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1040ez free filing 8. 1040ez free filing   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. 1040ez free filing Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. 1040ez free filing This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. 1040ez free filing A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 1040ez free filing An exchange is a transfer of property for other property or services. 1040ez free filing Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. 1040ez free filing If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. 1040ez free filing If the adjusted basis of the property is more than the amount you realize, you will have a loss. 1040ez free filing Basis and adjusted basis. 1040ez free filing   The basis of property you buy is usually its cost. 1040ez free filing The adjusted basis of property is basis plus certain additions and minus certain deductions. 1040ez free filing See chapter 6 for more information about basis and adjusted basis. 1040ez free filing Amount realized. 1040ez free filing   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. 1040ez free filing 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. 1040ez free filing   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040ez free filing Amount recognized. 1040ez free filing   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. 1040ez free filing A recognized gain is a gain you must include in gross income and report on your income tax return. 1040ez free filing A recognized loss is a loss you deduct from gross income. 1040ez free filing However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. 1040ez free filing See Like-Kind Exchanges next. 1040ez free filing Also, a loss from the disposition of property held for personal use is not deductible. 1040ez free filing Like-Kind Exchanges Certain exchanges of property are not taxable. 1040ez free filing This means any gain from the exchange is not recognized, and any loss cannot be deducted. 1040ez free filing Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. 1040ez free filing The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040ez free filing To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. 1040ez free filing Qualifying property. 1040ez free filing Like-kind property. 1040ez free filing These two requirements are discussed later. 1040ez free filing Multiple-party transactions. 1040ez free filing   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. 1040ez free filing Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. 1040ez free filing Receipt of title from third party. 1040ez free filing   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. 1040ez free filing Basis of property received. 1040ez free filing   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. 1040ez free filing See chapter 6 for more information. 1040ez free filing Money paid. 1040ez free filing   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. 1040ez free filing The basis of the property received is the basis of the property given up, increased by the money paid. 1040ez free filing Example. 1040ez free filing You traded an old tractor with an adjusted basis of $15,000 for a new one. 1040ez free filing The new tractor costs $300,000. 1040ez free filing You were allowed $80,000 for the old tractor and paid $220,000 cash. 1040ez free filing 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). 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing Reporting the exchange. 1040ez free filing   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. 1040ez free filing The Instructions for Form 8824 explain how to report the details of the exchange. 1040ez free filing   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. 1040ez free filing You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. 1040ez free filing See chapter 9 for more information. 1040ez free filing Qualifying property. 1040ez free filing   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. 1040ez free filing Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. 1040ez free filing Nonqualifying property. 1040ez free filing   The rules for like-kind exchanges do not apply to exchanges of the following property. 1040ez free filing Property you use for personal purposes, such as your home and family car. 1040ez free filing Stock in trade or other property held primarily for sale, such as crops and produce. 1040ez free filing Stocks, bonds, or notes. 1040ez free filing However, see Qualifying property above. 1040ez free filing Other securities or evidences of indebtedness, such as accounts receivable. 1040ez free filing Partnership interests. 1040ez free filing However, you may have a nontaxable exchange under other rules. 1040ez free filing See Other Nontaxable Exchanges in chapter 1 of Publication 544. 1040ez free filing Like-kind property. 1040ez free filing   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. 1040ez free filing Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 1040ez free filing Generally, real property exchanged for real property qualifies as an exchange of like-kind property. 1040ez free filing For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. 1040ez free filing   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. 1040ez free filing An exchange of a tractor for acreage, however, is not an exchange of like-kind property. 1040ez free filing The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. 1040ez free filing For example, the exchange of a bull for a cow is not a like-kind exchange. 1040ez free filing 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. 1040ez free filing    Note. 1040ez free filing Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. 1040ez free filing Personal property. 1040ez free filing   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. 1040ez free filing Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. 1040ez free filing Property classified in any General Asset Class may not be classified within a Product Class. 1040ez free filing Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. 1040ez free filing General Asset Classes. 1040ez free filing   General Asset Classes describe the types of property frequently used in many businesses. 1040ez free filing They include, but are not limited to, the following property. 1040ez free filing Office furniture, fixtures, and equipment (asset class 00. 1040ez free filing 11). 1040ez free filing Information systems, such as computers and peripheral equipment (asset class 00. 1040ez free filing 12). 1040ez free filing Data handling equipment except computers (asset class 00. 1040ez free filing 13). 1040ez free filing Automobiles and taxis (asset class 00. 1040ez free filing 22). 1040ez free filing Light general purpose trucks (asset class 00. 1040ez free filing 241). 1040ez free filing Heavy general purpose trucks (asset class 00. 1040ez free filing 242). 1040ez free filing Tractor units for use over-the-road (asset class 00. 1040ez free filing 26). 1040ez free filing Trailers and trailer-mounted containers (asset class 00. 1040ez free filing 27). 1040ez free filing Industrial steam and electric generation and/or distribution systems (asset class 00. 1040ez free filing 4). 1040ez free filing Product Classes. 1040ez free filing   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). 1040ez free filing The latest version of the manual can be accessed at www. 1040ez free filing census. 1040ez free filing gov/eos/www/naics/. 1040ez free filing Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. 1040ez free filing ntis. 1040ez free filing gov/products/naics. 1040ez free filing aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. 1040ez free filing A CD-ROM version with search and retrieval software is also available from NTIS. 1040ez free filing    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. 1040ez free filing Partially nontaxable exchange. 1040ez free filing   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. 1040ez free filing 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. 1040ez free filing A loss is not deductible. 1040ez free filing Example 1. 1040ez free filing 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. 1040ez free filing 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). 1040ez free filing However, only $10,000, the cash received, is recognized (included in income). 1040ez free filing Example 2. 1040ez free filing Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. 1040ez free filing Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). 1040ez free filing Example 3. 1040ez free filing Assume in Example 1 that the FMV of the land you received was only $15,000. 1040ez free filing Your $5,000 loss is not recognized. 1040ez free filing Unlike property given up. 1040ez free filing   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. 1040ez free filing The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. 1040ez free filing Like-kind exchanges between related persons. 1040ez free filing   Special rules apply to like-kind exchanges between related persons. 1040ez free filing These rules affect both direct and indirect exchanges. 1040ez free filing Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 1040ez free filing The gain or loss on the original exchange must be recognized as of the date of the later disposition. 1040ez free filing The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. 1040ez free filing Related persons. 1040ez free filing   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. 1040ez free filing ), 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. 1040ez free filing   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. 1040ez free filing Example. 1040ez free filing You used a grey pickup truck in your farming business. 1040ez free filing Your sister used a red pickup truck in her landscaping business. 1040ez free filing In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. 1040ez free filing At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. 1040ez free filing The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. 