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2013 Tax Return

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2013 Tax Return

2013 tax return 9. 2013 tax return   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. 2013 tax return Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. 2013 tax return Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. 2013 tax return Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. 2013 tax return It also covers the following topics. 2013 tax return Personal use of dwelling unit (including vacation home). 2013 tax return Depreciation. 2013 tax return Limits on rental losses. 2013 tax return How to report your rental income and expenses. 2013 tax return If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. 2013 tax return If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. 2013 tax return If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. 2013 tax return See Publication 527, Residential Rental Property, for more information. 2013 tax return Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. 2013 tax return Rental income is any payment you receive for the use or occupation of property. 2013 tax return In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. 2013 tax return When to report. 2013 tax return   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. 2013 tax return You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. 2013 tax return You constructively receive income when it is made available to you, for example, by being credited to your bank account. 2013 tax return   For more information about when you constructively receive income, see Accounting Methods in chapter 1. 2013 tax return Advance rent. 2013 tax return   Advance rent is any amount you receive before the period that it covers. 2013 tax return Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. 2013 tax return Example. 2013 tax return You sign a 10-year lease to rent your property. 2013 tax return In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. 2013 tax return You must include $10,000 in your income in the first year. 2013 tax return Canceling a lease. 2013 tax return   If your tenant pays you to cancel a lease, the amount you receive is rent. 2013 tax return Include the payment in your income in the year you receive it regardless of your method of accounting. 2013 tax return Expenses paid by tenant. 2013 tax return   If your tenant pays any of your expenses, the payments are rental income. 2013 tax return Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. 2013 tax return See Rental Expenses , later, for more information. 2013 tax return Property or services. 2013 tax return   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. 2013 tax return   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. 2013 tax return Security deposits. 2013 tax return   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. 2013 tax return But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. 2013 tax return   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. 2013 tax return Include it in your income when you receive it. 2013 tax return Part interest. 2013 tax return   If you own a part interest in rental property, you must report your part of the rental income from the property. 2013 tax return Rental of property also used as your home. 2013 tax return   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. 2013 tax return However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. 2013 tax return See Personal Use of Dwelling Unit (Including Vacation Home) , later. 2013 tax return Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. 2013 tax return It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. 2013 tax return Depreciation , which you can also deduct from your rental income, is discussed later. 2013 tax return Personal use of rental property. 2013 tax return   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. 2013 tax return Also, your rental expense deductions may be limited. 2013 tax return See Personal Use of Dwelling Unit (Including Vacation Home) , later. 2013 tax return Part interest. 2013 tax return   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. 2013 tax return When to deduct. 2013 tax return   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. 2013 tax return Depreciation. 2013 tax return   You can begin to depreciate rental property when it is ready and available for rent. 2013 tax return See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. 2013 tax return Pre-rental expenses. 2013 tax return   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. 2013 tax return Uncollected rent. 2013 tax return   If you are a cash-basis taxpayer, do not deduct uncollected rent. 2013 tax return Because you have not included it in your income, it is not deductible. 2013 tax return Vacant rental property. 2013 tax return   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. 2013 tax return However, you cannot deduct any loss of rental income for the period the property is vacant. 2013 tax return Vacant while listed for sale. 2013 tax return   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. 2013 tax return If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. 2013 tax return Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. 2013 tax return Improvements. 2013 tax return   You must capitalize any expense you pay to improve your rental property. 2013 tax return An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. 2013 tax return Betterments. 2013 tax return   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. 2013 tax return Restoration. 2013 tax return   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. 2013 tax return Adaptation. 2013 tax return   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. 2013 tax return Separate the costs of repairs and improvements, and keep accurate records. 2013 tax return You will need to know the cost of improvements when you sell or depreciate your property. 2013 tax return The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. 2013 tax return Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. 2013 tax return Insurance premiums paid in advance. 2013 tax return   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. 