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2013 Tax Booklet 1040ez

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2013 Tax Booklet 1040ez

2013 tax booklet 1040ez 5. 2013 tax booklet 1040ez   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez possessions, and How to report deductions. 2013 tax booklet 1040ez Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 2013 tax booklet 1040ez Items Related to Excluded Income U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 2013 tax booklet 1040ez If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2013 tax booklet 1040ez This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 2013 tax booklet 1040ez You can deduct only those expenses connected with earning includible income. 2013 tax booklet 1040ez These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 2013 tax booklet 1040ez These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 2013 tax booklet 1040ez For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 2013 tax booklet 1040ez If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 2013 tax booklet 1040ez Example. 2013 tax booklet 1040ez In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 2013 tax booklet 1040ez You did not have a housing exclusion. 2013 tax booklet 1040ez Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 2013 tax booklet 1040ez In 2013, you received a $12,000 bonus for work you did abroad in 2012. 2013 tax booklet 1040ez You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 2013 tax booklet 1040ez Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 2013 tax booklet 1040ez This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 2013 tax booklet 1040ez Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez tax purposes and is not the dependent of another U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez taxpayer. 2013 tax booklet 1040ez You also can claim exemptions for individuals who qualify as your dependents. 2013 tax booklet 1040ez To be your dependent, the individual must be a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen, U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez national, U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 2013 tax booklet 1040ez Children. 2013 tax booklet 1040ez   Children usually are citizens or residents of the same country as their parents. 2013 tax booklet 1040ez If you were a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen when your child was born, your child generally is a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen. 2013 tax booklet 1040ez This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 2013 tax booklet 1040ez   If you have a legally adopted child who is not a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen, U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez resident, or U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez national, the child meets the citizen requirement if you are a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen or U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez national and the child lived with you as a member of your household all year. 2013 tax booklet 1040ez Social security number. 2013 tax booklet 1040ez   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 2013 tax booklet 1040ez To get a social security number for a dependent, apply at a Social Security office or U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez consulate. 2013 tax booklet 1040ez You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 2013 tax booklet 1040ez   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 2013 tax booklet 1040ez Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 2013 tax booklet 1040ez   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 2013 tax booklet 1040ez To apply for an ITIN, file Form W-7 with the IRS. 2013 tax booklet 1040ez It usually takes 6 to 10 weeks to get an ITIN. 2013 tax booklet 1040ez Enter your dependent's ITIN wherever an SSN is requested on your tax return. 2013 tax booklet 1040ez More information. 2013 tax booklet 1040ez   For more information about exemptions, see Publication 501. 2013 tax booklet 1040ez Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 2013 tax booklet 1040ez Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 2013 tax booklet 1040ez You can deduct contributions to a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez organization that transfers funds to a charitable foreign organization if the U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez organization. 2013 tax booklet 1040ez Canadian, Mexican, and Israeli charities. 2013 tax booklet 1040ez   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 2013 tax booklet 1040ez Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 2013 tax booklet 1040ez See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 2013 tax booklet 1040ez Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 2013 tax booklet 1040ez Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 2013 tax booklet 1040ez See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 2013 tax booklet 1040ez Foreign moves. 2013 tax booklet 1040ez   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 2013 tax booklet 1040ez A foreign move does not include a move back to the United States or its possessions. 2013 tax booklet 1040ez Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 2013 tax booklet 1040ez If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 2013 tax booklet 1040ez Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 2013 tax booklet 1040ez Year to which expense is connected. 2013 tax booklet 1040ez   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 2013 tax booklet 1040ez It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 2013 tax booklet 1040ez   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 2013 tax booklet 1040ez The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 2013 tax booklet 1040ez The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 2013 tax booklet 1040ez Amount allocable to excluded income. 