1040ez free filing 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). 1040ez free filing 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). 1040ez free filing However, because this was a like-kind exchange, you recognized no gain. 1040ez free filing 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). 1040ez free filing She recognized gain only to the extent of the money she received, $200. 1040ez free filing 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). 1040ez free filing In 2013, you sold the red pickup truck to a third party for $7,000. 1040ez free filing Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 1040ez free filing On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. 1040ez free filing 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). 1040ez free filing In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. 1040ez free filing Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). 1040ez free filing Exceptions to the rules for related persons. 1040ez free filing   The following property dispositions are excluded from these rules. 1040ez free filing Dispositions due to the death of either related person. 1040ez free filing Involuntary conversions. 1040ez free filing 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. 1040ez free filing Multiple property exchanges. 1040ez free filing   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. 1040ez free filing However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. 1040ez free filing Transfer and receive properties in two or more exchange groups. 1040ez free filing Transfer or receive more than one property within a single exchange group. 1040ez free filing   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040ez free filing Deferred exchange. 1040ez free filing   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. 1040ez free filing 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. 1040ez free filing The property you receive is replacement property. 1040ez free filing The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. 1040ez free filing In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. 1040ez free filing   For more information see Deferred Exchanges in chapter 1 of Publication 544. 1040ez free filing 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. 1040ez free filing This rule does not apply if the recipient is a nonresident alien. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 1040ez free filing 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. 1040ez free filing This rule applies for determining loss as well as gain. 1040ez free filing Any gain recognized on a transfer in trust increases the basis. 1040ez free filing For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. 1040ez free filing 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). 1040ez free filing You may also have a capital gain if your section 1231 transactions result in a net gain. 1040ez free filing See Section 1231 Gains and Losses in  chapter 9. 1040ez free filing 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). 1040ez free filing Your net capital gains may be taxed at a lower tax rate than ordinary income. 1040ez free filing See Capital Gains Tax Rates , later. 1040ez free filing Your deduction for a net capital loss may be limited. 1040ez free filing See Treatment of Capital Losses , later. 1040ez free filing Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. 1040ez free filing The following items are examples of capital assets. 1040ez free filing A home owned and occupied by you and your family. 1040ez free filing Household furnishings. 1040ez free filing A car used for pleasure. 1040ez free filing 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. 1040ez free filing Stocks and bonds. 1040ez free filing However, there are special rules for gains on qualified small business stock. 1040ez free filing 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. 1040ez free filing Personal-use property. 1040ez free filing   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. 1040ez free filing Loss from the sale or exchange of personal-use property is not deductible. 1040ez free filing You can deduct a loss relating to personal-use property only if it results from a casualty or theft. 1040ez free filing For information on casualties and thefts, see chapter 11. 1040ez free filing 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. 1040ez free filing The time you own an asset before disposing of it is the holding period. 1040ez free filing If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. 1040ez free filing Report it in Part I of Schedule D (Form 1040). 1040ez free filing If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. 1040ez free filing Report it in Part II of Schedule D (Form 1040). 1040ez free filing Holding period. 1040ez free filing   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. 1040ez free filing The day you disposed of the property is part of your holding period. 1040ez free filing Example. 1040ez free filing If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. 1040ez free filing 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. 1040ez free filing Inherited property. 1040ez free filing   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. 1040ez free filing This rule does not apply to livestock used in a farm business. 1040ez free filing See Holding period under Livestock , later. 1040ez free filing Nonbusiness bad debt. 1040ez free filing   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. 1040ez free filing See chapter 4 of Publication 550. 1040ez free filing Nontaxable exchange. 1040ez free filing   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. 1040ez free filing That is, it begins on the same day as your holding period for the old property. 1040ez free filing Gift. 1040ez free filing   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. 1040ez free filing Real property. 1040ez free filing   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. 1040ez free filing   However, taking possession of real property under an option agreement is not enough to start the holding period. 1040ez free filing The holding period cannot start until there is an actual contract of sale. 1040ez free filing The holding period of the seller cannot end before that time. 1040ez free filing 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. 1040ez free filing Net short-term capital gain or loss. 1040ez free filing   Combine your short-term capital gains and losses. 1040ez free filing Do this by adding all of your short-term capital gains. 1040ez free filing Then add all of your short-term capital losses. 1040ez free filing Subtract the lesser total from the greater. 1040ez free filing The difference is your net short-term capital gain or loss. 1040ez free filing Net long-term capital gain or loss. 1040ez free filing   Follow the same steps to combine your long-term capital gains and losses. 1040ez free filing The result is your net long-term capital gain or loss. 1040ez free filing Net gain. 1040ez free filing   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. 1040ez free filing 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. 1040ez free filing See Capital Gains Tax Rates , later. 1040ez free filing Net loss. 1040ez free filing   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. 1040ez free filing But there are limits on how much loss you can deduct and when you can deduct it. 1040ez free filing See Treatment of Capital Losses next. 1040ez free filing 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. 1040ez free filing 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). 1040ez free filing If your other income is low, you may not be able to use the full $3,000. 1040ez free filing The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). 1040ez free filing Capital loss carryover. 1040ez free filing   Generally, you have a capital loss carryover if either of the following situations applies to you. 1040ez free filing Your net loss on Schedule D (Form 1040), is more than the yearly limit. 1040ez free filing Your taxable income without your deduction for exemptions is less than zero. 1040ez free filing 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. 1040ez free filing    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). 1040ez free filing 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. 1040ez free filing These lower rates are called the maximum capital gains rates. 1040ez free filing 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. 1040ez free filing See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). 1040ez free filing Also see Publication 550. 1040ez free filing Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. 1040ez free filing A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). 1040ez free filing Property held for sale in the ordinary course of your farm business. 1040ez free filing   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. 1040ez free filing 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). 1040ez free filing The treatment of this property is discussed in chapter 3. 1040ez free filing Land and depreciable properties. 1040ez free filing   Land and depreciable property you use in farming are not capital assets. 1040ez free filing Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. 1040ez free filing 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. 1040ez free filing The sales of these business assets are reported on Form 4797. 1040ez free filing See chapter 9 for more information. 1040ez free filing 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. 1040ez free filing Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. 1040ez free filing Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. 1040ez free filing Hedging transactions. 1040ez free filing Transactions that are not hedging transactions. 1040ez free filing 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. 1040ez free filing There is a limit on the amount of capital losses you can deduct each year. 1040ez free filing Hedging transactions are not subject to the mark-to-market rules. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing The gain or loss on the termination of these hedges is generally ordinary gain or loss. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing Examples include fuel and feed. 1040ez free filing If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. 1040ez free filing Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. 1040ez free filing It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. 1040ez free filing Retain the identification of each hedging transaction with your books and records. 1040ez free filing Also, identify the item(s) or aggregate risk that is being hedged in your records. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing Accounting methods for hedging transactions. 1040ez free filing   The accounting method you use for a hedging transaction must clearly reflect income. 1040ez free filing 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. 1040ez free filing There are requirements and limits on the method you can use for certain hedging transactions. 1040ez free filing See Regulations section 1. 1040ez free filing 446-4(e) for those requirements and limits. 1040ez free filing   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. 1040ez free filing Cash method. 1040ez free filing Farm-price method. 1040ez free filing Unit-livestock-price method. 1040ez free filing   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. 1040ez free filing   Your books and records must describe the accounting method used for each type of hedging transaction. 1040ez free filing They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. 1040ez free filing You must make the additional identification no more than 35 days after entering into the hedging transaction. 1040ez free filing Example of a hedging transaction. 1040ez free filing   You file your income tax returns on the cash method. 1040ez free filing On July 2 you anticipate a yield of 50,000 bushels of corn this year. 1040ez free filing The December futures price is $5. 1040ez free filing 75 a bushel, but there are indications that by harvest time the price will drop. 1040ez free filing To protect yourself against a drop in the price, you enter into the following hedging transaction. 1040ez free filing You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. 1040ez free filing 75 a bushel. 1040ez free filing   The price did not drop as anticipated but rose to $6 a bushel. 1040ez free filing In November, you sell your crop at a local elevator for $6 a bushel. 1040ez free filing You also close out your futures position by buying ten December contracts for $6 a bushel. 1040ez free filing You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. 1040ez free filing   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. 1040ez free filing Your loss on the hedge is 25 cents a bushel. 1040ez free filing In effect, the net selling price of your corn is $5. 1040ez free filing 75 a bushel. 1040ez free filing   Report the results of your futures transactions and your sale of corn separately on Schedule F. 1040ez free filing See the instructions for the 2013 Schedule F (Form 1040). 1040ez free filing   The loss on your futures transactions is $13,900, figured as follows. 1040ez free filing July 2 - Sold December corn futures (50,000 bu. 1040ez free filing @$5. 1040ez free filing 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 1040ez free filing @$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. 1040ez free filing   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. 1040ez free filing × $6). 1040ez free filing Report it on Schedule F, Part I, line 2, as income from sales of products you raised. 1040ez free filing   Assume you were right and the price went down 25 cents a bushel. 1040ez free filing In effect, you would still net $5. 1040ez free filing 75 a bushel, figured as follows. 1040ez free filing Sold cash corn, per bushel $5. 1040ez free filing 50 Gain on hedge, per bushel . 1040ez free filing 25 Net price, per bushel $5. 1040ez free filing 75       The gain on your futures transactions would have been $11,100, figured as follows. 1040ez free filing July 2 - Sold December corn futures (50,000 bu. 1040ez free filing @$5. 1040ez free filing 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 1040ez free filing @$5. 1040ez free filing 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. 1040ez free filing   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. 1040ez free filing Livestock This part discusses the sale or exchange of livestock used in your farm business. 1040ez free filing Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. 1040ez free filing However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. 1040ez free filing See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. 1040ez free filing The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. 1040ez free filing The sale of this livestock is reported on Schedule F. 1040ez free filing See chapter 3. 1040ez free filing Also, special rules apply to sales or exchanges caused by weather-related conditions. 1040ez free filing See chapter 3. 1040ez free filing Holding period. 1040ez free filing   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). 1040ez free filing Livestock. 1040ez free filing   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. 1040ez free filing Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. 1040ez free filing Livestock used in farm business. 1040ez free filing   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. 1040ez free filing The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing Example 1. 1040ez free filing You discover an animal that you intend to use for breeding purposes is sterile. 1040ez free filing You dispose of it within a reasonable time. 1040ez free filing This animal was held for breeding purposes. 1040ez free filing Example 2. 1040ez free filing 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. 1040ez free filing These young animals were held for breeding or dairy purposes. 1040ez free filing 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. 1040ez free filing See Sales Caused by Weather-Related Conditions in chapter 3. 1040ez free filing Example 3. 1040ez free filing You are in the business of raising hogs for slaughter. 1040ez free filing Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. 1040ez free filing You sell the brood sows after obtaining the litter. 1040ez free filing 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. 1040ez free filing Example 4. 1040ez free filing You are in the business of raising registered cattle for sale to others for use as breeding cattle. 1040ez free filing The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. 1040ez free filing Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. 1040ez free filing Such use does not demonstrate that you are holding the cattle for breeding purposes. 1040ez free filing 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. 1040ez free filing The same applies to hog and sheep breeders. 1040ez free filing Example 5. 1040ez free filing You breed, raise, and train horses for racing purposes. 1040ez free filing Every year you cull horses from your racing stable. 1040ez free filing 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. 1040ez free filing These horses are all considered held for sporting purposes. 1040ez free filing Figuring gain or loss on the cash method. 1040ez free filing   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. 1040ez free filing Raised livestock. 1040ez free filing   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. 1040ez free filing Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. 1040ez free filing The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. 1040ez free filing However, see Uniform Capitalization Rules in chapter 6. 1040ez free filing Purchased livestock. 1040ez free filing   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. 1040ez free filing Example. 1040ez free filing A farmer sold a breeding cow on January 8, 2013, for $1,250. 1040ez free filing Expenses of the sale were $125. 1040ez free filing The cow was bought July 2, 2009, for $1,300. 1040ez free filing Depreciation (not less than the amount allowable) was $867. 1040ez free filing 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. 1040ez free filing Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. 1040ez free filing Any loss on the disposition of such property is treated as a long-term capital loss. 1040ez free filing Converted wetland. 1040ez free filing   This is generally land that was drained or filled to make the production of agricultural commodities possible. 1040ez free filing 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. 1040ez free filing   A wetland (before conversion) is land that meets all the following conditions. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing It supports, under normal circumstances, mostly plants that grow in saturated soil. 1040ez free filing Highly erodible cropland. 1040ez free filing   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. 1040ez free filing Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. 1040ez free filing 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. 1040ez free filing Successor. 1040ez free filing   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. 1040ez free filing Timber Standing timber you held as investment property is a capital asset. 1040ez free filing Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. 1040ez free filing If you held the timber primarily for sale to customers, it is not a capital asset. 1040ez free filing Gain or loss on its sale is ordinary business income or loss. 1040ez free filing It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). 1040ez free filing See the Instructions for Schedule F (Form 1040). 1040ez free filing 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. 1040ez free filing Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. 1040ez free filing , are ordinary farm income and expenses reported on Schedule F. 1040ez free filing 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. 