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1040ezform Publication 547 - Main Content Table of Contents CasualtyFamily pet. 1040ezform Progressive deterioration. 1040ezform Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. 1040ezform Business or income-producing property. 1040ezform Loss of inventory. 1040ezform Leased property. 1040ezform Exception for personal-use real property. 1040ezform Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. 1040ezform Lessee's loss. 1040ezform Disaster Area LossesDisaster loss to inventory. 1040ezform Main home in disaster area. 1040ezform Unsafe home. 1040ezform Time limit for making choice. 1040ezform Revoking your choice. 1040ezform Figuring the loss deduction. 1040ezform How to report the loss on Form 1040X. 1040ezform Records. 1040ezform Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. 1040ezform Property held more than 1 year. 1040ezform Depreciable property. 1040ezform Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. 1040ezform A sudden event is one that is swift, not gradual or progressive. 1040ezform An unexpected event is one that is ordinarily unanticipated and unintended. 1040ezform An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. 1040ezform Generally, casualty losses are deductible during the taxable year that the loss occurred. 1040ezform See Table 3, later. 1040ezform Deductible losses. 1040ezform   Deductible casualty losses can result from a number of different causes, including the following. 1040ezform Car accidents (but see Nondeductible losses , next, for exceptions). 1040ezform Earthquakes. 1040ezform Fires (but see Nondeductible losses , next, for exceptions). 1040ezform Floods. 1040ezform Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. 1040ezform Mine cave-ins. 1040ezform Shipwrecks. 1040ezform Sonic booms. 1040ezform Storms, including hurricanes and tornadoes. 1040ezform Terrorist attacks. 1040ezform Vandalism. 1040ezform Volcanic eruptions. 1040ezform Nondeductible losses. 1040ezform   A casualty loss is not deductible if the damage or destruction is caused by the following. 1040ezform Accidentally breaking articles such as glassware or china under normal conditions. 1040ezform A family pet (explained below). 1040ezform A fire if you willfully set it, or pay someone else to set it. 1040ezform A car accident if your willful negligence or willful act caused it. 1040ezform The same is true if the willful act or willful negligence of someone acting for you caused the accident. 1040ezform Progressive deterioration (explained below). 1040ezform However, see Special Procedure for Damage From Corrosive Drywall , later. 1040ezform Family pet. 1040ezform   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. 1040ezform Example. 1040ezform Your antique oriental rug was damaged by your new puppy before it was housebroken. 1040ezform Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. 1040ezform Progressive deterioration. 1040ezform   Loss of property due to progressive deterioration is not deductible as a casualty loss. 1040ezform This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. 1040ezform The following are examples of damage due to progressive deterioration. 1040ezform The steady weakening of a building due to normal wind and weather conditions. 1040ezform The deterioration and damage to a water heater that bursts. 1040ezform However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. 1040ezform Most losses of property caused by droughts. 1040ezform To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. 1040ezform Termite or moth damage. 1040ezform The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. 1040ezform However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. 1040ezform Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. 1040ezform Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. 1040ezform For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. 1040ezform Note. 1040ezform If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. 1040ezform S. 1040ezform Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. 1040ezform Form 4684 for the appropriate year can be found at IRS. 1040ezform gov. 1040ezform Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. 1040ezform Corrosive drywall. 1040ezform   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. 1040ezform The revised identification guidance and remediation guidelines are available at www. 1040ezform cpsc. 1040ezform gov/Safety-Education/Safety-Education-Centers/Drywall. 1040ezform Special instructions for completing Form 4684. 1040ezform   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. 1040ezform The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. 1040ezform Top margin of Form 4684. 1040ezform   Enter “Revenue Procedure 2010-36”. 1040ezform Line 1. 1040ezform   Enter the information required by the line 1 instructions. 1040ezform Line 2. 1040ezform   Skip this line. 1040ezform Line 3. 1040ezform   Enter the amount of insurance or other reimbursements you received (including through litigation). 1040ezform If none, enter -0-. 1040ezform Lines 4–7. 1040ezform   Skip these lines. 1040ezform Line 8. 1040ezform   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. 1040ezform Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. 1040ezform Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. 1040ezform If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). 1040ezform Line 9. 1040ezform   If line 8 is more than line 3, do one of the following. 1040ezform If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. 1040ezform If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. 1040ezform If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. 1040ezform    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. 1040ezform See Reimbursement Received After Deducting Loss, later. 1040ezform Lines 10–18. 1040ezform   Complete these lines according to the Instructions for Form 4684. 1040ezform Choosing not to follow this special procedure. 1040ezform   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. 1040ezform This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . 1040ezform Furthermore, you must have proof that shows the following. 1040ezform The loss is properly deductible in the tax year you claimed it and not in some other year. 1040ezform See When To Report Gains and Losses , later. 1040ezform The amount of the claimed loss. 1040ezform See Proof of Loss , later. 1040ezform No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. 1040ezform See When To Report Gains and Losses , later. 1040ezform Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. 1040ezform The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. 1040ezform You do not need to show a conviction for theft. 1040ezform Theft includes the taking of money or property by the following means. 1040ezform Blackmail. 1040ezform Burglary. 1040ezform Embezzlement. 1040ezform Extortion. 1040ezform Kidnapping for ransom. 1040ezform Larceny. 1040ezform Robbery. 1040ezform The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. 1040ezform Decline in market value of stock. 1040ezform   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. 1040ezform However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. 1040ezform You report a capital loss on Schedule D (Form 1040). 1040ezform For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. 1040ezform Mislaid or lost property. 1040ezform    The simple disappearance of money or property is not a theft. 1040ezform However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. 1040ezform Sudden, unexpected, and unusual events were defined earlier under Casualty . 1040ezform Example. 1040ezform A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. 1040ezform The diamond falls from the ring and is never found. 1040ezform The loss of the diamond is a casualty. 1040ezform Losses from Ponzi-type investment schemes. 1040ezform   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. 1040ezform R. 1040ezform B. 1040ezform 735 (available at www. 1040ezform irs. 1040ezform gov/irb/2009-14_IRB/ar07. 1040ezform html). 1040ezform Revenue Procedure 2009-20, 2009-14 I. 1040ezform R. 1040ezform B. 1040ezform 749 (available at www. 1040ezform irs. 1040ezform gov/irb/2009-14_IRB/ar11. 1040ezform html). 1040ezform Revenue Procedure 2011-58, 2011-50 I. 1040ezform R. 1040ezform B. 1040ezform 847 (available at www. 1040ezform irs. 1040ezform gov/irb/2011-50_IRB/ar11. 1040ezform html). 1040ezform If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. 1040ezform Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. 1040ezform Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. 1040ezform You do not need to complete Appendix A. 1040ezform For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. 1040ezform   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. 1040ezform Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. 1040ezform If you incurred this type of loss, you can choose one of the following ways to deduct the loss. 1040ezform As a casualty loss. 1040ezform As an ordinary loss. 1040ezform As a nonbusiness bad debt. 1040ezform Casualty loss or ordinary loss. 1040ezform   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. 1040ezform The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. 1040ezform If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. 1040ezform However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. 1040ezform Once you make the choice, you cannot change it without permission from the Internal Revenue Service. 1040ezform   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. 1040ezform The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. 1040ezform Your loss is subject to the 2%-of-adjusted-gross-income limit. 1040ezform You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. 1040ezform Nonbusiness bad debt. 1040ezform   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. 1040ezform How to report. 1040ezform   The kind of deduction you choose for your loss on deposits determines how you report your loss. 1040ezform See Table 1. 1040ezform More information. 1040ezform   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. 1040ezform Deducted loss recovered. 1040ezform   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. 1040ezform If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. 1040ezform For more information, see Recoveries in Publication 525. 1040ezform Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. 1040ezform You also must be able to support the amount you take as a deduction. 1040ezform Casualty loss proof. 