2013 tax booklet 1040ez   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 2013 tax booklet 1040ez The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 2013 tax booklet 1040ez Example. 2013 tax booklet 1040ez On November 1, 2012, you transfer to Monaco. 2013 tax booklet 1040ez Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 2013 tax booklet 1040ez In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 2013 tax booklet 1040ez You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 2013 tax booklet 1040ez The reimbursement is included in your income. 2013 tax booklet 1040ez Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 2013 tax booklet 1040ez Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 2013 tax booklet 1040ez Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 2013 tax booklet 1040ez You have no housing exclusion. 2013 tax booklet 1040ez The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 2013 tax booklet 1040ez To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 2013 tax booklet 1040ez The result, $5,562, is your nondeductible amount. 2013 tax booklet 1040ez    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 2013 tax booklet 1040ez In the preceding example, this year was 2012. 2013 tax booklet 1040ez You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 2013 tax booklet 1040ez Move between foreign countries. 2013 tax booklet 1040ez   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 2013 tax booklet 1040ez New place of work in U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 2013 tax booklet 1040ez If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 2013 tax booklet 1040ez Storage expenses. 2013 tax booklet 1040ez   These expenses are attributable to work you do during the year in which you incur the storage expenses. 2013 tax booklet 1040ez You cannot deduct the amount allocable to excluded income. 2013 tax booklet 1040ez Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 2013 tax booklet 1040ez By then, you should have all the information needed to properly figure the moving expense deduction. 2013 tax booklet 1040ez See Extensions under When To File and Pay in chapter 1. 2013 tax booklet 1040ez If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 2013 tax booklet 1040ez You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 2013 tax booklet 1040ez Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 2013 tax booklet 1040ez If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 2013 tax booklet 1040ez You cannot claim it on the return for the second year. 2013 tax booklet 1040ez Forms To File Report your moving expenses on Form 3903. 2013 tax booklet 1040ez Report your moving expense deduction on line 26 of Form 1040. 2013 tax booklet 1040ez If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 2013 tax booklet 1040ez For more information about figuring moving expenses, see Publication 521. 2013 tax booklet 1040ez Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 2013 tax booklet 1040ez In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 2013 tax booklet 1040ez Do not reduce your compensation by the foreign housing deduction. 2013 tax booklet 1040ez If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 2013 tax booklet 1040ez This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 2013 tax booklet 1040ez Other modifications are also required. 2013 tax booklet 1040ez For more information on IRAs, see Publication 590. 2013 tax booklet 1040ez Taxes of Foreign Countries and U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez possession. 2013 tax booklet 1040ez Taken as a deduction, foreign income taxes reduce your taxable income. 2013 tax booklet 1040ez Taken as a credit, foreign income taxes reduce your tax liability. 2013 tax booklet 1040ez You must treat all foreign income taxes the same way. 2013 tax booklet 1040ez If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 2013 tax booklet 1040ez However, you may be able to deduct other foreign taxes. 2013 tax booklet 1040ez See Deduction for Other Foreign Taxes, later. 2013 tax booklet 1040ez There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 2013 tax booklet 1040ez In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez tax liability, rather than as a deduction in figuring taxable income. 2013 tax booklet 1040ez However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez income is small, a lower final tax may result from deducting the foreign income taxes. 2013 tax booklet 1040ez In any event, you should figure your tax liability both ways and then use the one that is better for you. 2013 tax booklet 1040ez You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 2013 tax booklet 1040ez Foreign income taxes. 2013 tax booklet 1040ez   These are generally income taxes you pay to any foreign country or possession of the United States. 2013 tax booklet 1040ez Foreign income taxes on U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez return. 2013 tax booklet 1040ez   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 2013 tax booklet 1040ez These amounts cannot be included as withheld income taxes on Form 1040, line 62. 2013 tax booklet 1040ez Foreign taxes paid on excluded income. 2013 tax booklet 1040ez   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 2013 tax booklet 1040ez Foreign earned income exclusion. 2013 tax booklet 1040ez Foreign housing exclusion. 2013 tax booklet 1040ez Possession exclusion. 2013 tax booklet 1040ez If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 2013 tax booklet 1040ez   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 2013 tax booklet 1040ez You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 2013 tax booklet 1040ez The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 2013 tax booklet 1040ez The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 2013 tax booklet 1040ez   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 2013 tax booklet 1040ez    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 2013 tax booklet 1040ez Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 2013 tax booklet 1040ez Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 2013 tax booklet 1040ez Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 2013 tax booklet 1040ez The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 2013 tax booklet 1040ez The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 2013 tax booklet 1040ez You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 2013 tax booklet 1040ez Subsidies. 