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Www myfreetaxes com 8. Www myfreetaxes com   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Www myfreetaxes com Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Www myfreetaxes com Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Www myfreetaxes com Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Www myfreetaxes com Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Www myfreetaxes com This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Www myfreetaxes com A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Www myfreetaxes com An exchange is a transfer of property for other property or services. Www myfreetaxes com Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Www myfreetaxes com If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Www myfreetaxes com If the adjusted basis of the property is more than the amount you realize, you will have a loss. Www myfreetaxes com Basis and adjusted basis. Www myfreetaxes com   The basis of property you buy is usually its cost. Www myfreetaxes com The adjusted basis of property is basis plus certain additions and minus certain deductions. Www myfreetaxes com See chapter 6 for more information about basis and adjusted basis. Www myfreetaxes com Amount realized. Www myfreetaxes com   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Www myfreetaxes com The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Www myfreetaxes com   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Www myfreetaxes com Amount recognized. Www myfreetaxes com   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Www myfreetaxes com A recognized gain is a gain you must include in gross income and report on your income tax return. Www myfreetaxes com A recognized loss is a loss you deduct from gross income. Www myfreetaxes com However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Www myfreetaxes com See Like-Kind Exchanges next. Www myfreetaxes com Also, a loss from the disposition of property held for personal use is not deductible. Www myfreetaxes com Like-Kind Exchanges Certain exchanges of property are not taxable. Www myfreetaxes com This means any gain from the exchange is not recognized, and any loss cannot be deducted. Www myfreetaxes com Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Www myfreetaxes com The exchange of property for the same kind of property is the most common type of nontaxable exchange. Www myfreetaxes com To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Www myfreetaxes com Qualifying property. Www myfreetaxes com Like-kind property. Www myfreetaxes com These two requirements are discussed later. Www myfreetaxes com Multiple-party transactions. Www myfreetaxes com   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Www myfreetaxes com Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Www myfreetaxes com Receipt of title from third party. Www myfreetaxes com   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Www myfreetaxes com Basis of property received. Www myfreetaxes com   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Www myfreetaxes com See chapter 6 for more information. Www myfreetaxes com Money paid. Www myfreetaxes com   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Www myfreetaxes com The basis of the property received is the basis of the property given up, increased by the money paid. Www myfreetaxes com Example. Www myfreetaxes com You traded an old tractor with an adjusted basis of $15,000 for a new one. Www myfreetaxes com The new tractor costs $300,000. Www myfreetaxes com You were allowed $80,000 for the old tractor and paid $220,000 cash. Www myfreetaxes com You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Www myfreetaxes com If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Www myfreetaxes com In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Www myfreetaxes com Reporting the exchange. Www myfreetaxes com   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Www myfreetaxes com The Instructions for Form 8824 explain how to report the details of the exchange. Www myfreetaxes com   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Www myfreetaxes com You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Www myfreetaxes com See chapter 9 for more information. Www myfreetaxes com Qualifying property. Www myfreetaxes com   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Www myfreetaxes com Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Www myfreetaxes com Nonqualifying property. Www myfreetaxes com   The rules for like-kind exchanges do not apply to exchanges of the following property. Www myfreetaxes com Property you use for personal purposes, such as your home and family car. Www myfreetaxes com Stock in trade or other property held primarily for sale, such as crops and produce. Www myfreetaxes com Stocks, bonds, or notes. Www myfreetaxes com However, see Qualifying property above. Www myfreetaxes com Other securities or evidences of indebtedness, such as accounts receivable. Www myfreetaxes com Partnership interests. Www myfreetaxes com However, you may have a nontaxable exchange under other rules. Www myfreetaxes com See Other Nontaxable Exchanges in chapter 1 of Publication 544. Www myfreetaxes com Like-kind property. Www myfreetaxes com   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Www myfreetaxes com Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Www myfreetaxes com Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Www myfreetaxes com For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Www myfreetaxes com   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Www myfreetaxes com An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Www myfreetaxes com The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Www myfreetaxes com For example, the exchange of a bull for a cow is not a like-kind exchange. Www myfreetaxes com An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Www myfreetaxes com    Note. Www myfreetaxes com Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Www myfreetaxes com Personal property. Www myfreetaxes com   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Www myfreetaxes com Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Www myfreetaxes com Property classified in any General Asset Class may not be classified within a Product Class. Www myfreetaxes com Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Www myfreetaxes com General Asset Classes. Www myfreetaxes com   General Asset Classes describe the types of property frequently used in many businesses. Www myfreetaxes com They include, but are not limited to, the following property. Www myfreetaxes com Office furniture, fixtures, and equipment (asset class 00. Www myfreetaxes com 11). Www myfreetaxes com Information