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Www irs gov freefile 3. Www irs gov freefile   Abandonments Table of Contents 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. Www irs gov freefile Whether an abandonment has occurred is determined in light of all the facts and circumstances. Www irs gov freefile You must both show an intention to abandon the property and affirmatively act to abandon the property. Www irs gov freefile A voluntary conveyance of the property in lieu of foreclosure is not an abandonment and is treated as the exchange of property to satisfy a debt. Www irs gov freefile For more information, see Sales and Exchanges in Publication 544. Www irs gov freefile The tax consequences of abandonment of property that secures a debt depend on whether you were personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Www irs gov freefile See Publication 544 if you abandoned property that did not secure debt. Www irs gov freefile This publication only discusses the tax consequences of abandoning property that secured a debt. Www irs gov freefile Abandonment of property securing recourse debt. Www irs gov freefile    In most cases, if you abandon property that secures debt for which you are personally liable (recourse debt), you do not have gain or loss until the later foreclosure is completed. Www irs gov freefile For details on figuring gain or loss on the foreclosure, see chapter 2. Www irs gov freefile Example 1—abandonment of personal-use property securing recourse debt. Www irs gov freefile In 2009, Anne purchased a home for $200,000. Www irs gov freefile She borrowed the entire purchase price, for which she was personally liable, and gave the bank a mortgage on the home. Www irs gov freefile In 2013, Anne lost her job and was unable to continue making her mortgage loan payments. Www irs gov freefile Because her mortgage loan balance was $185,000 and the FMV of her home was only $150,000, Anne decided to abandon her home by permanently moving out on August 1, 2013. Www irs gov freefile Because Anne was personally liable for the debt and the bank did not complete a foreclosure of the property in 2013, Anne has neither gain nor loss in tax year 2013 from abandoning the home. Www irs gov freefile If the bank sells the house at a foreclosure sale in 2014, Anne will have to figure her gain or nondeductible loss for tax year 2014 as discussed earlier in chapter 2. Www irs gov freefile Example 2—abandonment of business or investment property securing recourse debt. Www irs gov freefile In 2009, Sue purchased business property for $200,000. Www irs gov freefile She borrowed the entire purchase price, for which she was personally liable, and gave the lender a security interest in the property. Www irs gov freefile In 2013, Sue was unable to continue making her loan payments. Www irs gov freefile Because her loan balance was $185,000 and the FMV of the property was only $150,000, Sue abandoned the property on August 1, 2013. Www irs gov freefile Because Sue was personally liable for the debt and the lender did not complete a foreclosure of the property in 2013, Sue has neither gain nor loss in tax year 2013 from abandoning the property. Www irs gov freefile If the lender sells the property at a foreclosure sale in 2014, Sue will have to figure her gain or deductible loss for tax year 2014 as discussed earlier in chapter 2. Www irs gov freefile Abandonment of property securing nonrecourse debt. Www irs gov freefile    If you abandon property that secures debt for which you are not personally liable (nonrecourse debt), the abandonment is treated as a sale or exchange. Www irs gov freefile   The amount you realize on the abandonment of property that secured nonrecourse debt is the amount of the nonrecourse debt. Www irs gov freefile If the amount you realize is more than your adjusted basis, then you have a gain. Www irs gov freefile If your adjusted basis is more than the amount you realize, then you have a loss. Www irs gov freefile For more information on how to figure gain and loss, see Gain or Loss from Sales or Exchanges in Publication 544. Www irs gov freefile   Loss from abandonment of business or investment property is deductible as a loss. Www irs gov freefile The character of the loss depends on the character of the property. Www irs gov freefile The amount of deductible capital loss may be limited. Www irs gov freefile For more information, see Treatment of Capital Losses in Publication 544. Www irs gov freefile You cannot deduct any loss from abandonment of your home or other property held for personal use. Www irs gov freefile Example 1—abandonment of personal-use property securing nonrecourse debt. Www irs gov freefile In 2009, Timothy purchased a home for $200,000. Www irs gov freefile He borrowed the entire purchase price, for which he was not personally liable, and gave the bank a mortgage on the home. Www irs gov freefile In 2013, Timothy lost his job and was unable to continue making his mortgage loan payments. Www irs gov freefile Because his mortgage loan balance was $185,000 and the FMV of his home was only $150,000, Timothy decided to abandon his home by permanently moving out on August 1, 2013. Www irs gov freefile Because Timothy was not personally liable for the debt, the abandonment is treated as a sale or exchange of the home in tax year 2013. Www irs gov freefile Timothy's amount realized is $185,000 and his adjusted basis in the home is $200,000. Www irs gov freefile Timothy has a $15,000 nondeductible loss in tax year 2013. Www irs gov freefile (Had Timothy’s adjusted basis been less than the amount realized, Timothy would have had a gain that he would have to include in gross income. Www irs gov freefile ) The bank sells the house at a foreclosure sale in 2014. Www irs gov freefile Timothy has neither gain nor loss from the foreclosure sale. Www irs gov freefile Because he was not personally liable for the debt, he also has no cancellation of debt income. Www irs gov freefile Example 2—abandonment of business or investment property securing nonrecourse debt. Www irs gov freefile In 2009, Robert purchased business property for $200,000. Www irs gov freefile He borrowed the entire purchase