2013 tax booklet 1040ez   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 2013 tax booklet 1040ez This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 2013 tax booklet 1040ez   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2013 tax booklet 1040ez A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 2013 tax booklet 1040ez Limit The foreign tax credit is limited to the part of your total U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 2013 tax booklet 1040ez The allowable foreign tax credit cannot be more than your actual foreign tax liability. 2013 tax booklet 1040ez Exemption from limit. 2013 tax booklet 1040ez   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 2013 tax booklet 1040ez Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 2013 tax booklet 1040ez ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 2013 tax booklet 1040ez Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 2013 tax booklet 1040ez You elect this procedure. 2013 tax booklet 1040ez If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 2013 tax booklet 1040ez Separate limit. 2013 tax booklet 1040ez   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 2013 tax booklet 1040ez Figuring the limit. 2013 tax booklet 1040ez   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 2013 tax booklet 1040ez Do not take any excluded amount into account. 2013 tax booklet 1040ez   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 2013 tax booklet 1040ez   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 2013 tax booklet 1040ez The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 2013 tax booklet 1040ez The denominator (bottom number) of the fraction is your gross income from all sources. 2013 tax booklet 1040ez For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 2013 tax booklet 1040ez You must use special rules for deducting interest expenses. 2013 tax booklet 1040ez For more information on allocating and apportioning your deductions, see Publication 514. 2013 tax booklet 1040ez Exemptions. 2013 tax booklet 1040ez   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 2013 tax booklet 1040ez Recapture of foreign losses. 2013 tax booklet 1040ez   If you have an overall foreign loss and the loss reduces your U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez source income (resulting in a reduction of your U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 2013 tax booklet 1040ez This is done by treating a part of your taxable income from foreign sources in later years as U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez source income. 2013 tax booklet 1040ez This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 2013 tax booklet 1040ez Recapture of domestic losses. 2013 tax booklet 1040ez   If you have an overall domestic loss (resulting in no U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 2013 tax booklet 1040ez You must recapture the loss in later years when you have U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez source taxable income. 2013 tax booklet 1040ez This is done by treating a part of your taxable income from U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez sources in later years as foreign source income. 2013 tax booklet 1040ez This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 2013 tax booklet 1040ez Foreign tax credit carryback and carryover. 2013 tax booklet 1040ez   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 2013 tax booklet 1040ez   More information on figuring the foreign tax credit can be found in Publication 514. 2013 tax booklet 1040ez Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 2013 tax booklet 1040ez You can deduct only foreign income taxes paid on income that is subject to U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez tax. 2013 tax booklet 1040ez You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 2013 tax booklet 1040ez Foreign earned income exclusion. 2013 tax booklet 1040ez Foreign housing exclusion. 2013 tax booklet 1040ez Possession exclusion. 2013 tax booklet 1040ez Example. 2013 tax booklet 1040ez You are a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen and qualify to exclude your foreign earned income. 2013 tax booklet 1040ez Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 2013 tax booklet 1040ez You received dividends from Country X of $2,000 on which you paid income tax of $600. 2013 tax booklet 1040ez You can deduct the $600 tax payment because the dividends relating to it are subject to U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez tax. 2013 tax booklet 1040ez Because you exclude your wages, you cannot deduct the income tax of $10,000. 2013 tax booklet 1040ez If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 2013 tax booklet 1040ez Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 2013 tax booklet 1040ez You take this deduction on Schedule A (Form 1040). 2013 tax booklet 1040ez You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 2013 tax booklet 1040ez On the other hand, you generally can deduct personal property taxes when you pay them to U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez possessions. 2013 tax booklet 1040ez But if you claim the possession exclusion, see Publication 570. 2013 tax booklet 1040ez The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 2013 tax booklet 1040ez You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 2013 tax booklet 1040ez How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 2013 tax booklet 1040ez If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 2013 tax booklet 1040ez Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2013 tax booklet 1040ez Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 2013 tax booklet 1040ez If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 2013 tax booklet 1040ez You figure that amount by subtracting from the total deduction the amount related to excluded income. 