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Volunteer Income Tax Assistance

Volunteer income tax assistance 7. Volunteer income tax assistance   Excess Contributions Table of Contents How Do I Know If I Have Excess Contributions? What Happens If I Have Excess Contributions?Excess Annual Addition Excess Elective Deferral If your actual contributions are greater than your MAC, you have an excess contribution. Volunteer income tax assistance Excess contributions can result in income tax, additional taxes, and penalties. Volunteer income tax assistance The effect of excess contributions depends on the type of excess contribution. Volunteer income tax assistance This chapter discusses excess contributions to your 403(b) account. Volunteer income tax assistance How Do I Know If I Have Excess Contributions? At the end of the year or the beginning of the next year, you should refigure your MAC based on your actual compensation and actual contributions made to your account. Volunteer income tax assistance If the actual contributions to your account are greater than your MAC, you have excess contributions. Volunteer income tax assistance If, at any time during the year, your employment status or your compensation changes, you should refigure your MAC using a revised estimate of compensation to prevent excess contributions. Volunteer income tax assistance What Happens If I Have Excess Contributions? Certain excess contributions in a 403(b) account can be corrected. Volunteer income tax assistance The effect of an excess 403(b) contribution will depend on the type of excess contribution. Volunteer income tax assistance Types of excess contributions. Volunteer income tax assistance   If, after checking your actual contributions, you determine that you have an excess, the first thing is to identify the type of excess that you have. Volunteer income tax assistance Excess contributions to a 403(b) account are categorized as either an: Excess annual addition, or Excess elective deferral. Volunteer income tax assistance Excess Annual Addition An excess annual addition is a contribution that is more than your limit on annual additions. Volunteer income tax assistance To determine your limit on annual additions, see chapter 3 (chapter 5 for ministers or church employees). Volunteer income tax assistance In the year that your contributions are more than your limit on annual additions, the excess amount will be included in your income. Volunteer income tax assistance Excise Tax If your 403(b) account invests in mutual funds, and you exceed your limit on annual additions, you may be subject to a 6% excise tax on the excess contribution. Volunteer income tax assistance The excise tax does not apply to funds in an annuity account or to excess deferrals. Volunteer income tax assistance You must pay the excise tax each year in which there are excess contributions in your account. Volunteer income tax assistance Excess contributions can be corrected by contributing less than the applicable limit in later years or by making permissible distributions. Volunteer income tax assistance See chapter 8 for a discussion on permissible distributions. Volunteer income tax assistance You cannot deduct the excise tax. Volunteer income tax assistance Reporting requirement. Volunteer income tax assistance   You must file Form 5330 if there has been an excess contribution to a custodial account and that excess has not been corrected. Volunteer income tax assistance Excess Elective Deferral An excess elective deferral is the amount that is more than your limit on elective deferrals. Volunteer income tax assistance To determine your limit on elective deferrals, see chapter 4. Volunteer income tax assistance Your employer's 403(b) plan may contain language permitting it to distribute excess deferrals. Volunteer income tax assistance If so, it may require that in order to get a distribution of excess deferrals, you either notify the plan of the amount of excess deferrals or designate a distribution as an excess deferral. Volunteer income tax assistance The plan may require that the notification or designation be in writing and may require that you certify or otherwise establish that the designated amount is an excess deferral. Volunteer income tax assistance A plan is not required to permit distribution of excess deferrals. Volunteer income tax assistance Correction of excess deferrals during year. Volunteer income tax assistance   If you have excess deferrals for a year, a corrective distribution may be made only if both of the following conditions are satisfied. Volunteer income tax assistance The plan and either you or your employer designate the distribution as an excess deferral to the extent you have excess deferrals for the year. Volunteer income tax assistance The correcting distribution is made after the date on which the excess deferral was made. Volunteer income tax assistance Correction of excess deferrals after the year. Volunteer income tax assistance   If you have excess deferrals for a year, you may receive a correcting distribution of the excess deferral no later than April 15 of the following year. Volunteer income tax assistance The plan can distribute the excess deferral (and any income allocable to the excess) no later than April 15 of the year following the year the excess deferral was made. Volunteer income tax assistance Tax treatment of excess deferrals not attributable to Roth contributions. Volunteer income tax assistance   If the excess deferral is distributed by April 15, it is included in your income in the year contributed and the earnings on the excess deferral will be taxed in the year distributed. Volunteer income tax assistance Tax treatment of excess deferrals attributable to Roth contributions. Volunteer income tax assistance   For these rules, see Regulations section 1. Volunteer income tax assistance 402(g)-1(e). Volunteer income tax assistance Prev  Up  Next   Home   More Online Publications
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The Volunteer Income Tax Assistance