systems, such as computers and peripheral equipment (asset class 00. Www myfreetaxes com 12). Www myfreetaxes com Data handling equipment except computers (asset class 00. Www myfreetaxes com 13). Www myfreetaxes com Automobiles and taxis (asset class 00. Www myfreetaxes com 22). Www myfreetaxes com Light general purpose trucks (asset class 00. Www myfreetaxes com 241). Www myfreetaxes com Heavy general purpose trucks (asset class 00. Www myfreetaxes com 242). Www myfreetaxes com Tractor units for use over-the-road (asset class 00. Www myfreetaxes com 26). Www myfreetaxes com Trailers and trailer-mounted containers (asset class 00. Www myfreetaxes com 27). Www myfreetaxes com Industrial steam and electric generation and/or distribution systems (asset class 00. Www myfreetaxes com 4). Www myfreetaxes com Product Classes. Www myfreetaxes com   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Www myfreetaxes com The latest version of the manual can be accessed at www. Www myfreetaxes com census. Www myfreetaxes com gov/eos/www/naics/. Www myfreetaxes com Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Www myfreetaxes com ntis. Www myfreetaxes com gov/products/naics. Www myfreetaxes com aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Www myfreetaxes com A CD-ROM version with search and retrieval software is also available from NTIS. Www myfreetaxes com    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Www myfreetaxes com Partially nontaxable exchange. Www myfreetaxes com   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Www myfreetaxes com You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Www myfreetaxes com A loss is not deductible. Www myfreetaxes com Example 1. Www myfreetaxes com You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Www myfreetaxes com You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Www myfreetaxes com However, only $10,000, the cash received, is recognized (included in income). Www myfreetaxes com Example 2. Www myfreetaxes com Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Www myfreetaxes com Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Www myfreetaxes com Example 3. Www myfreetaxes com Assume in Example 1 that the FMV of the land you received was only $15,000. Www myfreetaxes com Your $5,000 loss is not recognized. Www myfreetaxes com Unlike property given up. Www myfreetaxes com   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Www myfreetaxes com The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Www myfreetaxes com Like-kind exchanges between related persons. Www myfreetaxes com   Special rules apply to like-kind exchanges between related persons. Www myfreetaxes com These rules affect both direct and indirect exchanges. Www myfreetaxes com Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Www myfreetaxes com The gain or loss on the original exchange must be recognized as of the date of the later disposition. Www myfreetaxes com The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Www myfreetaxes com Related persons. Www myfreetaxes com   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Www myfreetaxes com ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Www myfreetaxes com   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Www myfreetaxes com Example. Www myfreetaxes com You used a grey pickup truck in your farming business. Www myfreetaxes com Your sister used a red pickup truck in her landscaping business. Www myfreetaxes com In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Www myfreetaxes com At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Www myfreetaxes com The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Www myfreetaxes com You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Www myfreetaxes com Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Www myfreetaxes com However, because this was a like-kind exchange, you recognized no gain. Www myfreetaxes com Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Www myfreetaxes com She recognized gain only to the extent of the money she received, $200. Www myfreetaxes com Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Www myfreetaxes com In 2013, you sold the red pickup truck to a third party for $7,000. Www myfreetaxes com Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Www myfreetaxes com On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Www myfreetaxes com You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Www myfreetaxes com In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Www myfreetaxes com Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Www myfreetaxes com Exceptions to the rules for related persons. Www myfreetaxes com   The following property dispositions are excluded from these rules. Www myfreetaxes com Dispositions due to the death of either related person. Www myfreetaxes com Involuntary conversions. Www myfreetaxes com Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Www myfreetaxes com Multiple property exchanges. Www myfreetaxes com   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Www myfreetaxes com However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Www myfreetaxes com Transfer and receive properties in two or more exchange groups. Www myfreetaxes com Transfer or receive more than one property within a single exchange group. Www myfreetaxes com   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Www myfreetaxes com Deferred exchange. Www myfreetaxes com   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Www myfreetaxes com A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Www myfreetaxes com The property you receive is replacement property. Www myfreetaxes com The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Www myfreetaxes com In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Www myfreetaxes com   For more information see Deferred Exchanges in chapter 1 of Publication 544. Www myfreetaxes com Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Www myfreetaxes com This rule does not apply if the recipient is a nonresident alien. Www myfreetaxes com Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Www myfreetaxes com Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Www myfreetaxes com The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Www myfreetaxes com This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Www myfreetaxes com This rule applies for determining loss as well as gain. Www myfreetaxes com Any gain recognized on a transfer in trust increases the basis. Www myfreetaxes com For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Www myfreetaxes com Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Www myfreetaxes com You may also have a capital gain if your section 1231 transactions result in a net gain. Www myfreetaxes com See Section 1231 Gains and