1040ezform   For a casualty loss, you should be able to show all of the following. 1040ezform The type of casualty (car accident, fire, storm, etc. 1040ezform ) and when it occurred. 1040ezform That the loss was a direct result of the casualty. 1040ezform That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. 1040ezform Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. 1040ezform Theft loss proof. 1040ezform   For a theft loss, you should be able to show all of the following. 1040ezform When you discovered that your property was missing. 1040ezform That your property was stolen. 1040ezform That you were the owner of the property. 1040ezform Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. 1040ezform    It is important that you have records that will prove your deduction. 1040ezform If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. 1040ezform Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. 1040ezform Table 1. 1040ezform Reporting Loss on Deposits IF you choose to report the loss as a(n). 1040ezform . 1040ezform . 1040ezform   THEN report it on. 1040ezform . 1040ezform . 1040ezform casualty loss   Form 4684 and Schedule A  (Form 1040). 1040ezform ordinary loss   Schedule A (Form 1040). 1040ezform nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). 1040ezform Amount of loss. 1040ezform   Figure the amount of your loss using the following steps. 1040ezform Determine your adjusted basis in the property before the casualty or theft. 1040ezform Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. 1040ezform From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. 1040ezform For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. 1040ezform Gain from reimbursement. 1040ezform   If your reimbursement is more than your adjusted basis in the property, you have a gain. 1040ezform This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. 1040ezform If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. 1040ezform See Figuring a Gain , later. 1040ezform Business or income-producing property. 1040ezform   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. 1040ezform Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. 1040ezform   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. 1040ezform   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. 1040ezform Do not claim this loss again as a casualty or theft loss. 1040ezform If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. 1040ezform   The other way is to deduct the loss separately. 1040ezform If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. 1040ezform Reduce the loss by the reimbursement you received. 1040ezform Do not include the reimbursement in gross income. 1040ezform If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. 1040ezform Leased property. 1040ezform   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. 1040ezform Separate computations. 1040ezform   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. 1040ezform Then combine the losses to determine the total loss from that casualty or theft. 1040ezform Exception for personal-use real property. 1040ezform   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. 1040ezform Figure the loss using the smaller of the following. 1040ezform The decrease in FMV of the entire property. 1040ezform The adjusted basis of the entire property. 1040ezform   See Real property under Figuring the Deduction, later. 1040ezform Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. 1040ezform The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. 1040ezform FMV of stolen property. 1040ezform   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. 1040ezform Example. 1040ezform Several years ago, you purchased silver dollars at face value for $150. 1040ezform This is your adjusted basis in the property. 1040ezform Your silver dollars were stolen this year. 1040ezform The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. 1040ezform Your theft loss is $150. 1040ezform Recovered stolen property. 1040ezform   Recovered stolen property is your property that was stolen and later returned to you. 1040ezform If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. 1040ezform Use this amount to refigure your total loss for the year in which the loss was deducted. 1040ezform   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. 1040ezform But report the difference only up to the amount of the loss that reduced your tax. 1040ezform For more information on the amount to report, see Recoveries in Publication 525. 1040ezform Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. 1040ezform However, other measures also can be used to establish certain decreases. 1040ezform See Appraisal and Cost of cleaning up or making repairs , next. 1040ezform Appraisal. 1040ezform   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. 1040ezform The appraiser must recognize the effects of any general market decline that may occur along with the casualty. 1040ezform This information is needed to limit any deduction to the actual loss resulting from damage to the property. 1040ezform   Several factors are important in evaluating the accuracy of an appraisal, including the following. 1040ezform The appraiser's familiarity with your property before and after the casualty or theft. 1040ezform The appraiser's knowledge of sales of comparable property in the area. 1040ezform The appraiser's knowledge of conditions in the area of the casualty. 1040ezform The appraiser's method of appraisal. 1040ezform You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. 1040ezform For more information on disasters, see Disaster Area Losses, later. 1040ezform Cost of cleaning up or making repairs. 1040ezform   The cost of repairing damaged property is not part of a casualty loss. 1040ezform Neither is the cost of cleaning up after a casualty. 1040ezform But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. 1040ezform The repairs are actually made. 1040ezform The repairs are necessary to bring the property back to its condition before the casualty. 1040ezform The amount spent for repairs is not excessive. 1040ezform The repairs take care of the damage only. 1040ezform The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. 1040ezform Landscaping. 1040ezform   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. 1040ezform You may be able to measure your loss by what you spend on the following. 1040ezform Removing destroyed or damaged trees and shrubs, minus any salvage you receive. 1040ezform Pruning and other measures taken to preserve damaged trees and shrubs. 1040ezform Replanting necessary to restore the property to its approximate value before the casualty. 1040ezform Car value. 1040ezform   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. 1040ezform You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. 1040ezform The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. 1040ezform If your car is not listed in the books, determine its value from other sources. 1040ezform A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. 1040ezform Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. 1040ezform Cost of protection. 1040ezform   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. 1040ezform The amount you spend on insurance or to board up your house against a storm is not part of your loss. 1040ezform If the property is business property, these expenses are deductible as business expenses. 1040ezform   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. 1040ezform An example would be the cost of a dike to prevent flooding. 1040ezform Exception. 1040ezform   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). 1040ezform Related expenses. 1040ezform   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. 1040ezform However, they may be deductible as business expenses if the damaged or stolen property is business property. 1040ezform Replacement cost. 1040ezform   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. 1040ezform Example. 1040ezform You bought a new chair 4 years ago for $300. 1040ezform In April, a fire destroyed the chair. 1040ezform You estimate that it would cost $500 to replace it. 1040ezform If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. 1040ezform The chair was not insured. 1040ezform Your loss is $100, the FMV of the chair before the fire. 1040ezform It is not $500, the replacement cost. 1040ezform Sentimental value. 1040ezform   Do not consider sentimental value when determining your loss. 1040ezform If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. 1040ezform Decline in market value of property in or near casualty area. 1040ezform   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. 1040ezform You have a loss only for actual casualty damage to your property. 1040ezform However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. 1040ezform Costs of photographs and appraisals. 1040ezform   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. 1040ezform Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. 1040ezform   Appraisals are used to figure the decrease in FMV because of a casualty or theft. 1040ezform See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. 1040ezform   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. 1040ezform They are expenses in determining your tax liability. 1040ezform You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). 1040ezform Adjusted Basis The measure of your investment in the property you own is its basis. 1040ezform For property you buy, your basis is usually its cost to you. 1040ezform For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. 1040ezform If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. 1040ezform Adjustments to basis. 1040ezform    While you own the property, various events may take place that change your basis. 1040ezform Some events, such as additions or permanent improvements to the property, increase basis. 1040ezform Others, such as earlier casualty losses and depreciation deductions, decrease basis. 1040ezform When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. 1040ezform See Publication 551 for more information on figuring the basis of your property. 1040ezform Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. 1040ezform You do not have a casualty or theft loss to the extent you are reimbursed. 1040ezform If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. 1040ezform You must reduce your loss even if you do not receive payment until a later tax year. 1040ezform See Reimbursement Received After Deducting Loss , later. 1040ezform Failure to file a claim for reimbursement. 1040ezform   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. 