Volunteer income tax assistance 6. Volunteer income tax assistance   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Volunteer income tax assistance Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Volunteer income tax assistance Also use basis to figure depreciation, amortization, depletion, and casualty losses. Volunteer income tax assistance If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Volunteer income tax assistance Only the basis allocated to the business or investment use of the property can be depreciated. Volunteer income tax assistance Your original basis in property is adjusted (increased or decreased) by certain events. Volunteer income tax assistance For example, if you make improvements to the property, increase your basis. Volunteer income tax assistance If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Volunteer income tax assistance Keep accurate records of all items that affect the basis of your assets. Volunteer income tax assistance For information on keeping records, see chapter 1. Volunteer income tax assistance Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Volunteer income tax assistance Cost Basis The basis of property you buy is usually its cost. Volunteer income tax assistance Cost is the amount you pay in cash, debt obligations, other property, or services. Volunteer income tax assistance Your cost includes amounts you pay for sales tax, freight, installation, and testing. Volunteer income tax assistance The basis of real estate and business assets will include other items, discussed later. Volunteer income tax assistance Basis generally does not include interest payments. Volunteer income tax assistance However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Volunteer income tax assistance You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Volunteer income tax assistance Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Volunteer income tax assistance Loans with low or no interest. Volunteer income tax assistance   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Volunteer income tax assistance You generally have unstated interest if your interest rate is less than the applicable federal rate. Volunteer income tax assistance See the discussion of unstated interest in Publication 537, Installment Sales. Volunteer income tax assistance Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Volunteer income tax assistance If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Volunteer income tax assistance Some of these expenses are discussed next. Volunteer income tax assistance Lump sum purchase. Volunteer income tax assistance   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Volunteer income tax assistance Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Volunteer income tax assistance Figure the basis of each asset by multiplying the lump sum by a fraction. Volunteer income tax assistance The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Volunteer income tax assistance Fair market value (FMV). Volunteer income tax assistance   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Volunteer income tax assistance Sales of similar property on or about the same date may help in figuring the FMV of the property. Volunteer income tax assistance If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Volunteer income tax assistance Real estate taxes. Volunteer income tax assistance   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Volunteer income tax assistance   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Volunteer income tax assistance Whether or not you reimburse the seller, do not include that amount in the basis of your property. Volunteer income tax assistance Settlement costs. Volunteer income tax assistance   Your basis includes the settlement fees and closing costs for buying the property. Volunteer income tax assistance See Publication 551 for a detailed list of items you can and cannot include in basis. Volunteer income tax assistance   Do not include fees and costs for getting a loan on the property. Volunteer income tax assistance Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Volunteer income tax assistance Points. Volunteer income tax assistance   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Volunteer income tax assistance You may be able to deduct the points currently or over the term of the loan. Volunteer income tax assistance For more information about deducting points, see Points in chapter 4 of Publication 535. Volunteer income tax assistance Assumption of a mortgage. Volunteer income tax assistance   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Volunteer income tax assistance Example. Volunteer income tax assistance If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Volunteer income tax assistance Constructing assets. Volunteer income tax assistance   If you build property or have assets built for you, your expenses for this construction are part of your basis. Volunteer income tax assistance Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Volunteer income tax assistance   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Volunteer income tax assistance You must capitalize them (include them in the asset's basis). Volunteer income tax assistance Employee wages paid for the construction work, reduced by any employment credits allowed. Volunteer income tax assistance Depreciation on equipment you own while it is used in the construction. Volunteer income tax assistance Operating and maintenance costs for equipment used in the construction. Volunteer income tax assistance The cost of business supplies and materials used in the construction. Volunteer income tax assistance    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Volunteer income tax assistance Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Volunteer income tax assistance To determine the basis of these assets or separate items, there must be an allocation of basis. Volunteer income tax assistance Group of assets acquired. Volunteer income tax assistance   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Volunteer income tax assistance Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Volunteer income tax assistance You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Volunteer income tax assistance If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Volunteer income tax assistance Farming business acquired. Volunteer income tax assistance   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Volunteer income tax assistance Generally, reduce the purchase price by any cash received. Volunteer income tax assistance Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Volunteer income tax assistance See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Volunteer income tax assistance Transplanted embryo. Volunteer income tax assistance   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Volunteer income tax assistance Allocate the rest of the purchase price to the basis of the calf. Volunteer income tax assistance Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Volunteer income tax assistance Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Volunteer income tax assistance You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Volunteer income tax assistance Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Volunteer income tax assistance However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Volunteer