Losses in  chapter 9. Www myfreetaxes com To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Www myfreetaxes com Your net capital gains may be taxed at a lower tax rate than ordinary income. Www myfreetaxes com See Capital Gains Tax Rates , later. Www myfreetaxes com Your deduction for a net capital loss may be limited. Www myfreetaxes com See Treatment of Capital Losses , later. Www myfreetaxes com Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Www myfreetaxes com The following items are examples of capital assets. Www myfreetaxes com A home owned and occupied by you and your family. Www myfreetaxes com Household furnishings. Www myfreetaxes com A car used for pleasure. Www myfreetaxes com If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Www myfreetaxes com Stocks and bonds. Www myfreetaxes com However, there are special rules for gains on qualified small business stock. Www myfreetaxes com For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Www myfreetaxes com Personal-use property. Www myfreetaxes com   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Www myfreetaxes com Loss from the sale or exchange of personal-use property is not deductible. Www myfreetaxes com You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Www myfreetaxes com For information on casualties and thefts, see chapter 11. Www myfreetaxes com Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Www myfreetaxes com The time you own an asset before disposing of it is the holding period. Www myfreetaxes com If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Www myfreetaxes com Report it in Part I of Schedule D (Form 1040). Www myfreetaxes com If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Www myfreetaxes com Report it in Part II of Schedule D (Form 1040). Www myfreetaxes com Holding period. Www myfreetaxes com   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Www myfreetaxes com The day you disposed of the property is part of your holding period. Www myfreetaxes com Example. Www myfreetaxes com If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Www myfreetaxes com If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Www myfreetaxes com Inherited property. Www myfreetaxes com   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Www myfreetaxes com This rule does not apply to livestock used in a farm business. Www myfreetaxes com See Holding period under Livestock , later. Www myfreetaxes com Nonbusiness bad debt. Www myfreetaxes com   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Www myfreetaxes com See chapter 4 of Publication 550. Www myfreetaxes com Nontaxable exchange. Www myfreetaxes com   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Www myfreetaxes com That is, it begins on the same day as your holding period for the old property. Www myfreetaxes com Gift. Www myfreetaxes com   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Www myfreetaxes com Real property. Www myfreetaxes com   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Www myfreetaxes com   However, taking possession of real property under an option agreement is not enough to start the holding period. Www myfreetaxes com The holding period cannot start until there is an actual contract of sale. Www myfreetaxes com The holding period of the seller cannot end before that time. Www myfreetaxes com Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Www myfreetaxes com Net short-term capital gain or loss. Www myfreetaxes com   Combine your short-term capital gains and losses. Www myfreetaxes com Do this by adding all of your short-term capital gains. Www myfreetaxes com Then add all of your short-term capital losses. Www myfreetaxes com Subtract the lesser total from the greater. Www myfreetaxes com The difference is your net short-term capital gain or loss. Www myfreetaxes com Net long-term capital gain or loss. Www myfreetaxes com   Follow the same steps to combine your long-term capital gains and losses. Www myfreetaxes com The result is your net long-term capital gain or loss. Www myfreetaxes com Net gain. Www myfreetaxes com   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Www myfreetaxes com However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Www myfreetaxes com See Capital Gains Tax Rates , later. Www myfreetaxes com Net loss. Www myfreetaxes com   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Www myfreetaxes com But there are limits on how much loss you can deduct and when you can deduct it. Www myfreetaxes com See Treatment of Capital Losses next. Www myfreetaxes com Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Www myfreetaxes com For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Www myfreetaxes com If your other income is low, you may not be able to use the full $3,000. Www myfreetaxes com The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Www myfreetaxes com Capital loss carryover. Www myfreetaxes com   Generally, you have a capital loss carryover if either of the following situations applies to you. Www myfreetaxes com Your net loss on Schedule D (Form 1040), is more than the yearly limit. Www myfreetaxes com Your taxable income without your deduction for exemptions is less than zero. Www myfreetaxes com If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Www myfreetaxes com    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Www myfreetaxes com Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Www myfreetaxes com These lower rates are called the maximum capital gains rates. Www myfreetaxes com The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Www myfreetaxes com See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Www myfreetaxes com Also see Publication 550. Www myfreetaxes com Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Www myfreetaxes com A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Www myfreetaxes com Property held for sale in the ordinary course of your farm business. Www myfreetaxes com   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Www myfreetaxes com Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Www myfreetaxes com The treatment of this property is discussed in chapter 3. Www myfreetaxes com Land and depreciable properties. Www myfreetaxes com   Land and depreciable property you use in farming are not capital assets. Www myfreetaxes com Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Www myfreetaxes com However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Www myfreetaxes com The sales of these business assets are reported on Form 4797. Www myfreetaxes com See chapter 9 for more information. Www myfreetaxes com Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Www myfreetaxes com Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Www myfreetaxes com A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Www myfreetaxes