2013 tax return You cannot deduct the total premium in the year you pay it. 2013 tax return Legal and other professional fees. 2013 tax return   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. 2013 tax return For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. 2013 tax return You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. 2013 tax return Local benefit taxes. 2013 tax return   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. 2013 tax return These charges are nondepreciable capital expenditures, and must be added to the basis of your property. 2013 tax return However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. 2013 tax return Local transportation expenses. 2013 tax return    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. 2013 tax return However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. 2013 tax return See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. 2013 tax return   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. 2013 tax return For 2013, the standard mileage rate for business use is 56. 2013 tax return 5 cents per mile. 2013 tax return For more information, see chapter 26. 2013 tax return    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. 2013 tax return In addition, you must complete Form 4562, Part V, and attach it to your tax return. 2013 tax return Rental of equipment. 2013 tax return   You can deduct the rent you pay for equipment that you use for rental purposes. 2013 tax return However, in some cases, lease contracts are actually purchase contracts. 2013 tax return If so, you cannot deduct these payments. 2013 tax return You can recover the cost of purchased equipment through depreciation. 2013 tax return Rental of property. 2013 tax return   You can deduct the rent you pay for property that you use for rental purposes. 2013 tax return If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. 2013 tax return Travel expenses. 2013 tax return   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. 2013 tax return You must properly allocate your expenses between rental and nonrental activities. 2013 tax return You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. 2013 tax return You recover the cost of improvements by taking depreciation. 2013 tax return For information on travel expenses, see chapter 26. 2013 tax return    To deduct travel expenses, you must keep records that follow the rules in chapter 26. 2013 tax return   See Rental Expenses in Publication 527 for more information. 2013 tax return Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. 2013 tax return You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. 2013 tax return You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. 2013 tax return However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). 2013 tax return Example. 2013 tax return Your tax year is the calendar year. 2013 tax return You moved from your home in May and started renting it out on June 1. 2013 tax return You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. 2013 tax return Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. 2013 tax return Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. 2013 tax return You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). 2013 tax return You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. 2013 tax return There is no change in the types of expenses deductible for the personal-use part of your property. 2013 tax return Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). 2013 tax return You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. 2013 tax return You do not have to divide the expenses that belong only to the rental part of your property. 2013 tax return For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. 2013 tax return If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. 2013 tax return You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. 2013 tax return How to divide expenses. 2013 tax return   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. 2013 tax return You can use any reasonable method for dividing the expense. 2013 tax return It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. 2013 tax return The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. 2013 tax return Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. 2013 tax return You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. 2013 tax return For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. 2013 tax return Where to report. 2013 tax return   Report your not-for-profit rental income on Form 1040, line 21. 2013 tax return For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. 2013 tax return   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. 2013 tax return You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. 2013 tax return Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. 2013 tax return In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. 2013 tax return Only your rental expenses may be deducted on Schedule E (Form 1040). 2013 tax return Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). 2013 tax return You must also determine if the dwelling unit is considered a home. 2013 tax return The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. 2013 tax return Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. 2013 tax return There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. 2013 tax return Dwelling unit. 2013 tax return   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. 2013 tax return It also includes all structures or other property belonging to the dwelling unit. 2013 tax return A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. 2013 tax return   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. 2013 tax return Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. 2013 tax return Example. 2013 tax return   You rent a room in your home that is always available for short-term occupancy by paying customers. 2013 tax return You do not use the room yourself, and you allow only paying customers to use the room. 2013 tax return The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. 2013 tax return Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. 2013 tax return When dividing your expenses, follow these rules. 2013 tax return Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. 