income tax assistance You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Volunteer income tax assistance You are not subject to the uniform capitalization rules if the property is produced for personal use. Volunteer income tax assistance In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Volunteer income tax assistance Plants. Volunteer income tax assistance   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Volunteer income tax assistance Animals. Volunteer income tax assistance   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Volunteer income tax assistance The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Volunteer income tax assistance Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Volunteer income tax assistance For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Volunteer income tax assistance For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Volunteer income tax assistance Exceptions. Volunteer income tax assistance   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Volunteer income tax assistance   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Volunteer income tax assistance See Accrual Method Required under Accounting Methods in chapter 2. Volunteer income tax assistance   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Volunteer income tax assistance If you make this election, special rules apply. Volunteer income tax assistance This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Volunteer income tax assistance This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Volunteer income tax assistance    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Volunteer income tax assistance See chapter 7, for additional information on depreciation. Volunteer income tax assistance Example. Volunteer income tax assistance You grow trees that have a preproductive period of more than 2 years. Volunteer income tax assistance The trees produce an annual crop. Volunteer income tax assistance You are an individual and the uniform capitalization rules apply to your farming business. Volunteer income tax assistance You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Volunteer income tax assistance You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Volunteer income tax assistance Preproductive period of more than 2 years. Volunteer income tax assistance   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Volunteer income tax assistance Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Volunteer income tax assistance Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Volunteer income tax assistance More information. Volunteer income tax assistance   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Volunteer income tax assistance 263A-4. Volunteer income tax assistance Table 6-1. Volunteer income tax assistance Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Volunteer income tax assistance Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Volunteer income tax assistance The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Volunteer income tax assistance Increases to Basis Increase the basis of any property by all items properly added to a capital account. Volunteer income tax assistance These include the cost of any improvements having a useful life of more than 1 year. Volunteer income tax assistance The following costs increase the basis of property. Volunteer income tax assistance The cost of extending utility service lines to property. Volunteer income tax assistance Legal fees, such as the cost of defending and perfecting title. Volunteer income tax assistance Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Volunteer income tax assistance Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Volunteer income tax assistance Do not deduct these expenses as taxes. Volunteer income tax assistance However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Volunteer income tax assistance If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Volunteer income tax assistance See chapter 7. Volunteer income tax assistance Deducting vs. Volunteer income tax assistance capitalizing costs. Volunteer income tax assistance   Do not add to your basis costs you can deduct as current expenses. Volunteer income tax assistance For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Volunteer income tax assistance However, you can elect either to deduct or to capitalize certain other costs. Volunteer income tax assistance See chapter 7 in Publication 535. Volunteer income tax assistance Decreases to Basis The following are some items that reduce the basis of property. Volunteer income tax assistance Section 179 deduction. Volunteer income tax assistance Deductions previously allowed or allowable for amortization, depreciation, and depletion. Volunteer income tax assistance Alternative motor vehicle credit. Volunteer income tax assistance See Form 8910. Volunteer income tax assistance Alternative fuel vehicle refueling property credit. Volunteer income tax assistance See Form 8911. Volunteer income tax assistance Residential energy efficient property credits. Volunteer income tax assistance See Form 5695. Volunteer income tax assistance Investment credit (part or all) taken. Volunteer income tax assistance Casualty and theft losses and insurance reimbursements. Volunteer income tax assistance Payments you receive for granting an easement. Volunteer income tax assistance Exclusion from income of subsidies for energy conservation measures. Volunteer income tax assistance Certain canceled debt excluded from income. Volunteer income tax assistance Rebates from a manufacturer or seller. Volunteer income tax assistance Patronage dividends received from a cooperative association as a result of a purchase of property. Volunteer income tax assistance See Patronage Dividends in chapter 3. Volunteer income tax assistance Gas-guzzler tax. Volunteer income tax assistance See Form 6197. Volunteer income tax assistance Some of these items are discussed next. Volunteer income tax assistance For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Volunteer income tax assistance Depreciation and section 179 deduction. Volunteer income tax assistance   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Volunteer income tax assistance For more information on these deductions, see chapter 7. Volunteer income tax assistance Section 179 deduction. Volunteer income tax assistance   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Volunteer income tax assistance Depreciation. Volunteer income tax assistance   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Volunteer income tax assistance If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Volunteer income tax assistance