com The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Www myfreetaxes com A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Www myfreetaxes com Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Www myfreetaxes com Hedging transactions. Www myfreetaxes com Transactions that are not hedging transactions. Www myfreetaxes com Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Www myfreetaxes com There is a limit on the amount of capital losses you can deduct each year. Www myfreetaxes com Hedging transactions are not subject to the mark-to-market rules. Www myfreetaxes com If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Www myfreetaxes com They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Www myfreetaxes com The gain or loss on the termination of these hedges is generally ordinary gain or loss. Www myfreetaxes com Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Www myfreetaxes com Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Www myfreetaxes com Examples include fuel and feed. Www myfreetaxes com If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Www myfreetaxes com Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Www myfreetaxes com It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Www myfreetaxes com Retain the identification of each hedging transaction with your books and records. Www myfreetaxes com Also, identify the item(s) or aggregate risk that is being hedged in your records. Www myfreetaxes com Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Www myfreetaxes com For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Www myfreetaxes com Accounting methods for hedging transactions. Www myfreetaxes com   The accounting method you use for a hedging transaction must clearly reflect income. Www myfreetaxes com This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Www myfreetaxes com There are requirements and limits on the method you can use for certain hedging transactions. Www myfreetaxes com See Regulations section 1. Www myfreetaxes com 446-4(e) for those requirements and limits. Www myfreetaxes com   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Www myfreetaxes com Cash method. Www myfreetaxes com Farm-price method. Www myfreetaxes com Unit-livestock-price method. Www myfreetaxes com   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Www myfreetaxes com   Your books and records must describe the accounting method used for each type of hedging transaction. Www myfreetaxes com They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Www myfreetaxes com You must make the additional identification no more than 35 days after entering into the hedging transaction. Www myfreetaxes com Example of a hedging transaction. Www myfreetaxes com   You file your income tax returns on the cash method. Www myfreetaxes com On July 2 you anticipate a yield of 50,000 bushels of corn this year. Www myfreetaxes com The December futures price is $5. Www myfreetaxes com 75 a bushel, but there are indications that by harvest time the price will drop. Www myfreetaxes com To protect yourself against a drop in the price, you enter into the following hedging transaction. Www myfreetaxes com You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Www myfreetaxes com 75 a bushel. Www myfreetaxes com   The price did not drop as anticipated but rose to $6 a bushel. Www myfreetaxes com In November, you sell your crop at a local elevator for $6 a bushel. Www myfreetaxes com You also close out your futures position by buying ten December contracts for $6 a bushel. Www myfreetaxes com You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Www myfreetaxes com   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Www myfreetaxes com Your loss on the hedge is 25 cents a bushel. Www myfreetaxes com In effect, the net selling price of your corn is $5. Www myfreetaxes com 75 a bushel. Www myfreetaxes com   Report the results of your futures transactions and your sale of corn separately on Schedule F. Www myfreetaxes com See the instructions for the 2013 Schedule F (Form 1040). Www myfreetaxes com   The loss on your futures transactions is $13,900, figured as follows. Www myfreetaxes com July 2 - Sold December corn futures (50,000 bu. Www myfreetaxes com @$5. Www myfreetaxes com 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Www myfreetaxes com @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Www myfreetaxes com   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Www myfreetaxes com × $6). Www myfreetaxes com Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Www myfreetaxes com   Assume you were right and the price went down 25 cents a bushel. Www myfreetaxes com In effect, you would still net $5. Www myfreetaxes com 75 a bushel, figured as follows. Www myfreetaxes com Sold cash corn, per bushel $5. Www myfreetaxes com 50 Gain on hedge, per bushel . Www myfreetaxes com 25 Net price, per bushel $5. Www myfreetaxes com 75       The gain on your futures transactions would have been $11,100, figured as follows. Www myfreetaxes com July 2 - Sold December corn futures (50,000 bu. Www myfreetaxes com @$5. Www myfreetaxes com 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Www myfreetaxes com @$5. Www myfreetaxes com 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Www myfreetaxes com   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Www myfreetaxes com Livestock This part discusses the sale or exchange of livestock used in your farm business. Www myfreetaxes com Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Www myfreetaxes com However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Www myfreetaxes com See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Www myfreetaxes com The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Www myfreetaxes com The sale of this livestock is reported on Schedule F. Www myfreetaxes com See chapter 3. Www myfreetaxes com Also, special rules apply to sales or exchanges caused by weather-related conditions. Www myfreetaxes com See chapter 3. Www myfreetaxes com Holding period. Www myfreetaxes com   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Www myfreetaxes com Livestock. Www myfreetaxes com   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Www myfreetaxes com Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Www myfreetaxes com Livestock used in farm business. Www myfreetaxes com   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Www myfreetaxes com The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Www myfreetaxes com An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Www myfreetaxes com However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Www myfreetaxes com Example 1. Www myfreetaxes com You discover an animal that you intend to use for breeding purposes is sterile. Www myfreetaxes com You dispose