1040ezform Otherwise, you cannot deduct this loss as a casualty or theft. 1040ezform The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. 1040ezform Example. 1040ezform You have a car insurance policy with a $1,000 deductible. 1040ezform Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). 1040ezform This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. 1040ezform Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. 1040ezform Other types of reimbursements are discussed next. 1040ezform Also see the Instructions for Form 4684. 1040ezform Employer's emergency disaster fund. 1040ezform   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. 1040ezform Take into consideration only the amount you used to replace your destroyed or damaged property. 1040ezform Example. 1040ezform Your home was extensively damaged by a tornado. 1040ezform Your loss after reimbursement from your insurance company was $10,000. 1040ezform Your employer set up a disaster relief fund for its employees. 1040ezform Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. 1040ezform You received $4,000 from the fund and spent the entire amount on repairs to your home. 1040ezform In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. 1040ezform Your casualty loss before applying the deduction limits (discussed later) is $6,000. 1040ezform Cash gifts. 1040ezform   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. 1040ezform This applies even if you use the money to pay for repairs to property damaged in the disaster. 1040ezform Example. 1040ezform Your home was damaged by a hurricane. 1040ezform Relatives and neighbors made cash gifts to you that were excludable from your income. 1040ezform You used part of the cash gifts to pay for repairs to your home. 1040ezform There were no limits or restrictions on how you could use the cash gifts. 1040ezform It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. 1040ezform Insurance payments for living expenses. 1040ezform   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. 1040ezform You lose the use of your main home because of a casualty. 1040ezform Government authorities do not allow you access to your main home because of a casualty or threat of one. 1040ezform Inclusion in income. 1040ezform   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. 1040ezform Report this amount on Form 1040, line 21. 1040ezform However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. 1040ezform See Qualified disaster relief payments , later, under Disaster Area Losses. 1040ezform   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. 1040ezform Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. 1040ezform Generally, these expenses include the amounts you pay for the following. 1040ezform Renting suitable housing. 1040ezform Transportation. 1040ezform Food. 1040ezform Utilities. 1040ezform Miscellaneous services. 1040ezform Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. 1040ezform Example. 1040ezform As a result of a fire, you vacated your apartment for a month and moved to a motel. 1040ezform You normally pay $525 a month for rent. 1040ezform None was charged for the month the apartment was vacated. 1040ezform Your motel rent for this month was $1,200. 1040ezform You normally pay $200 a month for food. 1040ezform Your food expenses for the month you lived in the motel were $400. 1040ezform You received $1,100 from your insurance company to cover your living expenses. 1040ezform You determine the payment you must include in income as follows. 1040ezform 1. 1040ezform Insurance payment for living expenses $1,100 2. 1040ezform Actual expenses during the month you are unable to use your home because of the fire $1,600   3. 1040ezform Normal living expenses 725   4. 1040ezform Temporary increase in living expenses: Subtract line 3  from line 2 875 5. 1040ezform Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. 1040ezform   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. 1040ezform Example. 1040ezform Your main home was destroyed by a tornado in August 2011. 1040ezform You regained use of your home in November 2012. 1040ezform The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. 1040ezform You include this amount in income on your 2012 Form 1040. 1040ezform If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. 1040ezform Disaster relief. 1040ezform   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. 1040ezform Table 2. 1040ezform Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. 1040ezform Apply this rule to personal-use property after you have figured the amount of your loss. 1040ezform You must reduce your total casualty or theft loss by 10% of your adjusted gross income. 1040ezform Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). 1040ezform You must reduce your total casualty or theft loss by 2% of your adjusted gross income. 1040ezform Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. 1040ezform Single Event Apply this rule only once, even if many pieces of property are affected. 1040ezform Apply this rule only once, even if many pieces of property are affected. 1040ezform Apply this rule only once, even if many pieces of property are affected. 1040ezform More Than One Event Apply to the loss from each event. 1040ezform Apply to the total of all your losses from all events. 1040ezform Apply to the total of all your losses from all events. 1040ezform More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. 1040ezform Apply separately to each person. 1040ezform Apply separately to each person. 1040ezform Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. 1040ezform Apply as if you were one person. 1040ezform Apply as if you were one person. 1040ezform Filing Separate Return Apply separately to each spouse. 1040ezform Apply separately to each spouse. 1040ezform Apply separately to each spouse. 1040ezform More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. 1040ezform Apply separately to each owner of jointly owned property. 1040ezform Apply separately to each owner of jointly owned property. 1040ezform    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. 1040ezform For more information, see Qualified disaster relief payments under Disaster Area Losses, later. 1040ezform   Disaster unemployment assistance payments are unemployment benefits that are taxable. 1040ezform   Generally, disaster relief grants received under the Robert T. 1040ezform Stafford Disaster Relief and Emergency Assistance Act are not included in your income. 1040ezform See Federal disaster relief grants , later, under Disaster Area Losses. 1040ezform Loan proceeds. 1040ezform   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. 1040ezform If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. 1040ezform Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. 1040ezform This section explains the adjustment you may have to make. 1040ezform Actual reimbursement less than expected. 1040ezform   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. 1040ezform Example. 1040ezform Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. 1040ezform The accident was due to the negligence of the other driver. 1040ezform At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. 1040ezform You did not have a deductible loss in 2012. 1040ezform In January 2013, the court awards you a judgment of $2,000. 1040ezform However, in July it becomes apparent that you will be unable to collect any amount from the other driver. 1040ezform Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). 1040ezform Actual reimbursement more than expected. 1040ezform   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. 1040ezform However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. 1040ezform You do not refigure your tax for the year you claimed the deduction. 1040ezform See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. 1040ezform Example. 1040ezform In 2012, a hurricane destroyed your motorboat. 1040ezform Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. 1040ezform You did not itemize deductions on your 2012 return, so you could not deduct the loss. 1040ezform When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. 1040ezform This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. 1040ezform The loss did not reduce your tax. 1040ezform    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. 1040ezform If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. 1040ezform Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. 1040ezform You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. 1040ezform Actual reimbursement same as expected. 1040ezform   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. 1040ezform Example. 1040ezform In December 2013, you had a collision while driving your personal car. 1040ezform Repairs to the car cost $950. 1040ezform You had $100 deductible collision insurance. 1040ezform Your insurance company agreed to reimburse you for the rest of the damage. 1040ezform Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. 1040ezform Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. 1040ezform When you receive the $850 from the insurance company in 2014, do not report it as income. 1040ezform Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. 1040ezform The deduction for casualty and theft losses of employee property and personal-use property is limited. 1040ezform A loss on employee property is subject to the 2% rule, discussed next. 1040ezform With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. 1040ezform The 2%, $100, and 10% rules are also summarized in Table 2 . 1040ezform Losses on business property (other than employee property) and income-producing property are not subject to these rules. 1040ezform However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. 1040ezform See the Instructions for Form 4684, Section B. 1040ezform If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. 1040ezform 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. 1040ezform Employee property is property used in performing services as an employee. 1040ezform $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. 1040ezform This reduction applies to each total casualty or theft loss. 1040ezform It does not matter how many pieces of property are involved in an event. 1040ezform Only a single $100 reduction applies. 1040ezform Example. 1040ezform You have $750 deductible collision insurance on your car. 1040ezform The car is damaged in a collision. 1040ezform The insurance company pays you for the damage minus the $750 deductible. 1040ezform The amount of the casualty loss is based solely on the deductible. 