2013 tax return This rule does not apply when determining whether you used the unit as a home. 2013 tax return Any day that the unit is available for rent but not actually rented is not a day of rental use. 2013 tax return Example. 2013 tax return Your beach cottage was available for rent from June 1 through August 31 (92 days). 2013 tax return During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. 2013 tax return The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. 2013 tax return Your family also used the cottage during the last 2 weeks of May (14 days). 2013 tax return The cottage was not used at all before May 17 or after August 31. 2013 tax return You figure the part of the cottage expenses to treat as rental expenses as follows. 2013 tax return The cottage was used for rental a total of 85 days (92 − 7). 2013 tax return The days it was available for rent but not rented (7 days) are not days of rental use. 2013 tax return The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. 2013 tax return You used the cottage for personal purposes for 14 days (the last 2 weeks in May). 2013 tax return The total use of the cottage was 99 days (14 days personal use + 85 days rental use). 2013 tax return Your rental expenses are 85/99 (86%) of the cottage expenses. 2013 tax return Note. 2013 tax return When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. 2013 tax return Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. 2013 tax return Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. 2013 tax return If you have a net loss, you may not be able to deduct all of the rental expenses. 2013 tax return See Dwelling Unit Used as a Home, next. 2013 tax return Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. 2013 tax return You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. 2013 tax return See What is a day of personal use , later. 2013 tax return Fair rental price. 2013 tax return   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. 2013 tax return The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. 2013 tax return   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. 2013 tax return Instead, count it as a day of personal use in applying both (1) and (2) above. 2013 tax return What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. 2013 tax return You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). 2013 tax return However, see Days used as a main home before or after renting , later. 2013 tax return A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. 2013 tax return Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. 2013 tax return ), and lineal descendants (children, grandchildren, etc. 2013 tax return ). 2013 tax return Anyone under an arrangement that lets you use some other dwelling unit. 2013 tax return Anyone at less than a fair rental price. 2013 tax return Main home. 2013 tax return   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. 2013 tax return Shared equity financing agreement. 2013 tax return   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. 2013 tax return Donation of use of property. 2013 tax return   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. 2013 tax return Examples. 2013 tax return   The following examples show how to determine days of personal use. 2013 tax return Example 1. 2013 tax return You and your neighbor are co-owners of a condominium at the beach. 2013 tax return Last year, you rented the unit to vacationers whenever possible. 2013 tax return The unit was not used as a main home by anyone. 2013 tax return Your neighbor used the unit for 2 weeks last year; you did not use it at all. 2013 tax return Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. 2013 tax return Example 2. 2013 tax return You and your neighbors are co-owners of a house under a shared equity financing agreement. 2013 tax return Your neighbors live in the house and pay you a fair rental price. 2013 tax return Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. 2013 tax return This is because your neighbors rent the house as their main home under a shared equity financing agreement. 2013 tax return Example 3. 2013 tax return You own a rental property that you rent to your son. 2013 tax return Your son does not own any interest in this property. 2013 tax return He uses it as his main home and pays you a fair rental price. 2013 tax return Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. 2013 tax return Example 4. 2013 tax return You rent your beach house to Joshua. 2013 tax return Joshua rents his cabin in the mountains to you. 2013 tax return You each pay a fair rental price. 2013 tax return You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. 2013 tax return Days used for repairs and maintenance. 2013 tax return   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. 2013 tax return Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. 2013 tax return Days used as a main home before or after renting. 2013 tax return   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. 2013 tax return Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. 2013 tax return You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. 2013 tax return However, this special rule does not apply when dividing expenses between rental and personal use. 2013 tax return Examples. 2013 tax return   The following examples show how to determine whether you used your rental property as a home. 2013 tax return Example 1. 2013 tax return You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. 2013 tax return You rented the basement apartment at a fair rental price to college students during the regular school year. 2013 tax return You rented to them on a 9-month lease (273 days). 2013 tax return You figured 10% of the total days rented to others at a fair rental price is 27 days. 2013 tax return During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. 2013 tax return Your basement apartment was used as a home because you used it for personal purposes for 30 days. 2013 tax return Rent-free use by your brothers is considered personal use. 2013 tax return Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). 2013 tax return Example 2. 2013 tax return You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). 2013 tax return Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. 