1040ez free filing Timber considered cut. 1040ez free filing   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. 1040ez free filing This is true whether the timber is cut under contract or whether you cut it yourself. 1040ez free filing Christmas trees. 1040ez free filing   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. 1040ez free filing They qualify for both rules discussed below. 1040ez free filing Election to treat cutting as a sale or exchange. 1040ez free filing   Under the general rule, the cutting of timber results in no gain or loss. 1040ez free filing It is not until a sale or exchange occurs that gain or loss is realized. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing Any later sale results in ordinary business income or loss. 1040ez free filing See the example below. 1040ez free filing   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. 1040ez free filing Making the election. 1040ez free filing   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. 1040ez free filing You do not have to make the election in the first year you cut the timber. 1040ez free filing You can make it in any year to which the election would apply. 1040ez free filing If the timber is partnership property, the election is made on the partnership return. 1040ez free filing This election cannot be made on an amended return. 1040ez free filing   Once you have made the election, it remains in effect for all later years unless you revoke it. 1040ez free filing Election under section 631(a) may be revoked. 1040ez free filing   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. 1040ez free filing The prior election (and revocation) is disregarded for purposes of making a subsequent election. 1040ez free filing See Form T (Timber), Forest Activities Schedule, for more information. 1040ez free filing Gain or loss. 1040ez free filing   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. 1040ez free filing   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. 1040ez free filing 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. 1040ez free filing 611-3. 1040ez free filing   Depletion of timber is discussed in chapter 7. 1040ez free filing Example. 1040ez free filing   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. 1040ez free filing It had an adjusted basis for depletion of $40 per MBF. 1040ez free filing You are a calendar year taxpayer. 1040ez free filing On January 1, 2013, the timber had a FMV of $350 per MBF. 1040ez free filing It was cut in April for sale. 1040ez free filing On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. 1040ez free filing You report the difference between the FMV and your adjusted basis for depletion as a gain. 1040ez free filing 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. 1040ez free filing You figure your gain as follows. 1040ez free filing 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. 1040ez free filing Outright sales of timber. 1040ez free filing   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). 1040ez free filing 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). 1040ez free filing Cutting contract. 1040ez free filing   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. 1040ez free filing You are the owner of the timber. 1040ez free filing You held the timber longer than 1 year before its disposal. 1040ez free filing You kept an economic interest in the timber. 1040ez free filing   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. 1040ez free filing   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. 1040ez free filing Include this amount on Form 4797 along with your other section 1231 gains or losses. 1040ez free filing Date of disposal. 1040ez free filing   The date of disposal is the date the timber is cut. 1040ez free filing 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. 1040ez free filing   This election applies only to figure the holding period of the timber. 1040ez free filing It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). 1040ez free filing   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. 1040ez free filing The statement must identify the advance payments subject to the election and the contract under which they were made. 1040ez free filing   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). 1040ez free filing Attach the statement to the amended return and write “Filed pursuant to section 301. 1040ez free filing 9100-2” at the top of the statement. 1040ez free filing File the amended return at the same address the original return was filed. 1040ez free filing Owner. 1040ez free filing   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. 1040ez free filing 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. 1040ez free filing Tree stumps. 1040ez free filing   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. 1040ez free filing Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. 1040ez free filing However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. 1040ez free filing Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. 1040ez free filing   See Form T (Timber) and its separate instructions for more information about dispositions of timber. 1040ez free filing 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). 1040ez free filing If you have a gain from the sale, you may be allowed to exclude the gain on your home. 1040ez free filing For more information, see Publication 523, Selling Your Home. 1040ez free filing The gain on the sale of your business property is taxable. 1040ez free filing A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. 1040ez free filing Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. 1040ez free filing See chapter 9. 1040ez free filing Losses from personal-use property, other than casualty or theft losses, are not deductible. 1040ez free filing 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. 1040ez free filing See chapter 10 for information about installment sales. 1040ez free filing When you sell your farm, the gain or loss on each asset is figured separately. 1040ez free filing The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. 1040ez free filing Each of the assets sold must be classified as one of the following. 1040ez free filing Capital asset held 1 year or less. 1040ez free filing Capital asset held longer than 1 year. 1040ez free filing 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 ). 1040ez free filing 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). 1040ez free filing 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. 1040ez free filing Allocation of consideration paid for a farm. 1040ez free filing   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. 1040ez free filing The residual method is required only if the group of assets sold constitutes a trade or business. 1040ez free filing This method determines gain or loss from the transfer of each asset. 1040ez free filing It also determines the buyer's basis in the business assets. 1040ez free filing For more information, see Sale of a Business in chapter 2 of Publication 544. 1040ez free filing Property used in farm operation. 1040ez free filing   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. 1040ez free filing Recognized gains and losses on business property must be reported on your return for the year of the sale. 1040ez free filing If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). 1040ez free filing Example. 1040ez free filing You sell your farm, including your main home, which you have owned since December 2001. 1040ez free filing You realize gain on the sale as follows. 1040ez free filing   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. 1040ez free filing 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. 1040ez free filing Treat the balance as section 1231 gain. 1040ez free filing 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 . 1040ez free filing Partial sale. 1040ez free filing   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. 1040ez free filing You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. 1040ez free filing For a detailed discussion on installment sales, see Publication 544. 1040ez free filing Adjusted basis of the part sold. 1040ez free filing   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. 1040ez free filing , on the part sold. 1040ez free filing 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 . 1040ez free filing Example. 1040ez free filing You bought a 600-acre farm for $700,000. 1040ez free filing The farm included land and buildings. 1040ez free filing The purchase contract designated $600,000 of the purchase price to the land. 1040ez free filing You later sold 60 acres of land on which you had installed a fence. 1040ez free filing 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. 1040ez free filing Use this amount to determine your gain or loss on the sale of the 60 acres. 1040ez free filing Assessed values for local property taxes. 1040ez free filing   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. 1040ez free filing Example. 1040ez free filing Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. 1040ez free filing 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. 1040ez free filing The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. 1040ez free filing Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. 1040ez free filing The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). 1040ez free filing Sale of your home. 1040ez free filing   Your home is a capital asset and not property used in the trade or business of farming. 1040ez free filing 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. 1040ez free filing Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. 1040ez free filing   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. 1040ez free filing For more information on basis, see chapter 6. 1040ez free filing More information. 1040ez free filing   For more information on selling your home, see Publication 523. 1040ez free filing Gain from condemnation. 1040ez free filing   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. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 1040ez free filing This is true even if you voluntarily return the property to the lender. 1040ez free filing You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. 1040ez free filing Buyer's (borrower's) gain or loss. 1040ez free filing   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. 1040ez free filing The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 1040ez free filing See Determining Gain or Loss , earlier. 1040ez free filing Worksheet 8-1. 1040ez free filing Worksheet for Foreclosures andRepossessions Part 1. 1040ez free filing Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 1040ez free filing Complete this part only if you were personally liable for the debt. 1040ez free filing Otherwise, go to Part 2. 1040ez free filing   1. 1040ez free filing 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. 1040ez free filing Enter the Fair Market Value of the transferred property   3. 1040ez free filing Ordinary income from cancellation of debt upon foreclosure or repossession. 1040ez free filing * Subtract line 2 from line 1. 1040ez free filing If zero or less, enter -0-   Part 2. 1040ez free filing Figure your gain or loss from foreclosure or repossession. 1040ez free filing   4. 1040ez free filing If you completed Part 1, enter the smaller of line 1 or line 2. 1040ez free filing If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. 1040ez free filing Enter any proceeds you received from the foreclosure sale   6. 1040ez free filing Add lines 4 and 5   7. 1040ez free filing Enter the adjusted basis of the transferred property   8. 1040ez free filing Gain or loss from foreclosure or repossession. 1040ez free filing Subtract line 7  from line 6   * The income may not be taxable. 1040ez free filing See Cancellation of debt . 1040ez free filing    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. 1040ez free filing Amount realized on a nonrecourse debt. 1040ez free filing   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. 1040ez free filing 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. 1040ez free filing Example 1. 1040ez free filing Ann paid $200,000 for land used in her farming business. 1040ez free filing She paid $15,000 down and borrowed the remaining $185,000 from a bank. 1040ez free filing Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. 1040ez free filing The bank foreclosed on the loan 2 years after Ann stopped making payments. 1040ez free filing When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. 1040ez free filing The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. 1040ez free filing She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). 1040ez free filing She has a $20,000 deductible loss. 1040ez free filing Example 2. 1040ez free filing Assume the same facts as in Example 1 except the FMV of the land was $210,000. 1040ez free filing The result is the same. 1040ez free filing The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. 1040ez free filing Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. 1040ez free filing Amount realized on a recourse debt. 1040ez free filing   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. 1040ez free filing   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. 1040ez free filing The amount realized does not include the canceled debt that is your income from cancellation of debt. 1040ez free filing See Cancellation of debt , later. 1040ez free filing Example 3. 1040ez free filing Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). 1040ez free filing In this case, the amount she realizes is $170,000. 1040ez free filing This is the canceled debt ($180,000) up to the FMV of the land ($170,000). 1040ez free filing Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). 1040ez free filing She has a $30,000 deductible loss, which she figures on Form 4797, Part I. 1040ez free filing She is also treated as receiving ordinary income from cancellation of debt. 1040ez free filing That income is $10,000 ($180,000 − $170,000). 1040ez free filing This is the part of the canceled debt not included in the amount realized. 1040ez free filing She reports this as other income on Schedule F, line 8. 1040ez free filing Seller's (lender's) gain or loss on repossession. 1040ez free filing   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. 1040ez free filing For more information, see Repossession in Publication 537, Installment Sales. 1040ez free filing Cancellation of debt. 1040ez free filing   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. 1040ez free filing This income is separate from any gain or loss realized from the foreclosure or repossession. 1040ez free filing Report the income from cancellation of a business debt on Schedule F, line 8. 1040ez free filing Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 1040ez free filing    You can use Worksheet 8-1 to figure your income from cancellation of debt. 1040ez free filing   However, income from cancellation of debt is not taxed if any of the following apply. 1040ez free filing The cancellation is intended as a gift. 1040ez free filing The debt is qualified farm debt (see chapter 3). 1040ez free filing The debt is qualified real property business debt (see chapter 5 of Publication 334). 1040ez free filing You are insolvent or bankrupt (see  chapter 3). 1040ez free filing The debt is qualified principal residence indebtedness (see chapter 3). 1040ez free filing   Use Form 982 to report the income exclusion. 1040ez free filing Abandonment The abandonment of property is a disposition of property. 1040ez free filing 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. 1040ez free filing Business or investment property. 1040ez free filing   Loss from abandonment of business or investment property is deductible as a loss. 1040ez free filing Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 1040ez free filing If your adjusted basis is more than the amount you realize (if any), then you have a loss. 1040ez free filing If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 1040ez free filing This rule also applies to leasehold improvements the lessor made for the lessee. 1040ez free filing 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 . 1040ez free filing   If the abandoned property is secured by debt, special rules apply. 1040ez free filing 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). 1040ez free filing For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). 1040ez free filing The abandonment loss is deducted in the tax year in which the loss is sustained. 1040ez free filing Report the loss on Form 4797, Part II, line 10. 1040ez free filing Personal-use property. 1040ez free filing   You cannot deduct any loss from abandonment of your home or other property held for personal use. 1040ez free filing Canceled debt. 1040ez free filing   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. 1040ez free filing This income is separate from any loss realized from abandonment of the property. 1040ez free filing Report income from cancellation of a debt related to a business or rental activity as business or rental income. 1040ez free filing Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 1040ez free filing   However, income from cancellation of debt is not taxed in certain circumstances. 1040ez free filing See Cancellation of debt earlier under Foreclosure or Repossession . 1040ez free filing Forms 1099-A and 1099-C. 1040ez free filing   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. 1040ez free filing 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. 1040ez free filing 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. 1040ez free filing For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 1040ez free filing Prev  Up  Next   Home   More Online Publications
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The 1040ez Free Filing

1040ez free filing 2. 1040ez free filing   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. 1040ez free filing Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. 1040ez free filing Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction 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). 1040ez free filing You must do this to figure your net capital gain or loss. 1040ez free filing For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. 1040ez free filing See Capital Gains Tax Rates in chapter 4. 1040ez free filing Your deduction for a net capital loss may be limited. 1040ez free filing See Treatment of Capital Losses in chapter 4. 1040ez free filing Capital gain or loss. 1040ez free filing   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. 1040ez free filing You also may have a capital gain if your section 1231 transactions result in a net gain. 1040ez free filing Section 1231 transactions. 1040ez free filing   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. 1040ez free filing They also include certain involuntary conversions of business or investment property, including capital assets. 1040ez free filing See Section 1231 Gains and Losses in chapter 3 for more information. 1040ez free filing Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. 1040ez free filing Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. 1040ez free filing For exceptions, see Noncapital Assets, later. 1040ez free filing The following items are examples of capital assets. 1040ez free filing Stocks and bonds. 1040ez free filing A home owned and occupied by you and your family. 1040ez free filing Timber grown on your home property or investment property, even if you make casual sales of the timber. 1040ez free filing Household furnishings. 1040ez free filing A car used for pleasure or commuting. 1040ez free filing Coin or stamp collections. 1040ez free filing Gems and jewelry. 1040ez free filing Gold, silver, and other metals. 1040ez free filing Personal-use property. 1040ez free filing   Generally, property held for personal use is a capital asset. 1040ez free filing Gain from a sale or exchange of that property is a capital gain. 1040ez free filing Loss from the sale or exchange of that property is not deductible. 