1040ezform The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. 1040ezform Single event. 1040ezform   Generally, events closely related in origin cause a single casualty. 1040ezform It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. 1040ezform A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. 1040ezform Example 1. 1040ezform A thunderstorm destroyed your pleasure boat. 1040ezform You also lost some boating equipment in the storm. 1040ezform Your loss was $5,000 on the boat and $1,200 on the equipment. 1040ezform Your insurance company reimbursed you $4,500 for the damage to your boat. 1040ezform You had no insurance coverage on the equipment. 1040ezform Your casualty loss is from a single event and the $100 rule applies once. 1040ezform Figure your loss before applying the 10% rule (discussed later) as follows. 1040ezform     Boat Equipment 1. 1040ezform Loss $5,000 $1,200 2. 1040ezform Subtract insurance 4,500 -0- 3. 1040ezform Loss after reimbursement $ 500 $1,200 4. 1040ezform Total loss $1,700 5. 1040ezform Subtract $100 100 6. 1040ezform Loss before 10% rule $1,600 Example 2. 1040ezform Thieves broke into your home in January and stole a ring and a fur coat. 1040ezform You had a loss of $200 on the ring and $700 on the coat. 1040ezform This is a single theft. 1040ezform The $100 rule applies to the total $900 loss. 1040ezform Example 3. 1040ezform In September, hurricane winds blew the roof off your home. 1040ezform Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. 1040ezform This is considered a single casualty. 1040ezform The $100 rule is applied to your total loss from the flood waters and the wind. 1040ezform More than one loss. 1040ezform   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. 1040ezform Example. 1040ezform Your family car was damaged in an accident in January. 1040ezform Your loss after the insurance reimbursement was $75. 1040ezform In February, your car was damaged in another accident. 1040ezform This time your loss after the insurance reimbursement was $90. 1040ezform Apply the $100 rule to each separate casualty loss. 1040ezform Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. 1040ezform More than one person. 1040ezform   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. 1040ezform Example. 1040ezform A fire damaged your house and also damaged the personal property of your house guest. 1040ezform You must reduce your loss by $100. 1040ezform Your house guest must reduce his or her loss by $100. 1040ezform Married taxpayers. 1040ezform   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. 1040ezform It does not matter whether you own the property jointly or separately. 1040ezform   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. 1040ezform This is true even if you own the property jointly. 1040ezform If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. 1040ezform   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. 1040ezform Neither of you can figure your deduction on the entire loss on a separate return. 1040ezform Each of you must reduce the loss by $100. 1040ezform More than one owner. 1040ezform   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. 1040ezform For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. 1040ezform 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. 1040ezform Apply this rule after you reduce each loss by $100. 1040ezform For more information, see the Form 4684 instructions. 1040ezform If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. 1040ezform Example. 1040ezform In June, you discovered that your house had been burglarized. 1040ezform Your loss after insurance reimbursement was $2,000. 1040ezform Your adjusted gross income for the year you discovered the theft is $29,500. 1040ezform Figure your theft loss as follows. 1040ezform 1. 1040ezform Loss after insurance $2,000 2. 1040ezform Subtract $100 100 3. 1040ezform Loss after $100 rule $1,900 4. 1040ezform Subtract 10% of $29,500 AGI $2,950 5. 1040ezform Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). 1040ezform More than one loss. 1040ezform   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. 1040ezform Then you must reduce the total of all your losses by 10% of your adjusted gross income. 1040ezform Example. 1040ezform In March, you had a car accident that totally destroyed your car. 1040ezform You did not have collision insurance on your car, so you did not receive any insurance reimbursement. 1040ezform Your loss on the car was $1,800. 1040ezform In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. 1040ezform Your loss on the basement items after reimbursement was $2,100. 1040ezform Your adjusted gross income for the year that the accident and fire occurred is $25,000. 1040ezform You figure your casualty loss deduction as follows. 1040ezform     Car Basement 1. 1040ezform Loss $1,800 $2,100 2. 1040ezform Subtract $100 per incident 100 100 3. 1040ezform Loss after $100 rule $1,700 $2,000 4. 1040ezform Total loss $3,700 5. 1040ezform Subtract 10% of $25,000 AGI 2,500 6. 1040ezform Casualty loss deduction $1,200 Married taxpayers. 1040ezform   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. 1040ezform It does not matter if you own the property jointly or separately. 1040ezform   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. 1040ezform More than one owner. 1040ezform   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. 1040ezform Gains and losses. 1040ezform   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. 1040ezform Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. 1040ezform Casualty or theft gains do not include gains you choose to postpone. 1040ezform See Postponement of Gain, later. 1040ezform Losses more than gains. 1040ezform   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. 1040ezform The rest, if any, is your deductible loss from personal-use property. 1040ezform Example. 1040ezform Your theft loss after reducing it by reimbursements and by $100 is $2,700. 1040ezform Your casualty gain is $700. 1040ezform Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. 1040ezform Gains more than losses. 1040ezform   If your recognized gains are more than your losses, subtract your losses from your gains. 1040ezform The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). 1040ezform The 10% rule does not apply to your gains. 1040ezform Example. 1040ezform Your theft loss is $600 after reducing it by reimbursements and by $100. 1040ezform Your casualty gain is $1,600. 1040ezform Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). 1040ezform More information. 1040ezform   For information on how to figure recognized gains, see Figuring a Gain , later. 1040ezform Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. 1040ezform However, a special rule applies to real property you own for personal use. 1040ezform Real property. 1040ezform   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. 1040ezform Example 1. 1040ezform In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. 1040ezform (Your land was not damaged. 1040ezform ) This was your only casualty or theft loss for the year. 1040ezform The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). 1040ezform The FMV immediately after the fire was $35,000 (value of the land). 1040ezform You collected $130,000 from the insurance company. 1040ezform Your adjusted gross income for the year the fire occurred is $80,000. 1040ezform Your deduction for the casualty loss is $6,700, figured in the following manner. 1040ezform 1. 1040ezform Adjusted basis of the entire property (cost in this example) $144,800 2. 1040ezform FMV of entire property  before fire $180,000 3. 1040ezform FMV of entire property after fire 35,000 4. 1040ezform Decrease in FMV of entire property (line 2 − line 3) $145,000 5. 1040ezform Loss (smaller of line 1 or line 4) $144,800 6. 1040ezform Subtract insurance 130,000 7. 1040ezform Loss after reimbursement $14,800 8. 1040ezform Subtract $100 100 9. 1040ezform Loss after $100 rule $14,700 10. 1040ezform Subtract 10% of $80,000 AGI 8,000 11. 1040ezform Casualty loss deduction $ 6,700 Example 2. 1040ezform You bought your home a few years ago. 1040ezform You paid $150,000 ($10,000 for the land and $140,000 for the house). 1040ezform You also spent an additional $2,000 for landscaping. 1040ezform This year a fire destroyed your home. 1040ezform The fire also damaged the shrubbery and trees in your yard. 1040ezform The fire was your only casualty or theft loss this year. 1040ezform Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. 1040ezform Shortly after the fire, the insurance company paid you $95,000 for the loss. 1040ezform Your adjusted gross income for this year is $70,000. 1040ezform You figure your casualty loss deduction as follows. 1040ezform 1. 1040ezform Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. 1040ezform FMV of entire property  before fire $175,000 3. 1040ezform FMV of entire property after fire 50,000 4. 1040ezform Decrease in FMV of entire property (line 2 − line 3) $125,000 5. 1040ezform Loss (smaller of line 1 or line 4) $125,000 6. 1040ezform Subtract insurance 95,000 7. 1040ezform Loss after reimbursement $30,000 8. 1040ezform Subtract $100 100 9. 1040ezform Loss after $100 rule $29,900 10. 1040ezform Subtract 10% of $70,000 AGI 7,000 11. 1040ezform Casualty loss deduction $ 22,900 Personal property. 1040ezform   Personal property is any property that is not real property. 1040ezform If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. 1040ezform Then combine these separate losses to figure the total loss. 1040ezform Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. 1040ezform Example 1. 1040ezform In August, a storm destroyed your pleasure boat, which cost $18,500. 1040ezform This was your only casualty or theft loss for the year. 1040ezform Its FMV immediately before the storm was $17,000. 1040ezform You had no insurance, but were able to salvage the motor of the boat and sell it for $200. 1040ezform Your adjusted gross income for the year the casualty occurred is $70,000. 1040ezform Although the motor was sold separately, it is part of the boat and not a separate item of property. 1040ezform You figure your casualty loss deduction as follows. 1040ezform 1. 1040ezform Adjusted basis (cost in this example) $18,500 2. 1040ezform FMV before storm $17,000 3. 1040ezform FMV after storm 200 4. 1040ezform Decrease in FMV  (line 2 − line 3) $16,800 5. 1040ezform Loss (smaller of line 1 or line 4) $16,800 6. 1040ezform Subtract insurance -0- 7. 1040ezform Loss after reimbursement $16,800 8. 1040ezform Subtract $100 100 9. 1040ezform Loss after $100 rule $16,700 10. 