price, for which he was not personally liable, and gave the lender a security interest in the property. Www irs gov freefile In 2013, Robert was unable to continue making his loan payments. Www irs gov freefile Because his loan balance was $185,000 and the FMV of the property was only $150,000, Robert decided to abandon the property on August 1, 2013. Www irs gov freefile Because Robert was not personally liable for the debt, the abandonment is treated as a sale or exchange of the property in tax year 2013. Www irs gov freefile Robert's amount realized is $185,000 and his adjusted basis in the property is $180,000 (as a result of $20,000 of depreciation deductions on the property). Www irs gov freefile Robert has a $5,000 gain in tax year 2013. Www irs gov freefile (Had Robert’s adjusted basis been greater than the amount realized, he would have had a deductible loss. Www irs gov freefile ) The lender sells the property at a foreclosure sale in 2014. Www irs gov freefile Robert has neither gain nor loss from the foreclosure sale. Www irs gov freefile Because he was not personally liable for the debt, he also has no cancellation of debt income. Www irs gov freefile Canceled debt. Www irs gov freefile    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. Www irs gov freefile This income is separate from any amount realized from abandonment of the property. Www irs gov freefile You must report this income on your return unless one of the exceptions or exclusions described in chapter 1 applies. Www irs gov freefile See chapter 1 for more details. Www irs gov freefile Forms 1099-A and 1099-C. Www irs gov freefile    In most cases, if you abandon real property (such as a home), intangible property, or tangible personal property held (wholly or partly) for use in a trade or business or for investment, that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your gain or loss from the abandonment. Www irs gov freefile Also, if your debt is canceled and the lender must file Form 1099-C, the lender can include the information about the abandonment on that form instead of on Form 1099-A. Www irs gov freefile The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Www irs gov freefile For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Www irs gov freefile Prev  Up  Next   Home   More Online Publications
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Www irs gov freefile 2. Www irs gov freefile   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Www irs gov freefile Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Www irs gov freefile S. Www irs gov freefile or foreign source income. Www irs gov freefile This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Www irs gov freefile S. Www irs gov freefile Virgin Islands (USVI). Www irs gov freefile Generally, the same rules that apply for determining U. Www irs gov freefile S. Www irs gov freefile source income also apply for determining possession source income. Www irs gov freefile However, there are some important exceptions to these rules. Www irs gov freefile Both the general rules and the exceptions are discussed in this chapter. Www irs gov freefile U. Www irs gov freefile S. Www irs gov freefile income rule. Www irs gov freefile   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Www irs gov freefile Table 2-1 shows the general rules for determining whether income is from sources within the United States. Www irs gov freefile Table 2-1. Www irs gov freefile General Rules for Determining U. Www irs gov freefile S. Www irs gov freefile Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Www irs gov freefile Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Www irs gov freefile For more information, see Regulations section 1. Www irs gov freefile 863-1(b). Www irs gov freefile Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Www irs gov freefile Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Www irs gov freefile Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Www irs gov freefile It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Www irs gov freefile Services performed wholly within a relevant possession. Www irs gov freefile   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Www irs gov freefile However, there is an exception for income earned as a member of the U. Www irs gov freefile S. Www irs gov freefile Armed Forces or a civilian spouse. Www irs gov freefile U. Www irs gov freefile S. Www irs gov freefile Armed Forces. Www irs gov freefile   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Www irs gov freefile However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Www irs gov freefile Civilian spouse of active duty member of the U. Www irs gov freefile S. Www irs gov freefile Armed Forces. Www irs gov freefile   If you are a bona fide resident of a U. Www irs gov freefile S. Www irs gov freefile possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Www irs gov freefile Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Www irs gov freefile S. Www irs gov freefile possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Www irs gov freefile Services performed partly inside and partly outside a relevant possession. Www irs gov freefile   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Www irs gov freefile Compensation (other than certain fringe benefits) is sourced on a time basis. Www irs gov freefile Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Www irs gov freefile   Or, you may be permitted to use an alternative basis to determine the source of compensation. Www irs gov freefile See Alternative basis , later. Www irs gov freefile   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Www irs gov freefile In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Www irs gov freefile Time basis. Www irs gov freefile   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Www irs gov freefile Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Www irs gov freefile The time period for which the income is made does not have to be a year. Www irs gov freefile Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Www irs gov freefile Example. Www irs gov freefile In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Www irs gov freefile Your