If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Volunteer income tax assistance   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Volunteer income tax assistance   See chapter 7 for information on figuring the depreciation you should have claimed. Volunteer income tax assistance   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Volunteer income tax assistance Casualty and theft losses. Volunteer income tax assistance   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Volunteer income tax assistance Also, decrease it by any deductible loss not covered by insurance. Volunteer income tax assistance See chapter 11 for information about figuring your casualty or theft loss. Volunteer income tax assistance   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Volunteer income tax assistance To make this determination, compare the repaired property to the property before the casualty. Volunteer income tax assistance Easements. Volunteer income tax assistance   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Volunteer income tax assistance It reduces the basis of the affected part of the property. Volunteer income tax assistance If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Volunteer income tax assistance See Easements and rights-of-way in chapter 3. Volunteer income tax assistance Exclusion from income of subsidies for energy conservation measures. Volunteer income tax assistance   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Volunteer income tax assistance Reduce the basis of the property by the excluded amount. Volunteer income tax assistance Canceled debt excluded from income. Volunteer income tax assistance   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Volunteer income tax assistance A debt includes any indebtedness for which you are liable or which attaches to property you hold. Volunteer income tax assistance   You can exclude your canceled debt from income if the debt is any of the following. Volunteer income tax assistance Debt canceled in a bankruptcy case or when you are insolvent. Volunteer income tax assistance Qualified farm debt. Volunteer income tax assistance Qualified real property business debt (provided you are not a C corporation). Volunteer income tax assistance Qualified principal residence indebtedness. Volunteer income tax assistance Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Volunteer income tax assistance If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Volunteer income tax assistance If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Volunteer income tax assistance   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Volunteer income tax assistance For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Volunteer income tax assistance For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Volunteer income tax assistance For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Volunteer income tax assistance Basis Other Than Cost There are times when you cannot use cost as basis. Volunteer income tax assistance In these situations, the fair market value or the adjusted basis of property may be used. Volunteer income tax assistance Examples are discussed next. Volunteer income tax assistance Property changed from personal to business or rental use. Volunteer income tax assistance   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Volunteer income tax assistance An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Volunteer income tax assistance   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Volunteer income tax assistance   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Volunteer income tax assistance The basis for figuring a gain is your adjusted basis in the property when you sell the property. Volunteer income tax assistance Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Volunteer income tax assistance Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Volunteer income tax assistance Property received for services. Volunteer income tax assistance   If you receive property for services, include the property's FMV in income. Volunteer income tax assistance The amount you include in income becomes your basis. Volunteer income tax assistance If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Volunteer income tax assistance Example. Volunteer income tax assistance George Smith is an accountant and also operates a farming business. Volunteer income tax assistance George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Volunteer income tax assistance The accounting work and the cow are each worth $1,500. Volunteer income tax assistance George must include $1,500 in income for his accounting services. Volunteer income tax assistance George's basis in the cow is $1,500. Volunteer income tax assistance Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Volunteer income tax assistance A taxable gain or deductible loss also is known as a recognized gain or loss. Volunteer income tax assistance A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Volunteer income tax assistance If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Volunteer income tax assistance Example. Volunteer income tax assistance You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Volunteer income tax assistance You must report a taxable gain of $4,000 for the land. Volunteer income tax assistance The tractor has a basis of $6,000. Volunteer income tax assistance Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Volunteer income tax assistance Similar or related property. Volunteer income tax assistance   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Volunteer income tax assistance However, make the following adjustments. Volunteer income tax assistance Decrease the basis by the following amounts. Volunteer income tax assistance Any loss you recognize on the involuntary conversion. Volunteer income tax assistance Any money you receive that you do not spend on similar property. Volunteer income tax assistance Increase the basis by the following amounts. Volunteer income tax assistance Any gain you recognize on the involuntary conversion. Volunteer income tax assistance Any cost of acquiring the replacement property. Volunteer income tax assistance Money or property not similar or related. Volunteer income tax assistance   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Volunteer income tax assistance Allocating the basis. Volunteer income tax assistance   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Volunteer income tax assistance Basis for depreciation. Volunteer income tax assistance   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Volunteer income tax assistance For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Volunteer income tax assistance For