2013 tax return You figured 10% of the total days rented to others at a fair rental price is 3 days. 2013 tax return The room was used as a home because you used it for personal purposes for 21 days. 2013 tax return That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). 2013 tax return Example 3. 2013 tax return You own a condominium apartment in a resort area. 2013 tax return You rented it at a fair rental price for a total of 170 days during the year. 2013 tax return For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. 2013 tax return Your family actually used the apartment for 10 of those days. 2013 tax return Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. 2013 tax return You figured 10% of the total days rented to others at a fair rental price is 16 days. 2013 tax return Your family also used the apartment for 7 other days during the year. 2013 tax return You used the apartment as a home because you used it for personal purposes for 17 days. 2013 tax return That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). 2013 tax return Minimal rental use. 2013 tax return   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. 2013 tax return See Used as a home but rented less than 15 days , later, for more information. 2013 tax return Limit on deductions. 2013 tax return   Renting a dwelling unit that is considered a home is not a passive activity. 2013 tax return Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. 2013 tax return The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. 2013 tax return Any expenses carried forward to the next year will be subject to any limits that apply for that year. 2013 tax return This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. 2013 tax return   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. 2013 tax return Reporting Income and Deductions Property not used for personal purposes. 2013 tax return   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. 2013 tax return Property used for personal purposes. 2013 tax return   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. 2013 tax return Not used as a home. 2013 tax return   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. 2013 tax return Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . 2013 tax return The expenses for personal use are not deductible as rental expenses. 2013 tax return   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. 2013 tax return Used as a home but rented less than 15 days. 2013 tax return   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). 2013 tax return You are not required to report the rental income and rental expenses from this activity. 2013 tax return The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). 2013 tax return See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. 2013 tax return Used as a home and rented 15 days or more. 2013 tax return   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. 2013 tax return Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . 2013 tax return The expenses for personal use are not deductible as rental expenses. 2013 tax return   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. 2013 tax return You do not need to use Worksheet 9-1. 2013 tax return   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. 2013 tax return To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. 2013 tax return Depreciation You recover the cost of income-producing property through yearly tax deductions. 2013 tax return You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. 2013 tax return Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. 2013 tax return You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. 2013 tax return You can deduct depreciation only on the part of your property used for rental purposes. 2013 tax return Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. 2013 tax return You may have to use Form 4562 to figure and report your depreciation. 2013 tax return See How To Report Rental Income and Expenses , later. 2013 tax return Alternative minimum tax (AMT). 2013 tax return    If you use accelerated depreciation, you may be subject to the AMT. 2013 tax return Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). 2013 tax return Claiming the correct amount of depreciation. 2013 tax return   You should claim the correct amount of depreciation each tax year. 2013 tax return If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. 2013 tax return   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. 2013 tax return S Individual Income Tax Return. 2013 tax return If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. 2013 tax return See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. 2013 tax return Changing your accounting method to deduct unclaimed depreciation. 2013 tax return   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. 2013 tax return In some instances, that consent is automatic. 2013 tax return For more information, see chapter 1 of Publication 946. 2013 tax return Land. 2013 tax return   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. 2013 tax return The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. 2013 tax return More information. 2013 tax return   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. 2013 tax return Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. 2013 tax return You must consider these rules in the order shown below. 2013 tax return At-risk rules. 2013 tax return These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. 2013 tax return This applies only if the real property was placed in service after 1986. 2013 tax return Passive activity limits. 2013 tax return Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. 2013 tax return However, there are exceptions. 2013 tax return At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. 2013 tax return Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. 2013 tax return In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. 2013 tax return You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. 2013 tax return See Publication 925 for more information. 2013 tax return Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. 2013 tax return For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. 2013 tax return Limits on passive activity deductions and credits. 2013 tax return    Deductions or losses from passive activities are limited. 