1040ezform Subtract 10% of $70,000 AGI 7,000 11. 1040ezform Casualty loss deduction $ 9,700 Example 2. 1040ezform In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. 1040ezform You had bought the car for $30,000. 1040ezform The FMV of the car just before the accident was $17,500. 1040ezform Its FMV just after the accident was $180 (scrap value). 1040ezform Your insurance company reimbursed you $16,000. 1040ezform Your watch was not insured. 1040ezform You had purchased it for $250. 1040ezform Its FMV just before the accident was $500. 1040ezform Your adjusted gross income for the year the accident occurred is $97,000. 1040ezform Your casualty loss deduction is zero, figured as follows. 1040ezform     Car Watch 1. 1040ezform Adjusted basis (cost) $30,000 $250 2. 1040ezform FMV before accident $17,500 $500 3. 1040ezform FMV after accident 180 -0- 4. 1040ezform Decrease in FMV (line 2 − line 3) $17,320 $500 5. 1040ezform Loss (smaller of line 1 or line 4) $17,320 $250 6. 1040ezform Subtract insurance 16,000 -0- 7. 1040ezform Loss after reimbursement $1,320 $250 8. 1040ezform Total loss $1,570 9. 1040ezform Subtract $100 100 10. 1040ezform Loss after $100 rule $1,470 11. 1040ezform Subtract 10% of $97,000 AGI 9,700 12. 1040ezform Casualty loss deduction $ -0- Both real and personal properties. 1040ezform   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. 1040ezform However, you apply a single $100 reduction to the total loss. 1040ezform Then, you apply the 10% rule to figure the casualty loss deduction. 1040ezform Example. 1040ezform In July, a hurricane damaged your home, which cost you $164,000 including land. 1040ezform The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. 1040ezform Your household furnishings were also damaged. 1040ezform You separately figured the loss on each damaged household item and arrived at a total loss of $600. 1040ezform You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. 1040ezform Your adjusted gross income for the year the hurricane occurred is $65,000. 1040ezform You figure your casualty loss deduction from the hurricane in the following manner. 1040ezform 1. 1040ezform Adjusted basis of real property (cost in this example) $164,000 2. 1040ezform FMV of real property before hurricane $170,000 3. 1040ezform FMV of real property after hurricane 100,000 4. 1040ezform Decrease in FMV of real property (line 2 − line 3) $70,000 5. 1040ezform Loss on real property (smaller of line 1 or line 4) $70,000 6. 1040ezform Subtract insurance 50,000 7. 1040ezform Loss on real property after reimbursement $20,000 8. 1040ezform Loss on furnishings $600 9. 1040ezform Subtract insurance -0- 10. 1040ezform Loss on furnishings after reimbursement $600 11. 1040ezform Total loss (line 7 plus line 10) $20,600 12. 1040ezform Subtract $100 100 13. 1040ezform Loss after $100 rule $20,500 14. 1040ezform Subtract 10% of $65,000 AGI 6,500 15. 1040ezform Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. 1040ezform   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. 1040ezform You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. 1040ezform When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. 1040ezform The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. 1040ezform Example. 1040ezform You own a building that you constructed on leased land. 1040ezform You use half of the building for your business and you live in the other half. 1040ezform The cost of the building was $400,000. 1040ezform You made no further improvements or additions to it. 1040ezform A flood in March damaged the entire building. 1040ezform The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. 1040ezform Your insurance company reimbursed you $40,000 for the flood damage. 1040ezform Depreciation on the business part of the building before the flood totaled $24,000. 1040ezform Your adjusted gross income for the year the flood occurred is $125,000. 1040ezform You have a deductible business casualty loss of $10,000. 1040ezform You do not have a deductible personal casualty loss because of the 10% rule. 1040ezform You figure your loss as follows. 1040ezform     Business   Personal     Part   Part 1. 1040ezform Cost (total $400,000) $200,000   $200,000 2. 1040ezform Subtract depreciation 24,000   -0- 3. 1040ezform Adjusted basis $176,000   $200,000 4. 1040ezform FMV before flood (total $380,000) $190,000   $190,000 5. 1040ezform FMV after flood (total $320,000) 160,000   160,000 6. 1040ezform Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. 1040ezform Loss (smaller of line 3 or line 6) $30,000   $30,000 8. 1040ezform Subtract insurance 20,000   20,000 9. 1040ezform Loss after reimbursement $10,000   $10,000 10. 1040ezform Subtract $100 on personal-use property -0-   100 11. 1040ezform Loss after $100 rule $10,000   $9,900 12. 1040ezform Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. 1040ezform Deductible business loss $10,000     14. 1040ezform Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. 1040ezform Your gain is figured as follows. 1040ezform The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. 1040ezform See Adjusted Basis , earlier, for information on adjusted basis. 1040ezform Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. 1040ezform Amount you receive. 1040ezform   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. 1040ezform It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. 1040ezform Example. 1040ezform A hurricane destroyed your personal residence and the insurance company awarded you $145,000. 1040ezform You received $140,000 in cash. 1040ezform The remaining $5,000 was paid directly to the holder of a mortgage on the property. 1040ezform The amount you received includes the $5,000 reimbursement paid on the mortgage. 1040ezform Main home destroyed. 1040ezform   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. 1040ezform You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). 1040ezform To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. 1040ezform For information on this exclusion, see Publication 523. 1040ezform If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. 1040ezform See Postponement of Gain , later. 1040ezform Reporting a gain. 1040ezform   You generally must report your gain as income in the year you receive the reimbursement. 1040ezform However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. 1040ezform   For information on how to report a gain, see How To Report Gains and Losses , later. 1040ezform    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. 1040ezform See 10% Rule under Deduction Limits, earlier. 1040ezform Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. 1040ezform Your basis in the new property is generally the same as your adjusted basis in the property it replaces. 1040ezform You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. 1040ezform However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. 1040ezform You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. 1040ezform See Controlling interest in a corporation , later. 1040ezform If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. 1040ezform To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. 1040ezform If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. 1040ezform Example. 1040ezform In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. 1040ezform You made no further improvements or additions to it. 1040ezform When a storm destroyed the cottage this January, the cottage was worth $250,000. 1040ezform You received $146,000 from the insurance company in March. 1040ezform You had a gain of $128,000 ($146,000 − $18,000). 1040ezform You spent $144,000 to rebuild the cottage. 1040ezform Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. 1040ezform Buying replacement property from a related person. 1040ezform   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). 1040ezform This rule applies to the following taxpayers. 1040ezform C corporations. 1040ezform Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. 1040ezform All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. 1040ezform For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. 1040ezform If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. 1040ezform If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. 1040ezform Exception. 1040ezform   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. 1040ezform Related persons. 1040ezform   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. 1040ezform For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. 1040ezform Death of a taxpayer. 1040ezform   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. 1040ezform The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. 1040ezform Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. 1040ezform Property you acquire as a gift or inheritance does not qualify. 1040ezform You do not have to use the same funds you receive as
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1040ezform 3. 1040ezform   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. 1040ezform Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. 1040ezform Its treatment as ordinary or capital is determined under rules for section 1231 transactions. 1040ezform When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. 1040ezform Any remaining gain is a section 1231 gain. 1040ezform Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. 1040ezform Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). 1040ezform Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. 1040ezform If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). 1040ezform Do not take that gain into account as section 1231 gain. 1040ezform Section 1231 transactions. 1040ezform   The following transactions result in gain or loss subject to section 1231 treatment. 1040ezform Sales or exchanges of real property or depreciable personal property. 1040ezform This property must be used in a trade or business and held longer than 1 year. 1040ezform Generally, property held for the production of rents or royalties is considered to be used in a trade or business. 1040ezform Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). 1040ezform Sales or exchanges of leaseholds. 1040ezform The leasehold must be used in a trade or business and held longer than 1 year. 1040ezform Sales or exchanges of cattle and horses. 1040ezform The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. 1040ezform Sales or exchanges of other livestock. 1040ezform This livestock does not include poultry. 1040ezform It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. 1040ezform Sales or exchanges of unharvested crops. 