of it within a reasonable time. Www myfreetaxes com This animal was held for breeding purposes. Www myfreetaxes com Example 2. Www myfreetaxes com You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Www myfreetaxes com These young animals were held for breeding or dairy purposes. Www myfreetaxes com Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Www myfreetaxes com See Sales Caused by Weather-Related Conditions in chapter 3. Www myfreetaxes com Example 3. Www myfreetaxes com You are in the business of raising hogs for slaughter. Www myfreetaxes com Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Www myfreetaxes com You sell the brood sows after obtaining the litter. Www myfreetaxes com Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Www myfreetaxes com Example 4. Www myfreetaxes com You are in the business of raising registered cattle for sale to others for use as breeding cattle. Www myfreetaxes com The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Www myfreetaxes com Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Www myfreetaxes com Such use does not demonstrate that you are holding the cattle for breeding purposes. Www myfreetaxes com However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Www myfreetaxes com The same applies to hog and sheep breeders. Www myfreetaxes com Example 5. Www myfreetaxes com You breed, raise, and train horses for racing purposes. Www myfreetaxes com Every year you cull horses from your racing stable. Www myfreetaxes com In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Www myfreetaxes com These horses are all considered held for sporting purposes. Www myfreetaxes com Figuring gain or loss on the cash method. Www myfreetaxes com   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Www myfreetaxes com Raised livestock. Www myfreetaxes com   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Www myfreetaxes com Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Www myfreetaxes com The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Www myfreetaxes com However, see Uniform Capitalization Rules in chapter 6. Www myfreetaxes com Purchased livestock. Www myfreetaxes com   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Www myfreetaxes com Example. Www myfreetaxes com A farmer sold a breeding cow on January 8, 2013, for $1,250. Www myfreetaxes com Expenses of the sale were $125. Www myfreetaxes com The cow was bought July 2, 2009, for $1,300. Www myfreetaxes com Depreciation (not less than the amount allowable) was $867. Www myfreetaxes com Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Www myfreetaxes com Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Www myfreetaxes com Any loss on the disposition of such property is treated as a long-term capital loss. Www myfreetaxes com Converted wetland. Www myfreetaxes com   This is generally land that was drained or filled to make the production of agricultural commodities possible. Www myfreetaxes com It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Www myfreetaxes com   A wetland (before conversion) is land that meets all the following conditions. Www myfreetaxes com It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Www myfreetaxes com It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Www myfreetaxes com It supports, under normal circumstances, mostly plants that grow in saturated soil. Www myfreetaxes com Highly erodible cropland. Www myfreetaxes com   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Www myfreetaxes com Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Www myfreetaxes com Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Www myfreetaxes com Successor. Www myfreetaxes com   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Www myfreetaxes com Timber Standing timber you held as investment property is a capital asset. Www myfreetaxes com Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Www myfreetaxes com If you held the timber primarily for sale to customers, it is not a capital asset. Www myfreetaxes com Gain or loss on its sale is ordinary business income or loss. Www myfreetaxes com It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Www myfreetaxes com See the Instructions for Schedule F (Form 1040). Www myfreetaxes com Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Www myfreetaxes com Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Www myfreetaxes com , are ordinary farm income and expenses reported on Schedule F. Www myfreetaxes com Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Www myfreetaxes com Timber considered cut. Www myfreetaxes com   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Www myfreetaxes com This is true whether the timber is cut under contract or whether you cut it yourself. Www myfreetaxes com Christmas trees. Www myfreetaxes com   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Www myfreetaxes com They qualify for both rules discussed below. Www myfreetaxes com Election to treat cutting as a sale or exchange. Www myfreetaxes com   Under the general rule, the cutting of timber results in no gain or loss. Www myfreetaxes com It is not until a sale or exchange occurs that gain or loss is realized. Www myfreetaxes com But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Www myfreetaxes com Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Www myfreetaxes com Any later sale results in ordinary business income or loss. Www myfreetaxes com See the example below. Www myfreetaxes com   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Www myfreetaxes com Making the election. Www myfreetaxes com   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Www myfreetaxes com You do not have to make the election in the first year you cut the timber. Www myfreetaxes com You can make it in any year to which the election would apply. Www myfreetaxes com If the timber is partnership property, the election is made on the partnership return. Www myfreetaxes com This election cannot be made on an amended return. Www myfreetaxes com   Once you have made the election, it remains in effect for all later years unless you revoke it. Www myfreetaxes com Election under section 631(a) may be revoked. Www myfreetaxes com   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Www myfreetaxes com The prior election (and revocation) is disregarded for purposes of making a subsequent election. Www myfreetaxes com See Form T (Timber), Forest Activities Schedule, for more information. Www myfreetaxes com Gain or loss. Www myfreetaxes com   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Www myfreetaxes com   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Www myfreetaxes com Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Www myfreetaxes com 611-3. Www myfreetaxes com   Depletion of timber is discussed in chapter 7. Www myfreetaxes