. Turbotax free state file   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. Turbotax free state file However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. Turbotax free state file Example. Turbotax free state file You entertain a customer. Turbotax free state file The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. Turbotax free state file The customer's spouse joins you because it is impractical to entertain the customer without the spouse. Turbotax free state file You can deduct the cost of entertaining the customer's spouse. Turbotax free state file If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. Turbotax free state file Gift or entertainment. Turbotax free state file   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Turbotax free state file However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. Turbotax free state file   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Turbotax free state file You can treat the tickets as either a gift or entertainment, whichever is to your advantage. Turbotax free state file   You can change your treatment of the tickets at a later date by filing an amended return. Turbotax free state file Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. Turbotax free state file   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Turbotax free state file You cannot choose, in this case, to treat the tickets as a gift. Turbotax free state file Prev  Up  Next   Home   More Online Publications
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Federal Laboratory Consortium for Technology Transfer

The goal of the Consortium is to facilitate knowledge and technology sharing across federal laboratories, and to speed the adoption of new knowledge and technologies in the wider economy by facilitating the sharing federal research with non-governmental public and private entities.

The Turbotax Free State File

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