Puerto Rico source income is $60,000, figured as follows. Www irs gov freefile       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Www irs gov freefile   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Www irs gov freefile Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Www irs gov freefile You determine the period to which the income is attributable based on the facts and circumstances of your case. Www irs gov freefile For more information on multi-year compensation, see Treasury Decision (T. Www irs gov freefile D. Www irs gov freefile ) 9212 and Regulations section 1. Www irs gov freefile 861-4, 2005-35 I. Www irs gov freefile R. Www irs gov freefile B. Www irs gov freefile 429, available at www. Www irs gov freefile irs. Www irs gov freefile gov/irb/2005-35_IRB/ar14. Www irs gov freefile html. Www irs gov freefile Certain fringe benefits sourced on a geographical basis. Www irs gov freefile   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Www irs gov freefile Housing. Www irs gov freefile Education. Www irs gov freefile Local transportation. Www irs gov freefile Tax reimbursement. Www irs gov freefile Hazardous or hardship duty pay. Www irs gov freefile Moving expense reimbursement. Www irs gov freefile For information on determining the source of the fringe benefits listed above, see Regulations section 1. Www irs gov freefile 861-4. Www irs gov freefile Alternative basis. Www irs gov freefile   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Www irs gov freefile If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Www irs gov freefile De minimis exception. Www irs gov freefile   There is an exception to the rule for determining the source of income earned in a possession. Www irs gov freefile Generally, you will not have income from a possession if during a tax year you: Are a U. Www irs gov freefile S. Www irs gov freefile citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Www irs gov freefile This exception began with income earned during your 2008 tax year. Www irs gov freefile Pensions. Www irs gov freefile   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Www irs gov freefile The contribution portion is sourced according to where services were performed that earned the pension. Www irs gov freefile The investment earnings portion is sourced according to the location of the pension trust. Www irs gov freefile Example. Www irs gov freefile You are a U. Www irs gov freefile S. Www irs gov freefile citizen who worked in Puerto Rico for a U. Www irs gov freefile S. Www irs gov freefile company. Www irs gov freefile All services were performed in Puerto Rico. Www irs gov freefile Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Www irs gov freefile S. Www irs gov freefile pension trust of your employer. Www irs gov freefile Distributions from the U. Www irs gov freefile S. Www irs gov freefile pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Www irs gov freefile S. Www irs gov freefile source income. Www irs gov freefile Investment Income This category includes such income as interest, dividends, rents, and royalties. Www irs gov freefile Interest income. Www irs gov freefile   The source of interest income is generally determined by the residence of the payer. Www irs gov freefile Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Www irs gov freefile   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Www irs gov freefile See Regulations section 1. Www irs gov freefile 937-2(i) for more information. Www irs gov freefile Dividends. Www irs gov freefile   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Www irs gov freefile There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Www irs gov freefile For more information, see Regulations section 1. Www irs gov freefile 937-2(g). Www irs gov freefile Rental income. Www irs gov freefile   Rents from property located in a relevant possession are treated as income from sources within that possession. Www irs gov freefile Royalties. Www irs gov freefile   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Www irs gov freefile   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Www irs gov freefile Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Www irs gov freefile The most common situations are discussed below. Www irs gov freefile Real property. Www irs gov freefile   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Www irs gov freefile The location of the property generally determines the source of income from the sale. Www irs gov freefile For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Www irs gov freefile If, however, the home you sold was located in the United States, the gain is U. Www irs gov freefile S. Www irs gov freefile source income. Www irs gov freefile Personal property. Www irs gov freefile   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Www irs gov freefile Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Www irs gov freefile If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Www irs gov freefile   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Www irs gov freefile The rules applying to sales of inventory are discussed below. Www irs gov freefile For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Www irs gov freefile Inventory. Www irs gov freefile   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Www irs gov freefile The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Www irs gov freefile Purchased. Www irs gov freefile   Income from the sale of inventory that you purchased is sourced where you sell the property. Www irs gov freefile Generally, this is where title to the property passes to the buyer. Www irs gov freefile Produced. Www irs gov freefile   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Www irs gov freefile For information on making the allocation, see Regulations section 1. Www irs gov freefile 863-3(f). Www irs gov freefile Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Www irs gov freefile S. Www irs gov freefile citizen or resident alien prior to becoming a bona fide resident of a possession. Www irs gov freefile You are subject to these special rules if you meet both of the following conditions. Www irs gov freefile