com Example. Www myfreetaxes com   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Www myfreetaxes com It had an adjusted basis for depletion of $40 per MBF. Www myfreetaxes com You are a calendar year taxpayer. Www myfreetaxes com On January 1, 2013, the timber had a FMV of $350 per MBF. Www myfreetaxes com It was cut in April for sale. Www myfreetaxes com On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Www myfreetaxes com You report the difference between the FMV and your adjusted basis for depletion as a gain. Www myfreetaxes com This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Www myfreetaxes com You figure your gain as follows. Www myfreetaxes com FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Www myfreetaxes com Outright sales of timber. Www myfreetaxes com   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Www myfreetaxes com However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Www myfreetaxes com Cutting contract. Www myfreetaxes com   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Www myfreetaxes com You are the owner of the timber. Www myfreetaxes com You held the timber longer than 1 year before its disposal. Www myfreetaxes com You kept an economic interest in the timber. Www myfreetaxes com   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Www myfreetaxes com   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Www myfreetaxes com Include this amount on Form 4797 along with your other section 1231 gains or losses. Www myfreetaxes com Date of disposal. Www myfreetaxes com   The date of disposal is the date the timber is cut. Www myfreetaxes com However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Www myfreetaxes com   This election applies only to figure the holding period of the timber. Www myfreetaxes com It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Www myfreetaxes com   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Www myfreetaxes com The statement must identify the advance payments subject to the election and the contract under which they were made. Www myfreetaxes com   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Www myfreetaxes com Attach the statement to the amended return and write “Filed pursuant to section 301. Www myfreetaxes com 9100-2” at the top of the statement. Www myfreetaxes com File the amended return at the same address the original return was filed. Www myfreetaxes com Owner. Www myfreetaxes com   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Www myfreetaxes com You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Www myfreetaxes com Tree stumps. Www myfreetaxes com   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Www myfreetaxes com Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Www myfreetaxes com However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Www myfreetaxes com Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Www myfreetaxes com   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Www myfreetaxes com Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Www myfreetaxes com If you have a gain from the sale, you may be allowed to exclude the gain on your home. Www myfreetaxes com For more information, see Publication 523, Selling Your Home. Www myfreetaxes com The gain on the sale of your business property is taxable. Www myfreetaxes com A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Www myfreetaxes com Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Www myfreetaxes com See chapter 9. Www myfreetaxes com Losses from personal-use property, other than casualty or theft losses, are not deductible. Www myfreetaxes com If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Www myfreetaxes com See chapter 10 for information about installment sales. Www myfreetaxes com When you sell your farm, the gain or loss on each asset is figured separately. Www myfreetaxes com The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Www myfreetaxes com Each of the assets sold must be classified as one of the following. Www myfreetaxes com Capital asset held 1 year or less. Www myfreetaxes com Capital asset held longer than 1 year. Www myfreetaxes com Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Www myfreetaxes com Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Www myfreetaxes com Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Www myfreetaxes com Allocation of consideration paid for a farm. Www myfreetaxes com   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Www myfreetaxes com The residual method is required only if the group of assets sold constitutes a trade or business. Www myfreetaxes com This method determines gain or loss from the transfer of each asset. Www myfreetaxes com It also determines the buyer's basis in the business assets. Www myfreetaxes com For more information, see Sale of a Business in chapter 2 of Publication 544. Www myfreetaxes com Property used in farm operation. Www myfreetaxes com   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Www myfreetaxes com Recognized gains and losses on business property must be reported on your return for the year of the sale. Www myfreetaxes com If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Www myfreetaxes com Example. Www myfreetaxes com You sell your farm, including your main home, which you have owned since December 2001. Www myfreetaxes com You realize gain on the sale as follows. Www myfreetaxes com   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Www myfreetaxes com All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Www myfreetaxes com Treat the balance as section 1231 gain. Www myfreetaxes com The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Www myfreetaxes com Partial sale. Www myfreetaxes com   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Www myfreetaxes com You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Www myfreetaxes com For a detailed discussion on installment sales, see Publication 544. Www myfreetaxes com Adjusted basis of the part sold. Www myfreetaxes com   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Www myfreetaxes com , on the part sold. Www myfreetaxes com If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Www myfreetaxes com Example. Www myfreetaxes com You bought a 600-acre farm for $700,000. Www myfreetaxes com The farm included land and buildings. Www myfreetaxes com The purchase contract designated $600,000 of the purchase price to the land. Www myfreetaxes com You later sold 60 acres of land on which you had installed a fence. Www myfreetaxes com Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Www myfreetaxes com Use this amount to determine your gain or loss on the sale of the 60 acres. Www myfreetaxes com Assessed values for local property taxes. Www myfreetaxes com   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Www