1040ez free filing You can deduct a loss relating to personal-use property only if it results from a casualty or theft. 1040ez free filing Investment property. 1040ez free filing   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. 1040ez free filing This treatment does not apply to property used to produce rental income. 1040ez free filing See Business assets, later, under Noncapital Assets. 1040ez free filing Release of restriction on land. 1040ez free filing   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. 1040ez free filing Noncapital Assets A noncapital asset is property that is not a capital asset. 1040ez free filing The following kinds of property are not capital assets. 1040ez free filing Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. 1040ez free filing Inventories are discussed in Publication 538, Accounting Periods and Methods. 1040ez free filing But, see the Tip below. 1040ez free filing Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. 1040ez free filing Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). 1040ez free filing Sales of this type of property are discussed in chapter 3. 1040ez free filing Real property used in your trade or business or as rental property, even if the property is fully depreciated. 1040ez free filing A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. 1040ez free filing But, see the Tip below. 1040ez free filing U. 1040ez free filing S. 1040ez free filing Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. 1040ez free filing Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. 1040ez free filing It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. 1040ez free filing The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. 1040ez free filing Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. 1040ez free filing Supplies of a type you regularly use or consume in the ordinary course of your trade or business. 1040ez free filing You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. 1040ez free filing See chapter 4 of Publication 550 for details. 1040ez free filing Property held mainly for sale to customers. 1040ez free filing   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. 1040ez free filing Inventories are discussed in Publication 538. 1040ez free filing Business assets. 1040ez free filing   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. 1040ez free filing The sale or disposition of business property is discussed in chapter 3. 1040ez free filing Letters and memoranda. 1040ez free filing   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. 1040ez free filing Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. 1040ez free filing For this purpose, letters and memoranda addressed to you are considered prepared for you. 1040ez free filing If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. 1040ez free filing Commodities derivative financial instrument. 1040ez free filing   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). 1040ez free filing Commodities derivative dealer. 1040ez free filing   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. 1040ez free filing Hedging transaction. 1040ez free filing   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. 1040ez free filing Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. 1040ez free filing Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. 1040ez free filing Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. 1040ez free filing If these rules apply, gains may be treated as ordinary income and losses may not be deductible. 1040ez free filing See Transfers to Spouse in chapter 1 for rules that apply to spouses. 1040ez free filing Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. 1040ez free filing It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. 1040ez free filing Depreciable property transaction. 1040ez free filing   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. 1040ez free filing A person and the person's controlled entity or entities. 1040ez free filing A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. 1040ez free filing An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). 1040ez free filing An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). 1040ez free filing Controlled entity. 1040ez free filing   A person's controlled entity is either of the following. 1040ez free filing A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. 1040ez free filing An entity whose relationship with that person is one of the following. 1040ez free filing A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. 1040ez free filing Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. 1040ez free filing Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040ez free filing Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040ez free filing Controlled partnership transaction. 1040ez free filing   A gain recognized in a controlled partnership transaction may be ordinary income. 1040ez free filing The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. 1040ez free filing   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. 1040ez free filing A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. 1040ez free filing Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. 1040ez free filing Determining ownership. 1040ez free filing   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. 1040ez free filing Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. 1040ez free filing (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. 1040ez free filing ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. 1040ez free filing Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. 1040ez free filing For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. 1040ez free filing But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. 1040ez free filing Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. 1040ez free filing This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. 1040ez free filing For the list of related persons, see Related persons next. 1040ez free filing If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. 1040ez free filing The gain on each item is taxable. 1040ez free filing The loss on any item is nondeductible. 1040ez free filing Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. 1040ez free filing Related persons. 1040ez free filing   The following is a list of related persons. 1040ez free filing Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. 1040ez free filing ), and lineal descendants (children, grandchildren, etc. 1040ez free filing ). 1040ez free filing An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. 1040ez free filing Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. 1040ez free filing A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. 1040ez free filing A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 1040ez free filing Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. 1040ez free filing A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. 1040ez free filing A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. 1040ez free filing Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040ez free filing Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040ez free filing An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. 1040ez free filing Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. 1040ez free filing A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. 1040ez free filing Partnership interests. 1040ez free filing   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. 1040ez free filing Controlled groups. 1040ez free filing   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. 1040ez free filing   For more information, see section 267(f) of the Internal Revenue Code. 1040ez free filing Ownership of stock or partnership interests. 1040ez free filing   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. 1040ez free filing Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. 1040ez free filing (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. 1040ez free filing ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. 1040ez free filing Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. 1040ez free filing An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. 1040ez free filing For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. 1040ez free filing But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. 1040ez free filing Indirect transactions. 1040ez free filing   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. 1040ez free filing This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. 1040ez free filing Property received from a related person. 1040ez free filing   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. 1040ez free filing This rule applies only to the original transferee. 1040ez free filing Example 1. 1040ez free filing Your brother sold stock to you for $7,600. 1040ez free filing His cost basis was $10,000. 1040ez free filing His loss of $2,400 was not deductible. 1040ez free filing You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). 1040ez free filing Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. 1040ez free filing Example 2. 1040ez free filing Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. 1040ez free filing Your recognized loss is only $700 ($7,600 − $6,900). 1040ez free filing You cannot deduct the loss not allowed to your brother. 1040ez free filing Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. 1040ez free filing Sale of a Business The sale of a business usually is not a sale of one asset. 1040ez free filing Instead, all the assets of the business are sold. 1040ez free filing Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. 1040ez free filing A business usually has many assets. 1040ez free filing When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. 1040ez free filing The gain or loss on each asset is figured separately. 1040ez free filing The sale of capital assets results in capital gain or loss. 1040ez free filing The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). 