1040ezform The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. 1040ezform You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). 1040ezform Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. 1040ezform Cutting of timber or disposal of timber, coal, or iron ore. 1040ezform The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. 1040ezform Condemnations. 1040ezform The condemned property must have been held longer than 1 year. 1040ezform It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. 1040ezform It cannot be property held for personal use. 1040ezform Casualties and thefts. 1040ezform The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). 1040ezform You must have held the property longer than 1 year. 1040ezform However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. 1040ezform For more information on casualties and thefts, see Publication 547. 1040ezform Property for sale to customers. 1040ezform   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. 1040ezform If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. 1040ezform Example. 1040ezform You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. 1040ezform Customers make deposits on the reels, which you refund if the reels are returned within a year. 1040ezform If they are not returned, you keep each deposit as the agreed-upon sales price. 1040ezform Most reels are returned within the 1-year period. 1040ezform You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. 1040ezform Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. 1040ezform Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. 1040ezform Copyrights. 1040ezform    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). 1040ezform The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. 1040ezform Treatment as ordinary or capital. 1040ezform   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. 1040ezform If you have a net section 1231 loss, it is ordinary loss. 1040ezform If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. 1040ezform The rest, if any, is long-term capital gain. 1040ezform Nonrecaptured section 1231 losses. 1040ezform   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. 1040ezform Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. 1040ezform These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. 1040ezform Example. 1040ezform In 2013, Ben has a $2,000 net section 1231 gain. 1040ezform To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. 1040ezform From 2008 through 2012 he had the following section 1231 gains and losses. 1040ezform Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. 1040ezform 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. 1040ezform To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. 1040ezform This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. 1040ezform On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. 1040ezform Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. 1040ezform Whether the adjusted basis was figured using depreciation or amortization another person claimed. 1040ezform Corporate distributions. 1040ezform   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. 1040ezform General asset accounts. 1040ezform   Different rules apply to dispositions of property you depreciated using a general asset account. 1040ezform For information on these rules, see Publication 946. 1040ezform Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. 1040ezform See Gain Treated as Ordinary Income, later. 1040ezform Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. 1040ezform See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. 1040ezform Section 1245 property defined. 1040ezform   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. 1040ezform Personal property (either tangible or intangible). 1040ezform Other tangible property (except buildings and their structural components) used as any of the following. 1040ezform See Buildings and structural components below. 1040ezform An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. 1040ezform A research facility in any of the activities in (a). 1040ezform A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). 1040ezform That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. 1040ezform Amortization of certified pollution control facilities. 1040ezform The section 179 expense deduction. 1040ezform Deduction for clean-fuel vehicles and certain refueling property. 1040ezform Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. 1040ezform Deduction for certain qualified refinery property. 1040ezform Deduction for qualified energy efficient commercial building property. 1040ezform Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. 1040ezform (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). 1040ezform ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). 1040ezform Expenditures to remove architectural and transportation barriers to the handicapped and elderly. 1040ezform Deduction for qualified tertiary injectant expenses. 1040ezform Certain reforestation expenditures. 1040ezform Deduction for election to expense qualified advanced mine safety equipment property. 1040ezform Single purpose agricultural (livestock) or horticultural structures. 1040ezform Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. 1040ezform Any railroad grading or tunnel bore. 1040ezform Buildings and structural components. 1040ezform   Section 1245 property does not include buildings and structural components. 1040ezform The term building includes a house, barn, warehouse, or garage. 1040ezform The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. 1040ezform   Do not treat a structure that is essentially machinery or equipment as a building or structural component. 1040ezform Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. 1040ezform   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. 1040ezform Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. 1040ezform Facility for bulk storage of fungible commodities. 1040ezform   This term includes oil or gas storage tanks and grain storage bins. 1040ezform Bulk storage means the storage of a commodity in a large mass before it is used. 1040ezform For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. 1040ezform To be fungible, a commodity must be such that one part may be used in place of another. 1040ezform   Stored materials that vary in composition, size, and weight are not fungible. 1040ezform Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. 1040ezform For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. 1040ezform Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. 1040ezform The depreciation and amortization allowed or allowable on the property. 1040ezform The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). 1040ezform A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. 1040ezform For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. 1040ezform See Gifts and Transfers at Death, later. 1040ezform Use Part III of Form 4797 to figure the ordinary income part of the gain. 1040ezform Depreciation taken on other property or taken by other taxpayers. 1040ezform   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. 1040ezform Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. 1040ezform Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). 1040ezform Depreciation and amortization. 1040ezform   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. 1040ezform Ordinary depreciation deductions. 1040ezform Any special depreciation allowance you claimed. 1040ezform Amortization deductions for all the following costs. 1040ezform Acquiring a lease. 1040ezform Lessee improvements. 1040ezform Certified pollution control facilities. 1040ezform Certain reforestation expenses. 1040ezform Section 197 intangibles. 1040ezform Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. 1040ezform Franchises, trademarks, and trade names acquired before August 11, 1993. 1040ezform The section 179 deduction. 1040ezform Deductions for all the following costs. 1040ezform Removing barriers to the disabled and the elderly. 1040ezform Tertiary injectant expenses. 1040ezform Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). 1040ezform Environmental cleanup costs. 1040ezform Certain reforestation expenses. 1040ezform Qualified disaster expenses. 1040ezform Any basis reduction for the investment credit (minus any basis increase for credit recapture). 1040ezform Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). 1040ezform Example. 1040ezform You file your returns on a calendar year basis. 1040ezform In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. 1040ezform You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. 1040ezform You did not take the section 179 deduction. 1040ezform You sold the truck in May 2013 for $7,000. 1040ezform The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). 1040ezform Figure the gain treated as ordinary income as follows. 1040ezform 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. 1040ezform   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. 1040ezform   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. 1040ezform Depreciation allowed or allowable. 1040ezform   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. 1040ezform However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. 1040ezform If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. 1040ezform   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. 1040ezform Multiple asset accounts. 1040ezform   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. 1040ezform Example. 1040ezform In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. 1040ezform All of the depreciation was recorded in a single depreciation account. 1040ezform After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. 1040ezform You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. 1040ezform However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. 1040ezform Normal retirement. 1040ezform   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. 1040ezform Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. 1040ezform To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. 1040ezform Section 1250 property defined. 1040ezform   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. 1040ezform It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. 1040ezform A fee simple interest in land is not included because it is not depreciable. 1040ezform   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. 1040ezform Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. 1040ezform For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. 