more information about involuntary conversions, see chapter 11. Volunteer income tax assistance Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Volunteer income tax assistance A nontaxable gain or loss also is known as an unrecognized gain or loss. Volunteer income tax assistance If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Volunteer income tax assistance Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Volunteer income tax assistance For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Volunteer income tax assistance There must also be an exchange of like-kind property. Volunteer income tax assistance For more information, see Like-Kind Exchanges in  chapter 8. Volunteer income tax assistance The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Volunteer income tax assistance Example 1. Volunteer income tax assistance You traded a truck you used in your farming business for a new smaller truck to use in farming. Volunteer income tax assistance The adjusted basis of the old truck was $10,000. Volunteer income tax assistance The FMV of the new truck is $30,000. Volunteer income tax assistance Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Volunteer income tax assistance Example 2. Volunteer income tax assistance You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Volunteer income tax assistance You use both the field cultivator and the planter in your farming business. Volunteer income tax assistance The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Volunteer income tax assistance   Exchange expenses generally are the closing costs that you pay. Volunteer income tax assistance They include such items as brokerage commissions, attorney fees, and deed preparation fees. Volunteer income tax assistance Add them to the basis of the like-kind property you receive. Volunteer income tax assistance Property plus cash. Volunteer income tax assistance   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Volunteer income tax assistance Example. Volunteer income tax assistance You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Volunteer income tax assistance Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Volunteer income tax assistance Special rules for related persons. Volunteer income tax assistance   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Volunteer income tax assistance Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Volunteer income tax assistance Each person reports it on the tax return filed for the year in which the later disposition occurred. Volunteer income tax assistance If this rule applies, the basis of the property received in the original exchange will be its FMV. Volunteer income tax assistance For more information, see chapter 8. Volunteer income tax assistance Exchange of business property. Volunteer income tax assistance   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Volunteer income tax assistance For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Volunteer income tax assistance Basis for depreciation. Volunteer income tax assistance   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Volunteer income tax assistance For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Volunteer income tax assistance Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Volunteer income tax assistance The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Volunteer income tax assistance Decrease the basis by the following amounts. Volunteer income tax assistance Any money you receive. Volunteer income tax assistance Any loss you recognize on the exchange. Volunteer income tax assistance Increase the basis by the following amounts. Volunteer income tax assistance Any additional costs you incur. Volunteer income tax assistance Any gain you recognize on the exchange. Volunteer income tax assistance If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Volunteer income tax assistance Example 1. Volunteer income tax assistance You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Volunteer income tax assistance You realize a gain of $40,000. Volunteer income tax assistance This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Volunteer income tax assistance Include your gain in income (recognize gain) only to the extent of the cash received. Volunteer income tax assistance Your basis in the land you received is figured as follows. Volunteer income tax assistance Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Volunteer income tax assistance You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Volunteer income tax assistance You realize a gain of $7,250. Volunteer income tax assistance This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Volunteer income tax assistance You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Volunteer income tax assistance Your basis in the truck you received is figured as follows. Volunteer income tax assistance Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Volunteer income tax assistance   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Volunteer income tax assistance The rest is the basis of the like-kind property. Volunteer income tax assistance Example. Volunteer income tax assistance You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Volunteer income tax assistance You also received $1,000 cash and a truck that had an FMV of $3,000. Volunteer income tax assistance The truck is unlike property. Volunteer income tax assistance You realized a gain of $1,500. Volunteer income tax assistance This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Volunteer income tax assistance You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Volunteer income tax assistance Your basis in the properties you received is figured as follows. Volunteer income tax assistance Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Volunteer income tax assistance This is the truck's FMV. Volunteer income tax assistance The rest ($12,500) is the basis of the tractor. Volunteer income tax assistance Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Volunteer income tax assistance Example. Volunteer income tax assistance You used a tractor on your farm for 3 years. Volunteer income tax assistance Its adjusted basis is $22,000 and its FMV is $40,000. Volunteer income tax assistance You are interested in a new tractor, which sells for $60,000. Volunteer income tax assistance Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Volunteer income tax assistance Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Volunteer income tax assistance However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Volunteer income tax assistance Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Volunteer income tax assistance Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Volunteer