myfreetaxes com Example. Www myfreetaxes com Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Www myfreetaxes com However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Www myfreetaxes com The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Www myfreetaxes com Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Www myfreetaxes com The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Www myfreetaxes com Sale of your home. Www myfreetaxes com   Your home is a capital asset and not property used in the trade or business of farming. Www myfreetaxes com If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Www myfreetaxes com Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Www myfreetaxes com   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Www myfreetaxes com For more information on basis, see chapter 6. Www myfreetaxes com More information. Www myfreetaxes com   For more information on selling your home, see Publication 523. Www myfreetaxes com Gain from condemnation. Www myfreetaxes com   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Www myfreetaxes com However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Www myfreetaxes com Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Www myfreetaxes com The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Www myfreetaxes com This is true even if you voluntarily return the property to the lender. Www myfreetaxes com You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Www myfreetaxes com Buyer's (borrower's) gain or loss. Www myfreetaxes com   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Www myfreetaxes com The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Www myfreetaxes com See Determining Gain or Loss , earlier. Www myfreetaxes com Worksheet 8-1. Www myfreetaxes com Worksheet for Foreclosures andRepossessions Part 1. Www myfreetaxes com Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Www myfreetaxes com Complete this part only if you were personally liable for the debt. Www myfreetaxes com Otherwise, go to Part 2. Www myfreetaxes com   1. Www myfreetaxes com Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Www myfreetaxes com Enter the Fair Market Value of the transferred property   3. Www myfreetaxes com Ordinary income from cancellation of debt upon foreclosure or repossession. Www myfreetaxes com * Subtract line 2 from line 1. Www myfreetaxes com If zero or less, enter -0-   Part 2. Www myfreetaxes com Figure your gain or loss from foreclosure or repossession. Www myfreetaxes com   4. Www myfreetaxes com If you completed Part 1, enter the smaller of line 1 or line 2. Www myfreetaxes com If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Www myfreetaxes com Enter any proceeds you received from the foreclosure sale   6. Www myfreetaxes com Add lines 4 and 5   7. Www myfreetaxes com Enter the adjusted basis of the transferred property   8. Www myfreetaxes com Gain or loss from foreclosure or repossession. Www myfreetaxes com Subtract line 7  from line 6   * The income may not be taxable. Www myfreetaxes com See Cancellation of debt . Www myfreetaxes com    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Www myfreetaxes com Amount realized on a nonrecourse debt. Www myfreetaxes com   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Www myfreetaxes com The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Www myfreetaxes com Example 1. Www myfreetaxes com Ann paid $200,000 for land used in her farming business. Www myfreetaxes com She paid $15,000 down and borrowed the remaining $185,000 from a bank. Www myfreetaxes com Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Www myfreetaxes com The bank foreclosed on the loan 2 years after Ann stopped making payments. Www myfreetaxes com When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Www myfreetaxes com The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Www myfreetaxes com She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Www myfreetaxes com She has a $20,000 deductible loss. Www myfreetaxes com Example 2. Www myfreetaxes com Assume the same facts as in Example 1 except the FMV of the land was $210,000. Www myfreetaxes com The result is the same. Www myfreetaxes com The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Www myfreetaxes com Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Www myfreetaxes com Amount realized on a recourse debt. Www myfreetaxes com   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Www myfreetaxes com   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Www myfreetaxes com The amount realized does not include the canceled debt that is your income from cancellation of debt. Www myfreetaxes com See Cancellation of debt , later. Www myfreetaxes com Example 3. Www myfreetaxes com Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Www myfreetaxes com In this case, the amount she realizes is $170,000. Www myfreetaxes com This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Www myfreetaxes com Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Www myfreetaxes com She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Www myfreetaxes com She is also treated as receiving ordinary income from cancellation of debt. Www myfreetaxes com That income is $10,000 ($180,000 − $170,000). Www myfreetaxes com This is the part of the canceled debt not included in the amount realized. Www myfreetaxes com She reports this as other income on Schedule F, line 8. Www myfreetaxes com Seller's (lender's) gain or loss on repossession. Www myfreetaxes com   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Www myfreetaxes com For more information, see Repossession in Publication 537, Installment Sales. Www myfreetaxes com Cancellation of debt. Www myfreetaxes com   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Www myfreetaxes com This income is separate from any gain or loss realized from the foreclosure or repossession. Www myfreetaxes com Report the income from cancellation of a business debt on Schedule F, line 8. Www myfreetaxes com Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Www myfreetaxes com    You can use Worksheet 8-1 to figure your income from cancellation of debt. Www myfreetaxes com   However, income from cancellation of debt is not taxed if any of the following apply. Www myfreetaxes com The cancellation is intended as a gift. Www myfreetaxes com The debt is qualified farm debt (see chapter 3). Www myfreetaxes com The debt is qualified real property business debt (see chapter 5 of Publication 334). Www myfreetaxes com You are insolvent or bankrupt (see  chapter 3). Www myfreetaxes com The debt is qualified principal residence indebtedness (see chapter 3). Www myfreetaxes com   Use Form 982 to report the income exclusion. Www myfreetaxes com Abandonment The abandonment of property is a disposition