2013 tax return You generally cannot offset income, other than passive income, with losses from passive activities. 2013 tax return Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. 2013 tax return Any excess loss or credit is carried forward to the next tax year. 2013 tax return   For a detailed discussion of these rules, see Publication 925. 2013 tax return    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. 2013 tax return Real estate professionals. 2013 tax return   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. 2013 tax return For a detailed discussion of the requirements, see Publication 527. 2013 tax return For a detailed discussion of material participation, see Publication 925. 2013 tax return Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. 2013 tax return Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. 2013 tax return Exception for Rental Real Estate Activities With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. 2013 tax return This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. 2013 tax return Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. 2013 tax return Active participation. 2013 tax return   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. 2013 tax return Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. 2013 tax return Maximum special allowance. 2013 tax return   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. 2013 tax return   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. 2013 tax return If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. 2013 tax return   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. 2013 tax return More information. 2013 tax return   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. 2013 tax return How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). 2013 tax return However, do not use that schedule to report a not-for-profit activity. 2013 tax return See Not Rented for Profit, earlier. 2013 tax return Providing substantial services. 2013 tax return   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). 2013 tax return Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. 2013 tax return For information, see Publication 334, Tax Guide for Small Business. 2013 tax return You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. 2013 tax return   Use Form 1065, U. 2013 tax return S. 2013 tax return Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). 2013 tax return Qualified joint venture. 2013 tax return   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. 2013 tax return This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. 2013 tax return For more information, see Publication 527. 2013 tax return Form 1098, Mortgage Interest Statement. 2013 tax return    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. 2013 tax return If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. 2013 tax return Attach a statement to your return showing the name and address of the other person. 2013 tax return In the left margin of Schedule E, next to line 13, enter “See attached. 2013 tax return ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. 2013 tax return , you normally report your rental income and expenses on Schedule E, Part I. 2013 tax return List your total income, expenses, and depreciation for each rental property. 2013 tax return Be sure to enter the number of fair rental and personal use days on line 2. 2013 tax return If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. 2013 tax return Complete lines 1 and 2 for each property. 2013 tax return However, fill in lines 23a through 26 on only one Schedule E. 2013 tax return On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. 2013 tax return To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. 2013 tax return If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. 2013 tax return Form 6198, At-Risk Limitations. 2013 tax return See At-Risk Rules , earlier. 2013 tax return Also see Publication 925. 2013 tax return Form 8582, Passive Activity Loss Limitations. 2013 tax return See Passive Activity Limits , earlier. 2013 tax return Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. 2013 tax return If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. 2013 tax return Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). 2013 tax return Worksheet 9-1. 2013 tax return Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. 2013 tax return Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . 2013 tax return ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. 2013 tax return Rental Use Percentage A. 2013 tax return Total days available for rent at fair rental price A. 2013 tax return       B. 2013 tax return Total days available for rent (line A) but not rented B. 2013 tax return       C. 2013 tax return Total days of rental use. 2013 tax return Subtract line B from line A C. 2013 tax return       D. 2013 tax return Total days of personal use (including days rented at less than fair rental price) D. 2013 tax return       E. 2013 tax return Total days of rental and personal use. 2013 tax return Add lines C and D E. 2013 tax return       F. 2013 tax return Percentage of expenses allowed for rental. 2013 tax return Divide line C by line E     F. 2013 tax return   PART II. 2013 tax return Allowable Rental Expenses 1. 2013 tax return Enter rents received 1. 2013 tax return   2a. 2013 tax return Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. 2013 tax return       b. 2013 tax return Enter the rental portion of real estate taxes b. 2013 tax return       c. 2013 tax return Enter the rental portion of deductible casualty and theft losses (see instructions) c. 2013 tax return       d. 2013 tax return Enter direct rental expenses (see instructions) d. 2013 tax return       e. 2013 tax return Fully deductible rental expenses. 2013 tax return Add lines 2a–2d. 2013 tax return Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. 2013 tax return   3. 2013 tax return Subtract line 2e from line 1. 2013 tax return If zero or less, enter -0- 3. 2013 tax return   4a. 2013 tax return Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. 2013 tax return       b. 2013 tax return Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. 2013 tax return       c. 2013 tax return Carryover of operating expenses from 2012 worksheet c. 2013 tax return       d. 2013 tax return Add lines 4a–4c d. 2013 tax return       e. 2013 tax return Allowable expenses. 