1040ez free filing The sale of inventory results in ordinary income or loss. 1040ez free filing Partnership interests. 1040ez free filing   An interest in a partnership or joint venture is treated as a capital asset when sold. 1040ez free filing The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. 1040ez free filing For more information, see Disposition of Partner's Interest in Publication 541. 1040ez free filing Corporation interests. 1040ez free filing   Your interest in a corporation is represented by stock certificates. 1040ez free filing When you sell these certificates, you usually realize capital gain or loss. 1040ez free filing For information on the sale of stock, see chapter 4 in Publication 550. 1040ez free filing Corporate liquidations. 1040ez free filing   Corporate liquidations of property generally are treated as a sale or exchange. 1040ez free filing Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. 1040ez free filing Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. 1040ez free filing   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. 1040ez free filing For more information, see section 332 of the Internal Revenue Code and the related regulations. 1040ez free filing Allocation of consideration paid for a business. 1040ez free filing   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. 1040ez free filing Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. 1040ez free filing This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. 1040ez free filing It also determines the buyer's basis in the business assets. 1040ez free filing Consideration. 1040ez free filing   The buyer's consideration is the cost of the assets acquired. 1040ez free filing The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. 1040ez free filing Residual method. 1040ez free filing   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. 1040ez free filing This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. 1040ez free filing Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. 1040ez free filing   A group of assets constitutes a trade or business if either of the following applies. 1040ez free filing Goodwill or going concern value could, under any circumstances, attach to them. 1040ez free filing The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. 1040ez free filing   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). 1040ez free filing The consideration remaining after this reduction must be allocated among the various business assets in a certain order. 1040ez free filing See Classes of assets next for the complete order. 1040ez free filing Classes of assets. 1040ez free filing   The following definitions are the classifications for deemed or actual asset acquisitions. 1040ez free filing Allocate the consideration among the assets in the following order. 1040ez free filing The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. 1040ez free filing The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. 1040ez free filing Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). 1040ez free filing Class II assets are certificates of deposit, U. 1040ez free filing S. 1040ez free filing Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040ez free filing Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. 1040ez free filing However, see section 1. 1040ez free filing 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. 1040ez free filing Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. 1040ez free filing Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. 1040ez free filing    Note. 1040ez free filing Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. 1040ez free filing Class VI assets are section 197 intangibles (other than goodwill and going concern value). 1040ez free filing Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). 1040ez free filing   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. 1040ez free filing For example, if an asset is described in both Class II and Class IV, choose Class II. 1040ez free filing Example. 1040ez free filing The total paid in the sale of the assets of Company SKB is $21,000. 1040ez free filing No cash or deposit accounts or similar accounts were sold. 1040ez free filing The company's U. 1040ez free filing S. 1040ez free filing Government securities sold had a fair market value of $3,200. 1040ez free filing The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. 1040ez free filing Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. 1040ez free filing S. 1040ez free filing Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. 1040ez free filing Agreement. 1040ez free filing   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. 1040ez free filing This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040ez free filing Reporting requirement. 1040ez free filing   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 1040ez free filing Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. 1040ez free filing Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040ez free filing See the Instructions for Form 8594. 1040ez free filing Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. 1040ez free filing It includes such items as patents, copyrights, and the goodwill value of a business. 1040ez free filing Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. 1040ez free filing The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. 1040ez free filing See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. 1040ez free filing Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. 1040ez free filing The following discussions explain special rules that apply to certain dispositions of intangible property. 1040ez free filing Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. 1040ez free filing They include the following assets. 1040ez free filing Goodwill. 1040ez free filing Going concern value. 1040ez free filing Workforce in place. 1040ez free filing Business books and records, operating systems, and other information bases. 1040ez free filing Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. 1040ez free filing Customer-based intangibles. 1040ez free filing Supplier-based intangibles. 1040ez free filing Licenses, permits, and other rights granted by a governmental unit. 1040ez free filing Covenants not to compete entered into in connection with the acquisition of a business. 1040ez free filing Franchises, trademarks, and trade names. 1040ez free filing See chapter 8 of Publication 535 for a description of each intangible. 1040ez free filing Dispositions. 1040ez free filing   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. 1040ez free filing Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. 1040ez free filing If you retain more than one section 197 intangible, increase each intangible's adjusted basis. 1040ez free filing Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. 1040ez free filing   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. 1040ez free filing For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. 1040ez free filing Covenant not to compete. 1040ez free filing   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. 1040ez free filing Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. 1040ez free filing Anti-churning rules. 1040ez free filing   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. 1040ez free filing However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. 1040ez free filing Recognize gain on the transfer of the property. 1040ez free filing Pay income tax on the gain at the highest tax rate. 1040ez free filing   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. 1040ez free filing But each partner or shareholder must pay the tax on his or her share of gain. 1040ez free filing   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. 1040ez free filing You must file the tax return by the due date (including extensions). 1040ez free filing You must also notify the transferee of the election in writing by the due date of the return. 1040ez free filing   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). 1040ez free filing Attach the statement to the amended return and write “Filed pursuant to section 301. 1040ez free filing 9100-2” at the top of the statement. 1040ez free filing File the amended return at the same address the original return was filed. 1040ez free filing For more information about making the election, see Regulations section 1. 1040ez free filing 197-2(h)(9). 1040ez free filing For information about reporting the tax on your income tax return, see the Instructions for Form 4797. 1040ez free filing Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. 1040ez free filing This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. 1040ez free filing For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. 1040ez free filing This treatment applies to your transfer of a patent if you meet all the following conditions. 1040ez free filing You are the holder of the patent. 1040ez free filing You transfer the patent other than by gift, inheritance, or devise. 1040ez free filing You transfer all substantial rights to the patent or an undivided interest in all such rights. 1040ez free filing You do not transfer the patent to a related person. 1040ez free filing Holder. 1040ez free filing   You are the holder of a patent if you are either of the following. 1040ez free filing The individual whose effort created the patent property and who qualifies as the original and first inventor. 1040ez free filing The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. 1040ez free filing All substantial rights. 1040ez free filing   All substantial rights to patent property are all rights that have value when they are transferred. 1040ez free filing A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. 1040ez free filing   All substantial rights to a patent are not transferred if any of the following apply to the transfer. 1040ez free filing The rights are limited geographically within a country. 1040ez free filing The rights are limited to a period less than the remaining life of the patent. 1040ez free filing The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. 