2013 tax booklet 1040ez Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2013 tax booklet 1040ez Attach a statement to your return showing how you figured the deductible amount. 2013 tax booklet 1040ez Example 1. 2013 tax booklet 1040ez You are a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen employed as an accountant. 2013 tax booklet 1040ez Your tax home is in Germany for the entire tax year. 2013 tax booklet 1040ez You meet the physical presence test. 2013 tax booklet 1040ez Your foreign earned income for the year was $122,000 and your investment income was $10,380. 2013 tax booklet 1040ez After excluding $97,600, your AGI is $34,780. 2013 tax booklet 1040ez You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 2013 tax booklet 1040ez These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 2013 tax booklet 1040ez You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 2013 tax booklet 1040ez You must fill out Form 2106. 2013 tax booklet 1040ez On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 2013 tax booklet 1040ez You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 2013 tax booklet 1040ez You carry the remaining total of $450 to line 21 of Schedule A. 2013 tax booklet 1040ez Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 2013 tax booklet 1040ez On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 2013 tax booklet 1040ez Enter $254 on line 27 of Schedule A. 2013 tax booklet 1040ez Example 2. 2013 tax booklet 1040ez You are a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen, have a tax home in Spain, and meet the physical presence test. 2013 tax booklet 1040ez You are self-employed and personal services produce the business income. 2013 tax booklet 1040ez Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 2013 tax booklet 1040ez You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 2013 tax booklet 1040ez Since your excluded income is 83. 2013 tax booklet 1040ez 47% of your total income, 83. 2013 tax booklet 1040ez 47% of your business expenses are not deductible. 2013 tax booklet 1040ez Report your total income and expenses on Schedule C (Form 1040). 2013 tax booklet 1040ez On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 2013 tax booklet 1040ez 47% × $66,895) business expenses attributable to the exclusion. 2013 tax booklet 1040ez In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 2013 tax booklet 1040ez Example 3. 2013 tax booklet 1040ez Assume in Example 2 that both capital and personal services combine to produce the business income. 2013 tax booklet 1040ez No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 2013 tax booklet 1040ez Your exclusion of $15,011 is 12. 2013 tax booklet 1040ez 84% of your gross income ($15,011 ÷ $116,931). 2013 tax booklet 1040ez Because you excluded 12. 2013 tax booklet 1040ez 84% of your total income, $8,589 (. 2013 tax booklet 1040ez 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 2013 tax booklet 1040ez Example 4. 2013 tax booklet 1040ez You are a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen, have a tax home in Brazil, and meet the physical presence test. 2013 tax booklet 1040ez You are self-employed and both capital and personal services combine to produce business income. 2013 tax booklet 1040ez Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 2013 tax booklet 1040ez A reasonable allowance for the services you performed for the business is $77,000. 2013 tax booklet 1040ez Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 2013 tax booklet 1040ez The $77,000 is foreign earned income. 2013 tax booklet 1040ez If you choose to exclude the $77,000, you exclude 52. 2013 tax booklet 1040ez 74% of your gross income ($77,000 ÷ $146,000), and 52. 2013 tax booklet 1040ez 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 2013 tax booklet 1040ez Show your total income and expenses on Schedule C (Form 1040). 2013 tax booklet 1040ez On Form 2555, exclude $77,000 and show $90,713 on line 44. 2013 tax booklet 1040ez Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 2013 tax booklet 1040ez Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 2013 tax booklet 1040ez In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 2013 tax booklet 1040ez If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 2013 tax booklet 1040ez To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 2013 tax booklet 1040ez See Choosing the Exclusion in chapter 4. 2013 tax booklet 1040ez Example 5. 2013 tax booklet 1040ez You are a U. 2013 tax booklet 1040ez S. 2013 tax booklet 1040ez citizen, have a tax home in Panama, and meet the bona fide residence test. 2013 tax booklet 1040ez You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 2013 tax booklet 1040ez Capital investment is not material in producing the partnership's income. 2013 tax booklet 1040ez Under the terms of the partnership agreement, you are to receive 50% of the net profits. 2013 tax booklet 1040ez The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 2013 tax booklet 1040ez Of the net profits of $145,750, you received $72,875 as your distributive share. 2013 tax booklet 1040ez You choose to exclude $97,600 of your share of the gross income. 2013 tax booklet 1040ez Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 2013 tax booklet 1040ez 80 × $49,125). 2013 tax booklet 1040ez Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 2013 tax booklet 1040ez On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 2013 tax booklet 1040ez Your exclusion on Form 2555 is $58,300. 2013 tax booklet 1040ez In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 2013 tax booklet 1040ez Prev  Up  Next   Home   More Online Publications
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The 2013 Tax Booklet 1040ez

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