of property. Www myfreetaxes com 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 myfreetaxes com Business or investment property. Www myfreetaxes com   Loss from abandonment of business or investment property is deductible as a loss. Www myfreetaxes com Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Www myfreetaxes com If your adjusted basis is more than the amount you realize (if any), then you have a loss. Www myfreetaxes com If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Www myfreetaxes com This rule also applies to leasehold improvements the lessor made for the lessee. Www myfreetaxes com However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Www myfreetaxes com   If the abandoned property is secured by debt, special rules apply. Www myfreetaxes com The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Www myfreetaxes com For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Www myfreetaxes com The abandonment loss is deducted in the tax year in which the loss is sustained. Www myfreetaxes com Report the loss on Form 4797, Part II, line 10. Www myfreetaxes com Personal-use property. Www myfreetaxes com   You cannot deduct any loss from abandonment of your home or other property held for personal use. Www myfreetaxes com Canceled debt. Www myfreetaxes com   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 myfreetaxes com This income is separate from any loss realized from abandonment of the property. Www myfreetaxes com Report income from cancellation of a debt related to a business or rental activity as business or rental income. Www myfreetaxes com Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Www myfreetaxes com   However, income from cancellation of debt is not taxed in certain circumstances. Www myfreetaxes com See Cancellation of debt earlier under Foreclosure or Repossession . Www myfreetaxes com Forms 1099-A and 1099-C. Www myfreetaxes com   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Www myfreetaxes com However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Www myfreetaxes com The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Www myfreetaxes com For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Www myfreetaxes com Prev  Up  Next   Home   More Online Publications
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Www myfreetaxes com Index A Accrual period, Accrual period. Www myfreetaxes com Acquisition premium, Acquisition premium. Www myfreetaxes com Adjusted issue price, Adjusted issue price. Www myfreetaxes com Assistance (see Tax help) B Backup withholding, Backup Withholding Bearer bonds and coupons, Bearer Bonds and Coupons Brokers (see Information for brokers and other middlemen) C Certificates of deposit, Certificates of Deposit Comments and suggestions, Comments and suggestions. Www myfreetaxes com Contingent payment debt instruments, Contingent Payment Debt Instruments D Debt instrument, Debt instrument. Www myfreetaxes com Debt instruments Long-term, Long-Term Debt Instruments Short-term, Short-Term Obligations Redeemed at Maturity Debt instruments and coupons purchased after 1984, Debt Instruments and Coupons Purchased After 1984 Debt instruments and coupons purchased after July 1, 1982, and before 1985, Debt Instruments and Coupons Purchased After July 1, 1982, and Before 1985 Debt instruments issued after 1954, corporate, Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 Debt instruments issued after 1984, Debt Instruments Issued After 1984 Debt instruments issued after July 1, 1982, Debt Instruments Issued After July 1, 1982, and Before 1985 Debt instruments issued after May 27, 1969, corporate, Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 Debt instruments not on the OID list, Debt Instruments Not on the OID List Debt Instruments on the OID list, Debt Instruments on the OID List Definitions, Definitions Accrual period, Accrual period. Www myfreetaxes com Acquisition premium, Acquisition premium. Www myfreetaxes com Adjusted issue price, Adjusted issue price. Www myfreetaxes com Debt instrument, Debt instrument. Www myfreetaxes com Issue price, Issue price. Www myfreetaxes com Market discount, Market discount. Www myfreetaxes com Original issue discount (OID), Original issue discount (OID). Www myfreetaxes com Premium, Premium. Www myfreetaxes com Qualified stated interest, Qualified stated interest. Www myfreetaxes com Stated redemption price at maturity, Stated redemption price at maturity. Www myfreetaxes com Yield to maturity, Yield to maturity (YTM). Www myfreetaxes com E Electronic payee statements, Electronic payee statements. Www myfreetaxes com F Form 1099-OID, Form 1099-OID. Www myfreetaxes com Free tax services, Free help with your tax return. Www myfreetaxes com H Help (see Tax help) I Inflation-indexed debt instruments, Inflation-Indexed Debt Instruments Information for brokers and other middlemen, Information for Brokers and Other Middlemen Information for owners of OID debt instruments, Information for Owners of OID Debt Instruments Issue price, Issue price. Www myfreetaxes com Issuers of OID debt instruments, Instructions for, Instructions for issuers of OID debt instruments. Www myfreetaxes com L Long-term debt instruments, Long-Term Debt Instruments M Market discount, Market discount. Www myfreetaxes com O OID list, Debt Instruments on, Debt Instruments on the OID List OID on long-term debt instruments, figuring, Figuring OID on Long-Term Debt Instruments OID on stripped bonds and coupons, figuring, Figuring OID on Stripped Bonds and Coupons OID, figuring, Figuring OID. Www myfreetaxes com Using section I, Using Section I. Www myfreetaxes com Using the income tax regulations, Using the income tax regulations. Www myfreetaxes com Original issue discount (OID), Original issue discount (OID). Www myfreetaxes com Owners of OID debt instruments, information for, Information for Owners of OID Debt Instruments P Premium, Premium. Www myfreetaxes com Publications (see Tax help) Q Qualified stated interest, Qualified stated interest. Www myfreetaxes com R REMIC and CDO information reporting requirements, REMIC and CDO information reporting requirements. Www myfreetaxes com S Section I, Section I. Www myfreetaxes com Section II, Section II. Www myfreetaxes com Section III, Section III. Www myfreetaxes com Short-term obligations redeemed at maturity, Short-Term Obligations Redeemed at Maturity Stated redemption price at maturity, Stated redemption price at maturity. Www myfreetaxes com Stripped bonds and coupons, figuring OID, Figuring OID on Stripped Bonds and Coupons Suggestions, Comments and, Comments and suggestions. Www myfreetaxes com T Tax help, How To Get Tax Help Y Yield to maturity, Yield to maturity (YTM). Www myfreetaxes com , Yield to maturity (YTM). Www myfreetaxes com Prev  Up     Home   More Online Publications