income tax assistance Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Volunteer income tax assistance You also must know its FMV at the time it was given to you and any gift tax paid on it. Volunteer income tax assistance FMV equal to or greater than donor's adjusted basis. Volunteer income tax assistance   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Volunteer income tax assistance Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Volunteer income tax assistance   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Volunteer income tax assistance See Adjusted Basis , earlier. Volunteer income tax assistance   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Volunteer income tax assistance Figure the increase by multiplying the gift tax paid by the following fraction. Volunteer income tax assistance Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Volunteer income tax assistance The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Volunteer income tax assistance Example. Volunteer income tax assistance In 2013, you received a gift of property from your mother that had an FMV of $50,000. Volunteer income tax assistance Her adjusted basis was $20,000. Volunteer income tax assistance The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Volunteer income tax assistance She paid a gift tax of $7,320. Volunteer income tax assistance Your basis, $26,076, is figured as follows. Volunteer income tax assistance Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Volunteer income tax assistance 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Volunteer income tax assistance If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Volunteer income tax assistance However, your basis cannot exceed the FMV of the gift when it was given to you. Volunteer income tax assistance FMV less than donor's adjusted basis. Volunteer income tax assistance   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Volunteer income tax assistance Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Volunteer income tax assistance Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Volunteer income tax assistance (See Adjusted Basis , earlier. Volunteer income tax assistance )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Volunteer income tax assistance Example. Volunteer income tax assistance You received farmland as a gift from your parents when they retired from farming. Volunteer income tax assistance At the time of the gift, the land had an FMV of $80,000. Volunteer income tax assistance Your parents' adjusted basis was $100,000. Volunteer income tax assistance After you received the land, no events occurred that would increase or decrease your basis. Volunteer income tax assistance If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Volunteer income tax assistance If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Volunteer income tax assistance If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Volunteer income tax assistance For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Volunteer income tax assistance If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Volunteer income tax assistance Business property. Volunteer income tax assistance   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Volunteer income tax assistance Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Volunteer income tax assistance The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Volunteer income tax assistance However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Volunteer income tax assistance The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Volunteer income tax assistance For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Volunteer income tax assistance Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Volunteer income tax assistance If a federal estate return is filed, you can use its appraised value. Volunteer income tax assistance The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Volunteer income tax assistance For information on the alternate valuation, see the Instructions for Form 706. Volunteer income tax assistance The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Volunteer income tax assistance If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Volunteer income tax assistance Special-use valuation method. Volunteer income tax assistance   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Volunteer income tax assistance If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Volunteer income tax assistance If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Volunteer income tax assistance The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Volunteer income tax assistance   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Volunteer income tax assistance Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Volunteer income tax assistance Figure all FMVs without regard to the special-use valuation. Volunteer income tax assistance   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Volunteer income tax assistance This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Volunteer income tax assistance The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Volunteer income tax assistance   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Volunteer income tax assistance To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Volunteer income tax assistance If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Volunteer income tax assistance The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Volunteer income tax assistance   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Volunteer income tax assistance   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Volunteer income tax assistance Property inherited from a decedent who died in 2010. Volunteer income tax assistance   If you inherited property from a decedent who died in 2010, different rules may apply. Volunteer income tax assistance See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Volunteer income tax assistance Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Volunteer income tax assistance Partner's basis. Volunteer income tax assistance   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Volunteer income tax assistance However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Volunteer income tax assistance For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Volunteer income tax assistance Shareholder's basis. Volunteer income tax assistance   The basis of property distributed by a corporation to a shareholder is its fair market value. Volunteer income tax assistance For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 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