For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Www irs gov freefile For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Www irs gov freefile If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Www irs gov freefile Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Www irs gov freefile S. Www irs gov freefile tax return. Www irs gov freefile (See chapter 3 for additional filing information. Www irs gov freefile ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Www irs gov freefile These rules apply to dispositions after April 11, 2005. Www irs gov freefile For details, see Regulations section 1. Www irs gov freefile 937-2(f)(1) and Examples 1 and 2 of section 1. Www irs gov freefile 937-2(k). Www irs gov freefile Example 1. Www irs gov freefile In 2007, Cheryl Jones, a U. Www irs gov freefile S. Www irs gov freefile citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Www irs gov freefile S. Www irs gov freefile corporation listed on the New York Stock Exchange. Www irs gov freefile On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Www irs gov freefile Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Www irs gov freefile On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Www irs gov freefile On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Www irs gov freefile Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Www irs gov freefile The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Www irs gov freefile This existing special rule applies if you are a U. Www irs gov freefile S. Www irs gov freefile citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Www irs gov freefile S. Www irs gov freefile assets during the 10-year period beginning when you became a bona fide resident. Www irs gov freefile The gain is U. Www irs gov freefile S. Www irs gov freefile source income that generally is subject to U. Www irs gov freefile S. Www irs gov freefile tax if the property is either (1) located in the United States; (2) stock issued by a U. Www irs gov freefile S. Www irs gov freefile corporation or a debt obligation of a U. Www irs gov freefile S. Www irs gov freefile person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Www irs gov freefile See chapter 3 for filing information. Www irs gov freefile Special election. Www irs gov freefile   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Www irs gov freefile Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Www irs gov freefile This election overrides both of the special rules discussed earlier. Www irs gov freefile   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Www irs gov freefile Marketable securities. Www irs gov freefile   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Www irs gov freefile Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Www irs gov freefile S. Www irs gov freefile holding periods. Www irs gov freefile   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Www irs gov freefile The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Www irs gov freefile This is your gain (or loss) that is treated as being from sources within the relevant possession. Www irs gov freefile If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Www irs gov freefile Example 2. Www irs gov freefile Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Www irs gov freefile S. Www irs gov freefile and possession holding periods. Www irs gov freefile Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Www irs gov freefile Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Www irs gov freefile By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Www irs gov freefile Other personal property. Www irs gov freefile   For personal property other than marketable securities, use a time-based allocation. Www irs gov freefile Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Www irs gov freefile      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Www irs gov freefile Example 3. Www irs gov freefile In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Www irs gov freefile On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Www irs gov freefile On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Www irs gov freefile She had owned the interest for a total of 1,720 days. Www irs gov freefile Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Www irs gov freefile The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Www irs gov freefile By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Www irs gov freefile Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Www irs gov freefile Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Www irs gov freefile These rules do not apply to amounts paid as salary or other compensation for services. Www irs gov freefile See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Www irs gov freefile Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Www irs gov freefile These circumstances are listed below. Www irs gov freefile You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Www irs gov freefile That office or place of business is a material factor in producing the income. Www irs gov freefile The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Www irs gov freefile An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Www irs gov freefile The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Www irs gov freefile Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Www irs gov freefile Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Www irs gov freefile Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Www irs gov freefile Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Www irs gov freefile Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Www irs gov freefile Example. Www irs gov freefile Marcy Jackson is a bona fide resident of American Samoa. Www irs gov freefile Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Www irs gov freefile A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Www irs gov freefile Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Www irs gov freefile The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Www irs gov freefile However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Www irs gov freefile Prev  Up  Next   Home   More Online Publications