1040ez free filing The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. 1040ez free filing Related persons. 1040ez free filing   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. 1040ez free filing Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. 1040ez free filing Substitute “25% or more” ownership for “more than 50%. 1040ez free filing ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. 1040ez free filing For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. 1040ez free filing The brother-sister exception does not apply because the trust relationship is independent of family status. 1040ez free filing Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. 1040ez free filing A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. 1040ez free filing Significant power, right, or continuing interest. 1040ez free filing   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. 1040ez free filing   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. 1040ez free filing A right to disapprove any assignment of the interest, or any part of it. 1040ez free filing A right to end the agreement at will. 1040ez free filing A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. 1040ez free filing A right to make the recipient sell or advertise only your products or services. 1040ez free filing A right to make the recipient buy most supplies and equipment from you. 1040ez free filing A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. 1040ez free filing Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. 1040ez free filing However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. 1040ez free filing See section 1237 of the Internal Revenue Code. 1040ez free filing Timber Standing timber held as investment property is a capital asset. 1040ez free filing Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. 1040ez free filing If you held the timber primarily for sale to customers, it is not a capital asset. 1040ez free filing Gain or loss on its sale is ordinary business income or loss. 1040ez free filing It is reported in the gross receipts or sales and cost of goods sold items of your return. 1040ez free filing 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. 1040ez free filing These sales constitute a very minor part of their farm businesses. 1040ez free filing In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. 1040ez free filing , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. 1040ez free filing Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. 1040ez free filing Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. 1040ez free filing This is true whether the timber is cut under contract or whether you cut it yourself. 1040ez free filing Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. 1040ez free filing See chapter 3. 1040ez free filing Gain or loss is reported on Form 4797. 1040ez free filing Christmas trees. 1040ez free filing   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. 1040ez free filing They qualify for both rules discussed below. 1040ez free filing Election to treat cutting as a sale or exchange. 1040ez free filing   Under the general rule, the cutting of timber results in no gain or loss. 1040ez free filing It is not until a sale or exchange occurs that gain or loss is realized. 1040ez free filing 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 the timber is cut. 1040ez free filing 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. 1040ez free filing Any later sale results in ordinary business income or loss. 1040ez free filing See Example, later. 1040ez free filing   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 for use in your trade or business. 1040ez free filing Making the election. 1040ez free filing   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 the gain or loss. 1040ez free filing You do not have to make the election in the first year you cut timber. 1040ez free filing You can make it in any year to which the election would apply. 1040ez free filing If the timber is partnership property, the election is made on the partnership return. 1040ez free filing This election cannot be made on an amended return. 1040ez free filing   Once you have made the election, it remains in effect for all later years unless you cancel it. 1040ez free filing   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. 1040ez free filing The prior election (and revocation) is disregarded for purposes of making a subsequent election. 1040ez free filing See Form T (Timber), Forest Activities Schedule, for more information. 1040ez free filing Gain or loss. 1040ez free filing   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. 1040ez free filing   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. 1040ez free filing 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 of the Internal Revenue Code and the related regulations. 1040ez free filing   Timber depletion is discussed in chapter 9 of Publication 535. 1040ez free filing Example. 1040ez free filing In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. 1040ez free filing It had an adjusted basis for depletion of $40 per MBF. 1040ez free filing You are a calendar year taxpayer. 1040ez free filing On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. 1040ez free filing It was cut in April for sale. 1040ez free filing On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. 1040ez free filing You report the difference between the fair market value and your adjusted basis for depletion as a gain. 1040ez free filing This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. 1040ez free filing You figure your gain as follows. 1040ez free filing FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value 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. 1040ez free filing Outright sales of timber. 1040ez free filing   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 below). 1040ez free filing 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 below). 1040ez free filing Cutting contract. 1040ez free filing   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. 1040ez free filing You are the owner of the timber. 1040ez free filing You held the timber longer than 1 year before its disposal. 1040ez free filing You kept an economic interest in the timber. 1040ez free filing   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. 1040ez free filing   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. 1040ez free filing Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. 1040ez free filing Date of disposal. 1040ez free filing   The date of disposal is the date the timber is cut. 1040ez free filing 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. 1040ez free filing   This election applies only to figure the holding period of the timber. 1040ez free filing It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). 1040ez free filing   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. 1040ez free filing The statement must identify the advance payments subject to the election and the contract under which they were made. 1040ez free filing   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). 1040ez free filing Attach the statement to the amended return and write “Filed pursuant to section 301. 1040ez free filing 9100-2” at the top of the statement. 1040ez free filing File the amended return at the same address the original return was filed. 1040ez free filing Owner. 1040ez free filing   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. 1040ez free filing 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. 1040ez free filing Tree stumps. 1040ez free filing   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. 1040ez free filing Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. 1040ez free filing However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. 1040ez free filing Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. 1040ez free filing   See Form T (Timber) and its separate instructions for more information about dispositions of timber. 1040ez free filing Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. 1040ez free filing , are capital assets except when they are held for sale by a dealer. 1040ez free filing Any gain or loss from their sale or exchange generally is a capital gain or loss. 1040ez free filing If you are a dealer, the amount received from the sale is ordinary business income. 1040ez free filing Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. 1040ez free filing You owned the coal or iron ore longer than 1 year before its disposal. 1040ez free filing You kept an economic interest in the coal or iron ore. 1040ez free filing For this rule, the date the coal or iron ore is mined is considered the date of its disposal. 1040ez free filing Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). 1040ez free filing This amount is included on Form 4797 along with your other section 1231 gains and losses. 1040ez free filing You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. 1040ez free filing If you own only an option to buy the coal in place, you do not qualify as an owner. 1040ez free filing In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. 1040ez free filing The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. 1040ez free filing Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. 1040ez free filing If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. 1040ez free filing Special rule. 1040ez free filing   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. 1040ez free filing A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). 1040ez free filing An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. 1040ez free filing Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. 1040ez free filing This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. 1040ez free filing An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). 1040ez free filing A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. 1040ez free filing Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. 1040ez free filing For more information, see chapter 4 of Publication 550. 1040ez free filing Prev  Up  Next   Home   More Online Publications