1040ezform For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. 1040ezform If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. 1040ezform You will not have additional depreciation if any of the following conditions apply to the property disposed of. 1040ezform You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. 1040ezform In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. 1040ezform The property was residential low-income rental property you held for 162/3 years or longer. 1040ezform For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. 1040ezform You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. 1040ezform The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. 1040ezform These properties are depreciated using the straight line method. 1040ezform In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. 1040ezform Depreciation taken by other taxpayers or on other property. 1040ezform   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). 1040ezform Example. 1040ezform Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. 1040ezform Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. 1040ezform On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. 1040ezform At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). 1040ezform Depreciation allowed or allowable. 1040ezform   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. 1040ezform If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. 1040ezform Retired or demolished property. 1040ezform   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. 1040ezform Example. 1040ezform A wing of your building is totally destroyed by fire. 1040ezform The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. 1040ezform Figuring straight line depreciation. 1040ezform   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. 1040ezform If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. 1040ezform   Salvage value and useful life are not used for the ACRS method of depreciation. 1040ezform Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. 1040ezform   The straight line method is applied without any basis reduction for the investment credit. 1040ezform Property held by lessee. 1040ezform   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. 1040ezform This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. 1040ezform The same rule applies to the cost of acquiring a lease. 1040ezform   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. 1040ezform However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. 1040ezform Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. 1040ezform The percentages for these types of real property are as follows. 1040ezform Nonresidential real property. 1040ezform   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. 1040ezform For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. 1040ezform Residential rental property. 1040ezform   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. 1040ezform The percentage for periods before 1976 is zero. 1040ezform Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. 1040ezform Low-income housing. 1040ezform    Low-income housing includes all the following types of residential rental property. 1040ezform Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. 1040ezform Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. 1040ezform Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. 1040ezform Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. 1040ezform   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. 1040ezform If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. 1040ezform Foreclosure. 1040ezform   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. 1040ezform Example. 1040ezform On June 1, 2001, you acquired low-income housing property. 1040ezform On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. 1040ezform The property qualifies for a reduced applicable percentage because it was held more than 100 full months. 1040ezform The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. 1040ezform Therefore, 70% of the additional depreciation is treated as ordinary income. 1040ezform Holding period. 1040ezform   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. 1040ezform For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. 1040ezform If you sold it on January 2, 2013, the holding period is exactly 192 full months. 1040ezform The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. 1040ezform Holding period for constructed, reconstructed, or erected property. 1040ezform   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. 1040ezform Property acquired by gift or received in a tax-free transfer. 1040ezform   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. 1040ezform   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. 1040ezform See Low-Income Housing With Two or More Elements, next. 1040ezform Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. 1040ezform The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. 1040ezform The following are the types of separate elements. 1040ezform A separate improvement (defined below). 1040ezform The basic section 1250 property plus improvements not qualifying as separate improvements. 1040ezform The units placed in service at different times before all the section 1250 property is finished. 1040ezform For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. 1040ezform As a result, the apartment house consists of three separate elements. 1040ezform The 36-month test for separate improvements. 1040ezform   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. 1040ezform Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. 1040ezform Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). 1040ezform $5,000. 1040ezform The 1-year test. 1040ezform   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. 1040ezform The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. 1040ezform In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. 1040ezform Example. 1040ezform The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. 1040ezform During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. 1040ezform The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. 1040ezform However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. 1040ezform Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. 1040ezform Addition to the capital account. 1040ezform   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. 1040ezform   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. 1040ezform For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. 1040ezform The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. 1040ezform The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. 1040ezform   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. 1040ezform If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. 1040ezform Unadjusted basis. 1040ezform   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. 1040ezform However, the cost of components retired before that date is not included in the unadjusted basis. 1040ezform Holding period. 1040ezform   Use the following guidelines for figuring the applicable percentage for property with two or more elements. 1040ezform The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. 1040ezform The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. 1040ezform The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. 1040ezform   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. 1040ezform Use the first day of a calendar month that is closest to the middle of the tax year. 1040ezform If there are two first days of a month that are equally close to the middle of the year, use the earlier date. 1040ezform Figuring ordinary income attributable to each separate element. 1040ezform   Figure ordinary income attributable to each separate element as follows. 1040ezform   Step 1. 1040ezform Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. 1040ezform   Step 2. 1040ezform Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). 1040ezform   Step 3. 1040ezform Multiply the result in Step 2 by the applicable percentage for the element. 1040ezform Example. 1040ezform You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. 1040ezform The property consisted of four elements (W, X, Y, and Z). 1040ezform Step 1. 1040ezform The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. 1040ezform The sum of the additional depreciation for all the elements is $24,000. 1040ezform Step 2. 1040ezform The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. 1040ezform Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). 1040ezform $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. 1040ezform Step 3. 1040ezform The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. 1040ezform From these facts, the sum of the ordinary income for each element is figured as follows. 1040ezform   Step 1 Step 2 Step 3 Ordinary Income W . 1040ezform 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . 1040ezform 25 5,000 92% 4,600 Z . 1040ezform 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. 1040ezform In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. 1040ezform In any other disposition of the property, figure the fair market value that is more than the adjusted basis. 1040ezform Figure the additional depreciation for the periods after 1975. 1040ezform Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. 1040ezform Stop here if this is residential rental property or if (2) is equal to or more than (1). 1040ezform This is the gain treated as ordinary income because of additional depreciation. 1040ezform Subtract (2) from (1). 1040ezform Figure the additional depreciation for periods after 1969 but before 1976. 1040ezform Add the lesser of (4) or (5) to the result in (3). 1040ezform This is the gain treated as ordinary income because of additional depreciation. 1040ezform A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. 1040ezform Use Form 4797, Part III, to figure the ordinary income part of the gain. 1040ezform Corporations. 1040ezform   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. 1040ezform The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. 1040ezform Report this additional ordinary income on Form 4797, Part III, line 26 (f). 1040ezform Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. 1040ezform This applies even if no payments are received in that year. 1040ezform If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. 1040ezform For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. 1040ezform If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. 