2013 tax return Enter the smaller of line 3 or line 4d (see instructions) 4e. 2013 tax return   5. 2013 tax return Subtract line 4e from line 3. 2013 tax return If zero or less, enter -0- 5. 2013 tax return   6a. 2013 tax return Enter the rental portion of excess casualty and theft losses (see instructions) 6a. 2013 tax return       b. 2013 tax return Enter the rental portion of depreciation of the dwelling unit b. 2013 tax return       c. 2013 tax return Carryover of excess casualty losses and depreciation from 2012 worksheet c. 2013 tax return       d. 2013 tax return Add lines 6a–6c d. 2013 tax return       e. 2013 tax return Allowable excess casualty and theft losses and depreciation. 2013 tax return Enter the smaller of  line 5 or line 6d (see instructions) 6e. 2013 tax return   PART III. 2013 tax return Carryover of Unallowed Expenses to Next Year 7a. 2013 tax return Operating expenses to be carried over to next year. 2013 tax return Subtract line 4e from line 4d 7a. 2013 tax return   b. 2013 tax return Excess casualty and theft losses and depreciation to be carried over to next year. 2013 tax return  Subtract line 6e from line 6d b. 2013 tax return   Worksheet 9-1 Instructions. 2013 tax return Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. 2013 tax return Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. 2013 tax return Line 2a. 2013 tax return Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. 2013 tax return Do not include interest on a loan that did not benefit the dwelling unit. 2013 tax return For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. 2013 tax return Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. 2013 tax return Include the rental portion of this interest in the total you enter on line 2a of the worksheet. 2013 tax return   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. 2013 tax return See the Schedule A instructions. 2013 tax return However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. 2013 tax return See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. 2013 tax return Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. 2013 tax return   Note. 2013 tax return Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. 2013 tax return Instead, figure the personal portion on a separate Schedule A. 2013 tax return If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. 2013 tax return           Line 2c. 2013 tax return Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. 2013 tax return To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. 2013 tax return If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. 2013 tax return On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. 2013 tax return Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. 2013 tax return   Note. 2013 tax return Do not file this Form 4684 or use it to figure your personal losses on Schedule A. 2013 tax return Instead, figure the personal portion on a separate Form 4684. 2013 tax return           Line 2d. 2013 tax return Enter the total of your rental expenses that are directly related only to the rental activity. 2013 tax return These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. 2013 tax return Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. 2013 tax return           Line 2e. 2013 tax return You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. 2013 tax return Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. 2013 tax return           Line 4b. 2013 tax return On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. 2013 tax return If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. 2013 tax return Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). 2013 tax return           Line 4e. 2013 tax return You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. 2013 tax return *           Line 6a. 2013 tax return To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. 2013 tax return   A. 2013 tax return Enter the amount from Form 4684, line 10       B. 2013 tax return Enter the rental portion of line A       C. 2013 tax return Enter the amount from line 2c of this worksheet       D. 2013 tax return Subtract line C from line B. 2013 tax return Enter the result here and on line 6a of this worksheet               Line 6e. 2013 tax return You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. 2013 tax return * *Allocating the limited deduction. 2013 tax return If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. 2013 tax return Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. 2013 tax return Prev  Up  Next   Home   More Online Publications
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IRS Outlines Filing and Payment Options for Taxpayers Affected by Hurricane Irene, Tropical Storm Lee and Texas Wildfires

Oct. 4, 2011

WASHINGTON –– The Internal Revenue Service today reminded taxpayers affected by Hurricane Irene, Tropical Storm Irene, Tropical Storm Lee and the Texas wildfires that they have until Oct. 31 to meet certain tax filing and payment obligations and announced that e-File and Free File would remain available to accept their returns.

E-file, which will close for all other taxpayers following the Oct. 17 extension filing deadline, will be open through the end of October to any taxpayer who lives or has a business in areas granted tax relief because of Hurricane Irene, Tropical Storm Irene, the Texas wildfires or Tropical Storm Lee in New York and Pennsylvania.

Special Instructions for e-Filers

The IRS encouraged any taxpayer who wants to include a payment with the tax return to e-File by Oct. 20.

Because of year-end programming changes, IRS e-File will not accept returns that include payments after Oct 20. E-file returns that include a payment after that date will be rejected, but the IRS offers other options for these taxpayers to still e-file but pay separately by using:

EFTPS (The Electronic Federal Tax Payment System)
credit or debit card
check or money order

These guidelines apply to e-File and Free File returns only. Payments accompanying paper returns are not affected.

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Page Last Reviewed or Updated: 21-Mar-2014

The 2013 Tax Return

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