1040ezform To do this, allocate the selling price and the payments you receive in the year of sale to each asset. 1040ezform Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. 1040ezform For a detailed discussion of installment sales, see Publication 537. 1040ezform Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. 1040ezform However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. 1040ezform For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. 1040ezform See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. 1040ezform Part gift and part sale or exchange. 1040ezform   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. 1040ezform If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. 1040ezform However, see Bargain sale to charity, later. 1040ezform Example. 1040ezform You transferred depreciable personal property to your son for $20,000. 1040ezform When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. 1040ezform You took depreciation of $30,000. 1040ezform You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. 1040ezform You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. 1040ezform You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. 1040ezform Gift to charitable organization. 1040ezform   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. 1040ezform Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. 1040ezform   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. 1040ezform For more information, see Giving Property That Has Increased in Value in Publication 526. 1040ezform Bargain sale to charity. 1040ezform   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. 1040ezform First, figure the ordinary income as if you had sold the property at its fair market value. 1040ezform Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. 1040ezform See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. 1040ezform Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. 1040ezform Example. 1040ezform You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. 1040ezform Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. 1040ezform If you had sold the property at its fair market value, your ordinary income would have been $5,000. 1040ezform Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). 1040ezform Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. 1040ezform For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. 1040ezform However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. 1040ezform Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. 1040ezform Example 1. 1040ezform Janet Smith owned depreciable property that, upon her death, was inherited by her son. 1040ezform No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. 1040ezform However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. 1040ezform Example 2. 1040ezform The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. 1040ezform If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. 1040ezform Ordinary income from depreciation must be reported by the trust on the transfer. 1040ezform Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. 1040ezform For information on like-kind exchanges and involuntary conversions, see chapter 1. 1040ezform Depreciable personal property. 1040ezform   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. 1040ezform The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. 1040ezform The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. 1040ezform Example 1. 1040ezform You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. 1040ezform The old machine cost you $5,000 two years ago. 1040ezform You took depreciation deductions of $3,950. 1040ezform Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. 1040ezform Example 2. 1040ezform You bought office machinery for $1,500 two years ago and deducted $780 depreciation. 1040ezform This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). 1040ezform You choose to postpone reporting gain, but replacement machinery cost you only $1,000. 1040ezform Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. 1040ezform All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. 1040ezform Example 3. 1040ezform A fire destroyed office machinery you bought for $116,000. 1040ezform The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. 1040ezform You received a $117,000 insurance payment, realizing a gain of $92,640. 1040ezform You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. 1040ezform $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. 1040ezform The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. 1040ezform The amount you must report as ordinary income on the transaction is $12,000, figured as follows. 1040ezform 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. 1040ezform Depreciable real property. 1040ezform   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. 1040ezform The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. 1040ezform The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. 1040ezform   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. 1040ezform Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. 1040ezform Example. 1040ezform The state paid you $116,000 when it condemned your depreciable real property for public use. 1040ezform You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). 1040ezform You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. 1040ezform You choose to postpone reporting the gain. 1040ezform If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. 1040ezform The ordinary income to be reported is $6,000, which is the greater of the following amounts. 1040ezform The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. 1040ezform The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. 1040ezform   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. 1040ezform Basis of property acquired. 1040ezform   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. 1040ezform   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). 1040ezform However, if you acquired both depreciable real property and other property, allocate the total basis as follows. 1040ezform Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. 1040ezform Add the fair market value (or cost) of the other property acquired to the result in (1). 1040ezform Divide the result in (1) by the result in (2). 1040ezform Multiply the total basis by the result in (3). 1040ezform This is the basis of the depreciable real property acquired. 1040ezform If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). 1040ezform Subtract the result in (4) from the total basis. 1040ezform This is the basis of the other property acquired. 1040ezform If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). 1040ezform Example 1. 1040ezform In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. 1040ezform The property's adjusted basis was $38,400, with additional depreciation of $14,932. 1040ezform On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. 1040ezform Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). 1040ezform You chose to postpone reporting the gain under the involuntary conversion rules. 1040ezform Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. 1040ezform The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. 1040ezform The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. 1040ezform If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. 1040ezform Example 2. 1040ezform John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. 1040ezform He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. 1040ezform He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. 1040ezform Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. 1040ezform The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. 1040ezform The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. 1040ezform The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. 1040ezform The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. 1040ezform 4. 1040ezform The basis of the depreciable real property is $12,000. 1040ezform This is the $30,000 total basis multiplied by the 0. 1040ezform 4 figured in (3). 1040ezform The basis of the other property (land) is $18,000. 1040ezform This is the $30,000 total basis minus the $12,000 figured in (4). 1040ezform The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. 1040ezform Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. 1040ezform Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. 1040ezform See chapter 2. 1040ezform In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. 1040ezform In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. 1040ezform These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. 1040ezform The comparison should take into account all the following facts and circumstances. 1040ezform The original cost and reproduction cost of construction, erection, or production. 1040ezform The remaining economic useful life. 1040ezform The state of obsolescence. 1040ezform The anticipated expenditures required to maintain, renovate, or modernize the properties. 1040ezform Like-kind exchanges and involuntary conversions. 1040ezform   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. 1040ezform The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. 1040ezform The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. 1040ezform   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. 1040ezform The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. 1040ezform If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. 1040ezform Example. 1040ezform A fire destroyed your property with a total fair market value of $50,000. 1040ezform It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. 1040ezform You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. 1040ezform The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. 1040ezform You choose to postpone reporting your gain from the involuntary conversion. 1040ezform You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. 1040ezform The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. 1040ezform The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. 1040ezform The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. 1040ezform Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. 1040ezform The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. 1040ezform All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. 1040ezform Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. 1040ezform However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 1040ezform Prev  Up  Next   Home   More Online Publications